Note 6. Stock-Based Compensation

Total stock-based compensation recognized in the Company’s condensed consolidated statements of operations for the three months ended June 30, 2011 and 2010 was as follows:


	Three Months Ended June 30,
	2011		2010
	(in $000’s)
Cost of product revenue	$	76	$	62
Research and development		500		310
Selling, general and administrative		1,756		999

	$	2,332	$	1,371

The $2.3 million in stock-based compensation expense for the three months ended June 30, 2011 includes $0.9 million related to stock options and $1.4 million related to restricted stock, restricted stock units and the Company’s Employee Stock Purchase Plan, or ESPP. Stock compensation related to restricted stock and restricted stock units is primarily related to performance share awards, as described in more detail below. The $1.4 million in stock-based compensation expense for the three months ended June 30, 2010 includes $1.0 million related to stock options and $0.4 million related to restricted stock and the Company’s ESPP.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at June 30, 2011 was approximately $5.6 million, net of forfeitures, and the weighted-average time over which this cost will be recognized is 2.4 years.

Stock Option Activity

The following table summarizes the stock option activity for the three months ended June 30, 2011:


						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
	Options			Exercise		Contractual		Value
	(in thousands)			Price		Term (years)		(in thousands)
Outstanding at April 1, 2011		5,945		$	10.27		6.30
Granted		39			16.83
Exercised		(799	)		9.51
Cancelled		(109	)		11.59
Expired		(52	)		23.51

Outstanding at June 30, 2011		5,024		$	11.85		6.46	$	31,443

Exercisable at June 30, 2011		3,565		$	10.64		5.67	$	20,140

The total intrinsic value of options exercised was $5.8 million for the three months ended June 30, 2011. The total fair value of options vested during the three months ended June 30, 2011 was $10.0 million.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The fair value of options granted during the three months ended June 30, 2011 were calculated using the following weighted-average assumptions:


		Three Months Ended June 30,
		2011
Risk-free interest rate		1.83%
Expected option life (years)		5.30
Expected volatility		51.6%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock. The Company estimates the expected term based on historical experience. The expected dividend yield was zero, since the Company does not pay cash dividends and does not expect to pay cash dividends in the future. The calculation of the fair value of the options is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future.

The weighted-average grant-date fair value for options granted during the three months ended June 30, 2011 was $8.39.

Restricted Stock and Restricted Stock Units

In addition to stock option grants, the Company also has the ability to grant restricted stock and restricted stock units. Similar to stock options, these restricted stock and restricted stock unit grants are subject to certain vesting criteria. The following table summarizes the activity as follows:


	Three Months Ended
	June 30, 2011
	Number of Shares (in 000’s)			Weighted Average Grant Date Fair Value
Restricted stock awards and restricted stock units at April 1, 2011		407		$	9.84
Granted		564			18.49
Vested		(134	)		10.88
Forfeited		—			—

Restricted stock awards and restricted stock units at June 30, 2011		837		$	15.51

The remaining unrecognized compensation expense for restricted stock awards and restricted stock units, including performance based awards, at June 30, 2011 was approximately $10.1 million and the weighted-average time over which this cost will be recognized is 2.7 years.

Performance Based Awards

Included in the restricted stock activity discussed above are certain awards granted in fiscal 2011 and 2012 that contain performance based vesting.

During the three months ended June 30, 2010, 311,000 shares of restricted stock and a performance award for the potential issuance of 45,000 shares of common stock were issued to certain executive officers and members of senior management of the Company, all of which could vest upon achievement of prescribed performance milestones. During the year ended March 31, 2011, the Company determined that it met the prescribed performance targets.

During the three months ended June 30, 2011, the Company determined that it should have been using the graded vesting method instead of the straight-line method to expense stock-based compensation for the performance based awards issued in June 2010. This resulted in additional stock based compensation expense of approximately $0.6 million being recorded during the three months ended June 30, 2011 that should have been recorded during the year ended March 31, 2011. The Company believes that the amount is not material to its March 31, 2011 consolidated financial statements and has therefore recorded the adjustment in the current quarter.

During the three months ended June 30, 2011, performance awards of restricted stock units for the potential issuance of 284,000 shares of common stock were issued to certain executive officers and members of the senior management, all of which could vest upon achievement of prescribed revenue performance milestones. As of June 30, 2011, the Company believes it is probable that it will meet the prescribed performance targets for these awards.

As of June 30, 2011, the Company has recorded $2.2 million in stock-based compensation for shares and options in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these shares and options at June 30, 2011 is $5.8 million based on the Company’s current assessment of probability of achieving the performance milestones.