Note 6. Stock-Based Compensation

Total stock-based compensation recognized in the Company’s condensed consolidated statements of operations for the three and nine months ended December 31, 2011 and 2010 was as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	Three Months Ended December 31,				Nine Months Ended December 31,
	2011		2010		2011		2010
	(in $000’s)				(in $000’s)
Cost of product revenue	$	66	$	51	$	216	$	163
Research and development		397		214		1,269		750
Selling, general and administrative		1,310		1,007		4,419		3,105

	$	1,773	$	1,272	$	5,904	$	4,018

Stock Option Activity

The following table summarizes the stock option activity for the nine months ended December 31, 2011:


						Weighted
	Shares			Weighted		Average		Aggregate
	Underlying			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		58			16.34
Exercised		(1,241	)		9.41
Cancelled		(123	)		11.63
Expired		(95	)		21.22

Outstanding at December 31, 2011		4,544		$	10.32		6.15	$	37,106

Exercisable at December 31, 2011		3,238		$	10.76		5.44	$	24,916

The remaining unrecognized stock-based compensation expense for unvested stock option awards at December 31, 2011 was approximately $3.3 million, net of forfeitures, and the weighted-average time over which this cost is expected to be recognized is 2.0 years.

The total intrinsic value of options exercised was $9.9 million for the nine months ended December 31, 2011. The total fair value of options vested during the nine months ended December 31, 2011 was $3.6 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 and nine months ended December 31, 2011 were calculated using the following weighted-average assumptions:


	Three Months Ended			Nine Months Ended
	December 31,			December 31,
	2011			2011
Risk-free interest rate		0.92	%		1.49	%
Expected option life (years)		5.09			5.23
Expected volatility		55.1	%		52.7	%

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 and nine months ended December 31, 2011 was $7.98 and $8.01, respectively.

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 for the nine months ended December 31, 2011:


				Weighted Average
	Number of			Grant Date
	Shares (in 000’s)			Fair Value
Restricted stock awards and restricted stock units at April 1, 2011		407		$	9.84
Granted		596			17.70
Vested		(134	)		10.88
Forfeited		(2	)		18.49

Restricted stock awards and restricted stock units at December 31, 2011		867		$	15.07

The remaining unrecognized compensation expense for restricted stock awards and restricted stock units, including performance based awards, at December 31, 2011 was approximately $8.0 million and the weighted-average time over which this cost is expected to be recognized is 2.3 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 performance based 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 would vest upon achievement of prescribed performance milestones. During the year ended March 31, 2011, the Company determined that the prescribed performance targets were met and the compensation expense is being recognized accordingly over the remaining service period.

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 therefore recorded the adjustment in the quarter ended June 30, 2011.

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 would vest upon achievement of prescribed service and revenue performance milestones. As of December 31, 2011, the Company believes it is probable that the prescribed performance targets will be met for these awards, and the compensation expense is being recognized accordingly.

As of December 31, 2011, the Company has recorded $3.5 million in stock-based compensation for shares in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these restricted stock and restricted stock units at December 31, 2011 is $4.3 million based on the Company’s current assessment of probability of achieving the performance milestones.