8. Share-Based Compensation

The following table presents share-based compensation expense included in the Company’s consolidated statements of operations for the years ended July 31, 2012, 2011 and 2010 (in thousands):


	July 31,
	2012		2011		2010
Cost of product revenue	$	164	$	185	$	237
Cost of service revenue		454		281		272
Research and development		1,519		848		1,092
Sales and marketing		749		719		924
General and administrative		903		718		765

Net compensation expense	$	3,789	$	2,751	$	3,290

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in fiscal 2012, 2011 and 2010. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:


	July 31,
	2012			2011			2010
Expected option term(1)		5.8 years			6.1 years			5.2 years
Expected volatility factor (2)		46.9	%		44.5	%		39.2	%
Risk-free interest rate (3)		1.3	%		2.4	%		2.2	%
Expected annual dividend yield (4)		0.0	%		0.0	%		0.0	%

(1)	Historical data on exercise patterns is the basis for estimating the expected life of an option.

(2)	The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

(3)	The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.

(4)	Excludes cash distributions that reduce additional paid in capital.

Stock Incentive Plans

The Company has outstanding equity awards issued under legacy equity plans, including the 1999 Stock Incentive Plan (the “1999 Plan”) and the 1999 Non-employee Director Stock Option Plan (the “1999 Director Plan”). Each of these equity incentive plans remains in effect and has awards outstanding. Since January 6, 2009 new equity awards have been, and the Company also has outstanding equity awards, issued under the Company’s 2009 Stock Incentive Plan (the “2009 Plan”) and the Company’s 2009 Non-employee Director Stock Option Plan (the “2009 Director Plan”).

2009 Stock Incentive Plan

The 2009 Plan was approved by the Company’s Board on November 10, 2008 and became effective upon the approval of the Company’s stockholders on January 6, 2009. The 2009 plan has a ten year term. The 2009 Plan reserves 2,800,000 shares of common stock for issuance of awards, subject to increase by the number of shares granted under the Company’s 1998 and 1999 Plans that are not exercised or are forfeited, lapse or expire to the extent such shares would otherwise again have been available for issuance under such plans. In addition, any shares subject to an award granted under the 2009 Plan that are not exercised or are forfeited, lapse or expire also will be available for future grants of awards under the 2009 Plan. The number of shares available for issuance under the 2009 Plan is subject to adjustment in the event of a merger, stock split, stock dividend, and certain other changes in capitalization, including special cash distributions.

The 2009 Plan authorizes grants of awards including incentive stock options, nonqualified stock options, restricted stock, restricted stock units, performance awards and other awards to officers, directors, employees and consultants of the Company. Subject to certain restrictions, the Compensation Committee of the Board has broad discretion to: (i) interpret and construe the relevant provisions of the 2009 Plan; (ii) to determine which individuals are eligible to receive awards under the Plan; and (iii) to determine the terms and conditions for awards under the Plan, including the number of shares, vesting conditions and any required service criteria. Under the 2009 Plan, stock options may not be granted with an exercise price less than the fair market value of the underlying shares of commons stock on the date of grant. Option awards have a maximum term of ten years and generally vest over a three to five year period. Certain change in control transactions may cause awards granted under the 2009 Plan to vest at an accelerated rate unless the awards are assumed or substituted for in connection with the transaction. As of July 31, 2012, a total of 2,414,430 shares were available for grant under the 2009 Plan.

2009 Non-employee Director Stock Option Plan

On January 6, 2009, the Company’s stockholders also approved the Company’s 2009 Director Plan, which is a formula plan to provide stock options to the Company’s non-employee directors. Each non-employee director, upon initial appointment as a director, is granted an option to purchase 9,000 shares of common stock which vests over three years and, immediately following each annual meeting of stockholders, is automatically granted an option to purchase 3,000 shares of common stock which vests on the earlier of the next annual meeting of stockholders or one year. These stock options are the only awards that may be granted to non-employee directors under the 2009 Director Plan.

The 2009 Director Plan reserves 120,000 shares of common stock for issuance of awards, subject to increase by the number of shares granted under the Company’s 1999 Director Plan that are not exercised, expire or otherwise terminate to the extent such shares would otherwise again be available for issuance under the 1999 Director Plan. In addition, shares subject to an option granted under the 2009 Director Plan that are not exercised, expire or otherwise terminate without delivery of any common stock subject thereto also will be available for future grants of stock options under the 2009 Director Plan. Our Compensation Committee of the Board administers the 2009 Director Plan and, subject to certain restrictions contained in the Plan, has the power to construe it and to adopt rules and regulations for the administration of the Plan. Stock options under the 2009 Director Plan have a maximum ten year term and may not be granted with an exercise price less than the fair market value of the underlying shares of common stock on the date of grant. Certain change in control transactions will cause awards granted under the 2009 Plan to vest at an accelerated rate unless the awards are assumed or substituted for in connection with the transaction. As of July 31, 2012, 48,690 shares were available for grant under the 2009 Director Plan.

Stock Option Activity

Stock option activity under all of the Company’s stock plans during the year ended July 31, 2012 is summarized as follows:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Contractual Term (Years)
Outstanding at July 31, 2011 .		2,993,840		$	20.33		5.59

Options granted .		17,875			18.37
Options exercised .		(140,485	)		17.40
Options canceled .		(729,940	)		21.91

Outstanding at July 31, 2012 .		2,141,290		$	19.96		6.03

Options vested and expected to vest		2,098,875		$	19.95		5.97

Options exercisable at end of period		1,524,776		$	19.80		5.06

The weighted average fair value of stock options granted on dates of grant was $8.21, $9.62 and $12.91 during fiscal years 2012, 2011 and 2010, respectively.

The intrinsic value of stock options exercised, calculated as the difference between the market value of the shares on the exercise date and the exercise price of the option, was $0.3 million, $1.6 million, and $0.2 million for fiscal years 2012, 2011 and 2010, respectively.

The total cash received from employees as a result of employee stock option exercises during fiscal years 2012, 2011 and 2010 was $2.4 million, $6.3 million, and $0.2 million, respectively.

As of July 31, 2012, there was $4.8 million of total unrecognized compensation cost related to nonvested, share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted-average period of 1.6 years.