Note 7. Stock-Based Compensation

The Company recorded approximately $0.9 million and $1.0 million of stock-based compensation expense for the three months ended March 31, 2013 and 2012, respectively. The expense relating to stock-based awards is recognized on a straight-line basis over the requisite service period, usually the vesting period, based on the grant-date fair value. The unamortized compensation cost, net of expected forfeitures, as of March 31, 2013 was $4.6 million and is expected to be recognized as expense over a weighted average period of approximately 2.58 years.

The Company presents the tax benefits resulting from tax deductions in excess of the compensation cost recognized from the exercise of stock options as financing cash flows in the condensed consolidated statements of cash flows. For the three months ended March 31, 2013 and 2012, there were no such tax benefits associated with the exercise of stock options due to the Company’s loss position.

Common Stock Options and Restricted Stock

A summary of the option activity under the Company’s Amended and Restated 2000 Stock Option and Equity Incentive Plan (Amended 2000 Plan) and 2010 Equity Incentive Plan (2010 Plan), referred to collectively as the “Plans,” is presented below (in thousands, except exercise price):

			Options Outstanding
	Available for Grant		Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2012	1,265		6,872		$	4.05
Additional shares authorized under the 2010 Plan	500		—		—
Options granted	(176	)	176		$	3.48
Options cancelled	471		(471	)	$	5.48
Options exercised	—		(169	)	$	2.80
Options expired	(378	)	—		5.78
Balance at March 31, 2013	1,682		6,408		$	3.97

The Company also has awarded options to new employees outside of the Plans and may continue to do so, as material inducements to the acceptance of employment with the Company, as permitted under the Listing Rules of the Nasdaq Stock Market. These grants must be approved by the compensation committee of the board of directors, a majority of the independent directors or, below a specified share level, by an authorized executive officer.

A summary of the inducement grant option activity is presented below (in thousands, except exercise price):

	Options Outstanding
	Number of Shares		Weighted Average Exercise Prices
Balance at December 31, 2012	3,358		$	4.29
Granted	151		$	4.21
Cancelled	(1	)	$	1.50
Exercised	(94	)	$	1.55
Balance at March 31, 2013	3,414		$	4.37

The following table summarizes significant ranges of outstanding and exercisable options and inducement grants as of March 31, 2013 (in thousands, except contractual life and exercise price):

	Options Outstanding						Options Exercisable
Range of Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value		Number Exercisable	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value
$1.50 - $3.09	2,504	3.56	$	2.36	$	5,887	1,368	2.60	$	1.94	$	3,786
$3.10 - $3.86	2,476	4.56	$	3.55	2,861		1,014	3.98	$	3.64	1,081
$3.87 - $5.61	3,550	2.40	$	4.83	776		2,970	2.03	$	4.94	523
$5.62 - $9.81	1,292	2.73	$	6.56	—		901	2.15	$	6.80	—
	9,822	3.29	$	4.11	$	9,524	6,253	2.49	$	4.34	$	5,390

As of March 31, 2013, the Company had 9.2 million shares subject to outstanding options fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 3.16 years, weighted average exercise price of $4.14 and aggregate intrinsic value of $8.8 million.

The total fair value of shares subject to outstanding options vested during the three months ended March 31, 2013 and 2012 calculated using the Black-Scholes valuation method was $0.8 million and $0.5 million, respectively. The total intrinsic value of employee stock options exercised during the three months ended March 31, 2013 and 2012 was $0.4 million and $0.3 million, respectively.

Options to purchase 6.3 million and 6.7 million shares with weighted average exercise prices of $4.34 and $4.27 per share were exercisable at March 31, 2013 and 2012, respectively.

Valuation Assumptions

The fair value of the Company’s share-based payment awards for the three months ended March 31, 2013 and 2012 was estimated on the grant dates using the Black-Scholes valuation option-pricing model with the following assumptions:

	Three Months Ended March 31,
Employee stock options:	2013	2012
Risk-free interest rate	0.6%	0.7% - 0.8%
Volatility	58.5% - 59.1%	66.8%
Expected life (years)	4.0	4.0
Dividend yield	0%	0%

The risk-free interest rate was derived from the Daily Treasury Yield Curve Rates as published by the U.S. Department of the Treasury as of the grant date for terms equal to the expected terms of the options. The expected volatility was based on the combination of: 1) four-year historical volatility and 2) implied volatility of the Company’s stock price. The expected term of options granted was derived from historical data based on employee exercises and post-vesting employment termination behavior. A dividend yield of zero is applied because the Company has never paid dividends and has no intention to pay dividends in the near future.

The stock-based compensation expense recorded is adjusted based on estimated forfeiture rates. An annualized forfeiture rate has been used as a best estimate of future forfeitures based on the Company’s historical forfeiture experience. The stock-based compensation expense will be adjusted in later periods if the actual forfeiture rate is different from the estimate.

Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved the 2010 Employee Stock Purchase Plan (ESPP). A total of 2,000,000 shares of common stock have been reserved for issuance under the ESPP. The ESPP, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the board of directors or the compensation committee of the board of directors. The ESPP provides that eligible employees may purchase up to $25,000 worth of the Company’s common stock annually over the course of two six-month offering periods. The purchase price to be paid by participants is 85% of the price per share of the Company’s common stock either at the beginning or the end of each six-month offering period, whichever is less. On September 1, 2010, the Company commenced the first offering period under the ESPP. On February 28, 2013, approximately 147,000 shares of common stock were issued at an aggregate purchase price of $426,000 under the ESPP. As of March 31, 2013, there were approximately 1,189,000 shares authorized and unissued under the ESPP.