Note 7. Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations (in thousands):


	Three Months Ended September 30,				Six Months Ended September 30,
	2012		2011		2012		2011

Cost of product revenue	$	101	$	73	$	247	$	149
Research and development		435		372		998		872
Selling, general and administrative		1,748		1,354		3,718		3,110

	$	2,284	$	1,799	$	4,963	$	4,131

The components of stock-based compensation were as follows (in thousands):


	Three Months Ended September 30,				Six Months Ended September 30,
	2012		2011		2012		2011

Stock options	$	582	$	602	$	1,552	$	1,505
Restricted stock		122		304		460		1,460
Restricted stock units		1,542		845		2,865		1,101
Employee stock purchase plan		38		48		86		65

	$	2,284	$	1,799	$	4,963	$	4,131

Stock Options

The following table summarizes the stock option activity for the six months ended September 30, 2012:


	Shares Underlying Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at April 1, 2012		4,268		$	10.42		6.03
Granted		319			22.43
Exercised		(289	)		8.63
Cancelled and expired		(56	)		9.93

Outstanding at September 30, 2012		4,242		$	11.43		5.78	$	41,046

Exercisable at September 30, 2012		3,199		$	10.76		5.02	$	32,714

Options vested and expected to vest at September 30, 2012		4,001		$	11.42		5.66	$	38,723

The aggregate intrinsic value of options exercised was $4.2 million and $6.0 million for the six months ended September 30, 2012 and 2011, respectively. The total fair value of options vested during the six months ended September 30, 2012 and 2011 was $2.1 million and $3.3 million, respectively.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at September 30, 2012 was approximately $4.5 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.8 years.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The weighted average grant-date fair value for options granted during the six months ended September 30, 2012 and 2011 was $10.12 per share and $7.72 per share, respectively.

The fair value of options granted during the three and six months ended September 30, 2012 and 2011 were calculated using the following weighted average assumptions:


	Three Months Ended September 30,						Six Months Ended September 30,
	2012			2011			2012			2011
Risk-free interest rate		0.68	%		0.94	%		0.77	%		1.72	%
Expected option life (years)		4.20			5.21			4.32			5.29
Expected volatility		56.2	%		53.1	%		56.3	%		51.8	%

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 and adjusted for factors not reflected in historical volatility that may be more indicative of future volatility. The Company estimates the expected term of options based on historical exercise trends and estimates of future exercises of unexercised options.

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. In addition, an expected dividend yield of zero is used in the option valuation model, because the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

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 six months ended September 30, 2012:


	Number of Shares (in 000’s)			Weighted Average Grant Date Fair Value
Outstanding at April 1, 2012		871		$	15.76
Granted		397			22.32
Vested		(218	)		13.62
Forfeited		(23	)		20.32

Outstanding at September 30, 2012		1,027		$	18.65

The remaining unrecognized compensation expense for outstanding restricted stock awards and restricted stock units, including performance-based awards, as of September 30, 2012 was $11.3 million and the weighted-average period over which this cost will be recognized is 2.3 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the six months ended September 30, 2012 and 2011 was $22.32 per share and $17.70 per share, respectively. The total fair value of restricted stock and restricted stock units vested during the six months ended September 30, 2012 and 2011 was $3.0 million and $1.5 million, respectively.

Performance Based Awards

Included in the restricted stock and restricted stock units activity discussed above are certain awards that vest subject to certain performance-based criteria.

In May 2012, performance-based awards of restricted stock units for the potential issuance of 195,188 shares of common stock were issued to certain executive officers and employees, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of September 30, 2012, 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.

In May 2011 and June 2011, performance-based 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 of the Company, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of September 30, 2012, the Company has met the prescribed targets for 184,000 shares underlying these awards and believes it is probable that the prescribed performance targets will be met for the remaining 100,000 shares, and the compensation expense is being recognized accordingly.

During the three and six months ended September 30, 2012, the Company recorded $1.0 million and $1.9 million, respectively, in stock-based compensation expense for equity awards in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these equity awards at September 30, 2012 is $5.7 million based on the Company’s current assessment of probability of achieving the performance milestones. The weighted-average period over which this cost will be recognized is 2.3 years.