9. EQUITY COMPENSATION PLANS

The Company has several share-based incentive plans: the 2001 Stock Option Plan (the "2001 Plan"), the 2005 Equity Incentive Plan (the "2005 Plan") and the 2008 Employee Stock Purchase Plan (the "ESPP").

2001 Plan and 2005 Plan

The 2001 Plan is no longer used for granting incentives. Under the 2005 Plan, the Board of Directors may grant incentive stock options to employees and any parent or subsidiary's employees, and may grant nonstatutory stock options, restricted stock, stock appreciation rights, performance units or performance shares to employees, directors and consultants of the Company and any parent or subsidiary's employees, directors and consultants. The administrator (currently the Compensation Committee of the Board of Directors) has the power to determine the terms of any awards, including the exercise price of options, the number of shares subject to each award, the exercisability of the awards and the form of consideration.

Options granted under the 2001 Plan and the 2005 Plan generally expire ten years from the date of grant. Options granted from the 2001 Plan are generally exercisable beginning one year from the date of grant in cumulative yearly amounts of 25% of the shares granted. Options granted from the 2005 Plan generally vest over four years at a rate of 25% on the first anniversary date of the grant and ratably each month thereafter. Certain options granted were exercisable at the time of the grant and the underlying unvested shares are subject to the Company's repurchase rights as stated in the applicable plan agreement.

As of March 31, 2012, 6,344,197 shares of common stock had been reserved for issuance under the 2005 Plan. The shares authorized for issuance under the 2005 Plan include: (a) shares reserved but unissued under the 2001 Plan as of August 10, 2005, (b) shares returned to the 2001 Plan as the result of termination of options or the repurchase of shares issued under such plan, and (c) annual increases in the number of shares available for issuance on the first day of each year equal to the lesser of:

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3.25% of the outstanding shares of common stock on the first day of the fiscal year;

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825,000 shares; or

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an amount the Company's Board of Directors may determine.

On January 1, 2012 an additional 531,999 shares were authorized for issuance under the 2005 Plan representing 3.25% of the outstanding shares on that date. As of March 31, 2012 there were 1,304,590 shares available for future grants under the plans.

Activity under the Plans during the three months ended March 31, 2012 was as follows:


Stock Options	Number of Shares Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2012		2,535,773		$	9.00
Granted		161,150		$	9.92
Cancelled or forfeited		(19,160	)	$	11.24
Exercised		(32,639	)	$	6.52

Outstanding at March 31, 2012		2,645,124		$	9.07		5.76	$	4,714,878

Vested and expected to vest		2,613,321		$	9.05		5.72	$	4,694,491

Exercisable at March 31, 2012		2,018,835		$	9.12		4.86	$	3,533,373


Restricted Stock	Number of Shares Outstanding			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		402,911		$	7.68
Granted		100,323		$	9.92
Forfeited		(8,312	)	$	6.66
Released		(57,376	)	$	9.14

Outstanding at March 31, 2012		437,546		$	8.02

The total intrinsic value of options exercised during the three month periods ended March 31, 2012 and 2011 was $150,887 and $1,589,942, respectively. As a result of the Company's tax position, no tax benefit was recognized related to the stock option exercises. For the three month periods ended March 31, 2012 and 2011, respectively, $212,766 and $221,382 in cash proceeds was included in the Company's Condensed Consolidated Statements of Cash Flows as a result of the exercise of stock options. The total fair value of performance shares vested during the three month periods ended March 31, 2012 and 2011 was $99,200 and $1,243,200, respectively. The total fair value of restricted stock vested during the three month periods ended March 31, 2012 and 2011 was $610,766 and $304,783, respectively.

The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock grants.

The Company recognized expense related to stock options and restricted stock for the three months ended March 31, 2012 and 2011 of $589,831 and $721,357, respectively. As of March 31, 2012 there was $6,418,442 of unrecognized compensation costs related to non-vested stock option and restricted stock arrangements ($3,250,685 relating to stock options and $3,167,758 relating to restricted stock). This cost is expected to be recognized over a weighted average period of 2.5 years for stock options and 1.8 years for restricted stock.

The Company has issued performance shares to certain employees and consultants to incent and reward them for the achievement of specified performance over various service periods. The participants receive awards for a specified number of shares of the Company's common stock at the beginning of the award period, which entitles the participants to the shares at the end of the award period if achievement of the specified metrics and service requirements occurs. During the first quarter of 2012, 10,000 performance shares (gross) were released related to participants' achievement of certain specified metrics. As of March 31, 2012 the Company has no performance shares outstanding. In accordance with FASB ASC 718, the Company estimates the number of shares to be granted based upon the probability that the performance metric and service period will be achieved. The fair value of the estimated award, based on the market value of the Company's stock on the date of award, is expensed over the award period. The probability of meeting the specified metrics is reviewed quarterly. During the three months ended March 31, 2012 and 2011, the Company recognized expense related to performance shares of $0 and $0, respectively. As of March 31, 2012 there was no unrecognized compensation cost related to non-vested share-based compensation arrangements associated with these performance shares.

Employee Stock Purchase Plan (ESPP)

During the second quarter of 2008, the Company established its 2008 Employee Stock Purchase Plan ("ESPP") which is available to eligible employees as defined in the ESPP. Under the ESPP, shares of the Company's common stock may be purchased at a discount (currently 15%) of the lesser of the closing price of the Company's common stock on the first trading day or the last trading day of the offering period. The offering period (currently six months) and the offering price are subject to change. Participants may not purchase more than $25,000 of the Company's common stock in a calendar year and, effective January 1, 2009, may not purchase more than 1,500 shares during an offering period. Beginning on January 1, 2009 and on the first day of each fiscal year thereafter during the term of the ESPP, the number of shares available for sale under the ESPP shall be increased by the lesser of (i) two percent (2%) of the Company's outstanding shares of common stock as of the close of business on the last business day of the prior calendar year, not to exceed 600,000 shares, or (ii) a lesser amount determined by the Board of Directors. At March 31, 2012 there were 862,902 shares available for future issuance under the ESPP. Share-based compensation expense with respect to the ESPP was $98,025 and $75,880 for the three months ended March 31, 2012 and 2011, respectively.

Valuation and Expense Information Under FASB ASC 718

The following table summarizes share-based compensation expense related to employee share-based compensation under FASB ASC 718 for the three months ended March 31, 2012 and 2011. This expense was allocated as follows:


	Three Months Ended March 31,
	2012		2011
Cost of revenue	$	65,947	$	40,207
Research and development expenses		40,482		126,330
Selling, general and administrative expenses		581,427		630,700

Total share-based compensation expense related to employees	$	687,856	$	797,237

In calculating compensation expense, the fair value of the options is estimated on the grant date using the Black-Scholes model including the following assumptions:


	Three Months Ended March 31,
	2012			2011
Risk free interest rate		1.33	%		2.78	%
Expected life of option (years)		7.0			6.25
Expected volatility of stock		71.00	%		72.00	%
Weighted-average volatility		71.00	%		72.00	%
Dividend yield		0.00	%		0.00	%

For grants made before December 31, 2010 the Company's estimate of volatility was weighted between the Company's trading history and other companies in the industry. Beginning January 1, 2011 the Company's estimate of volatility is based solely on the Company's trading history. The risk-free interest rate assumption is based upon the U.S. treasury yield curve at the time of grant for the expected option life. The simplified method was utilized in determining the expected life of the options prior to January 1, 2012. Since January 1, 2012 the Company has used historical stock option exercise experience to estimate the expected life of stock options.

The fair value of restricted stock awards is based on the market value of the Company's stock on the date of the awards.

Based on the assumptions noted above, the weighted average estimated fair value per share of the stock options and restricted stock granted for the respective periods was as follows:


	Three Months Ended March 31,
	2012		2011
Stock options	$	6.62	$	7.42
Restricted stock	$	9.92	$	11.20

Non-Employee Stock Compensation

The Company has historically issued nonstatutory common stock options to consultants to purchase shares of common stock as a form of compensation for services provided to the Company. Such options vest over a service period ranging from immediately to four years. After January 1, 2006 all stock options granted to non-employee consultants have a four year vesting period and vest at a rate of 25% on the first anniversary date of the grant and ratably each month thereafter.

The fair value at the date of grant, which is subject to adjustment at each vesting date, was determined using the Black-Scholes model. There were no non-employee consultant stock options granted during the three month periods ended March 31, 2012 and 2011. The values attributable to the non-vested portion of the non-employee consultant stock options have been amortized over the service period on a graded vesting method and the vested portion of these stock options was remeasured at each vesting date.

The Company accounts for the options granted to non-employee consultants prior to their vesting date in accordance with ASC 505-50, "Equity-Based Payments to Non-Employees." Because these options do not contain specific performance provisions, there is no measurement date of fair value until the options vest. Therefore, the fair value of the options granted and outstanding prior to their vesting date is remeasured each reporting period. Stock compensation expense with respect to unvested non-employee consultant stock options totaled $218 and $6,169 for the three months ended March 31, 2012 and 2011, respectively.

Once these non-employee consultant stock options have vested, the awards no longer fall within the scope of ASC 505-50. Because the stock options require settlement by the Company's delivery of registered shares and because the tax withholding provisions in the awards allow the stock options to be partially net-cash settled, these vested stock options are no longer eligible for equity classification and are, thus, accounted for as derivative liabilities under FASB ASC 815, "Derivatives and Hedging," until the stock options are ultimately either exercised or forfeited. Accordingly, the vested non-employee consultant stock options are classified as liabilities and remeasured at fair value through earnings at each reporting period. During the three months ended March 31, 2012 and 2011, $37,325 and ($6,271), respectively, of income (expense) was recorded as a result of the remeasurement of the fair value of these stock options. As of March 31, 2012 and December 31, 2011, respectively, fully vested stock options to acquire 47,603 and 33,603 shares of common stock held by non-employee consultants remained unexercised and a liability of $270,052 and $208,007 was included in accrued liabilities in the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, respectively.