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SHARE-BASED PAYMENTS

Stock Option Plans

During the fiscal year ended July 31, 2012, the Company had awards for stock options under five plans: the 2004 Stock Incentive Plan (the “2004 Plan”), the 2002 Non-Officer Employee Stock Incentive Plan (the “2002 Plan”), the 2000 Stock Incentive Plan (the “2000 Plan”), the 2005 Non-Employee Director Plan (the “2005 Plan”) and the 2010 Incentive Award Plan (the “2010 Plan”). Options granted under the 2010 Plan, 2004 Plan, 2002 Plan and the 2000 Plan are generally exercisable as to 25% of the shares underlying the options beginning one year after the date of grant, with the option being exercisable as to the remaining shares in equal monthly installments over the next three years. Stock options granted under these plans have contractual terms of seven years. The Company may also grant awards other than stock options under the 2010 Plan.

In December 2010, at the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved the 2010 Plan, pursuant to which the Company may grant stock options, stock appreciation rights, restricted stock awards and other equity-based awards for the issuance of (i) 5,000,000 shares of common stock of the Company plus (ii) the number of shares subject to outstanding awards under the Company’s 2000 Plan, 2002 Plan and 2004 Plan (collectively, the “Prior Plans”) that expire or are forfeited following December 8, 2010, the effective date of the 2010 Plan. As of December 8, 2010, the Company ceased making any further awards under its Prior Plans. As of December 8, 2010, the effective date of the 2010 Plan, there were an additional 2,922,258 shares of Common Stock underlying equity awards issued under the Company’s Prior Plans. This amount represents the maximum number of additional shares that may be added to the 2010 Plan should these awards expire or be forfeited subsequent to December 8, 2010. Any awards that were outstanding under the Prior Plans as of the effective date continued to be subject to the terms and conditions of such Prior Plan. As of July 31, 2012, 4,745,581 shares were available for future issuance under the 2010 Plan.

In December 2005, at the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved the 2005 Plan, pursuant to which the Company may grant non-qualified stock options to certain members of the Board of Directors. The 2005 Plan replaced the Company’s Amended and Restated 1999 Stock Option Plan for Non-Employee Directors (“1999 Plan”). No additional options will be granted under the 1999 Plan; however, all then outstanding options under the 1999 Plan remained in effect in accordance with their respective terms. Pursuant to the 1999 Plan, 200,000 shares of the Company’s common stock were initially reserved for issuance. Up to 200,000 shares of common stock may be issued pursuant to awards granted under the 2005 Plan (subject to adjustment in the event of stock splits and other similar events). Prior to December 8, 2010, the Plan provided that each eligible director would automatically be granted an option to acquire 20,000 shares of Common Stock (the “Initial Option”) upon election to the Board. Each director who ceased to be an Affiliated Director (as defined in the 2005 Plan) and was not otherwise an employee of the Company or any of its subsidiaries or affiliates would be granted, on the date such director ceased to be an Affiliated Director but remained as a member of the Board of Directors, an Initial Option to acquire 20,000 shares of Common Stock under the 2005 Plan. Each Initial Option vests and becomes exercisable on a monthly basis as to 1/36th of the number of shares of Common Stock originally subject to the option on each monthly anniversary of the date of grant, provided that the optionee serves as a director on such monthly anniversary date. On December 8, 2010, the Board of Directors amended the 2005 Plan to eliminate the Initial Option. Prior to September 23, 2009, the 2005 Plan also provided that on the date of each annual meeting of stockholders of the Company, each eligible Director who was both serving as Director immediately prior to and immediately following such annual meeting, and who had served on the Board for at least six months, would automatically be granted an option to purchase 2,400 shares of Common Stock (an “Annual Option”). Each Annual Option vests and becomes exercisable on a monthly basis as to 1/36th of the number of shares originally subject to the option on each monthly anniversary of the date of grant, provided that the optionee serves as a Director on such monthly anniversary date. On September 23, 2009, the Board of Directors amended the 2005 Plan to eliminate the Annual Option. Stock options granted under the 2005 Plan have contractual terms of 10 years. Due to the amendments to the 2005 Plan, the Company no longer issues shares under the 2005 Plan.

The Board of Directors administers all stock plans, approves the individuals to whom options will be granted, and determines the number of shares and exercise price of each option and may delegate this authority to a committee of the Board or to certain officers of the Company in accordance with SEC regulations and applicable Delaware law.

Employee Stock Purchase Plan

On October 4, 1994, the Board of Directors of the Company adopted the 1995 Employee Stock Purchase Plan, as amended (the “ESPP”). During fiscal year 2002, the ESPP was amended to increase the aggregate number of shares that may be issued from the ESPP to 300,000 shares. In December 2009, at the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the ESPP to increase the aggregate number of shares that may be issued from the plan to 600,000 shares. Approximately 222,000 shares are available for future issuance as of July 31, 2012. Under the ESPP, employees who elect to participate in the ESPP instruct the Company to withhold a specified amount through payroll deductions during each quarterly period. On the last business day of each applicable quarterly payment period, the amount withheld is used to purchase the Company’s common stock at a purchase price equal to 85% of the lower of the market price on the first or last business day of the quarterly period. During the fiscal years ended July 31, 2012, 2011, 2010, and 2009 the Company issued approximately 23,000, 34,000, 39,000, and 35,000 shares, respectively, under the ESPP.

Stock Option Valuation and Expense Information under ASC Topic 718

The following table summarizes share-based compensation expense related to employee stock options, employee stock purchases and nonvested shares for the fiscal years ended July 31, 2012, 2011, 2010, and 2009:


	Years Ended July 31,
	2012		2011		2010		2009
	(in thousands)
Cost of revenue	$	344	$	374	$	337	$	392
Selling, general and administrative		2,646		3,107		3,817		4,711

	$	2,990	$	3,481	$	4,154	$	5,103

The Company estimates the fair value of stock option awards on the date of grant using a binomial-lattice model. The weighted-average grant date fair value of employee stock options granted during the fiscal years ended July 31, 2012, 2011, 2010, and 2009 was $1.98, $2.97, $3.73, and $3.22, respectively, using the binomial-lattice model with the following weighted-average assumptions:


	Years Ended July 31,
	2012			2011			2010			2010
Expected volatility		59.56	%		62.64	%		65.77	%		56.64	%
Risk-free interest rate		0.84	%		0.99	%		1.88	%		2.34	%
Expected term (in years)		4.66			4.27			4.08			4.08
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

The volatility assumption for fiscal years 2012, 2011, 2010, and 2009 is based on the weighted average of the historical volatility of the Company’s common shares for a period equal to the expected term of the stock option awards.

The weighted average risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates, as of the month of the grants.

The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is based on historical option activity. The determination of the expected term of employee stock options assumes that employees’ exercise behavior is comparable to historical option activity. The binomial-lattice model estimates the probability of exercise as a function of time based on the entire history of exercises and cancellations on all past option grants made by the Company. The expected term generated by these probabilities reflects actual and anticipated exercise behavior of options granted historically.

As share-based compensation expense recognized in the Consolidated Statement of Operations for the fiscal years ended July 31, 2012, 2011, 2010, and 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

Stock Options

A summary of option activity for the fiscal year ended July 31, 2012 is as follows:


	Number of shares			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(in thousands, except exercise price and years)
Stock options outstanding, July 31, 2011		2,566		$	10.97
Granted		1,252			4.26
Exercised		(2	)		3.78
Forfeited or expired		(1,129	)		10.11

Stock options outstanding, July 31, 2012		2,687		$	8.20		4.30	$	5

Stock options exercisable, July 31, 2012		1,289		$	11.46		2.61	$	5

As of July 31, 2012, unrecognized share-based compensation related to stock options was approximately $2.0 million. This cost is expected to be expensed over a weighted average period of 1.9 years. The aggregate intrinsic value of options exercised during the fiscal years ended July 31, 2012, 2011, 2010, and 2009 was approximately $0.00 million, $0.01 million, $0.10 million, and $0.00 million, respectively.

As of July 31, 2012, there were 2.6 million stock options that were vested and expected to vest in the future with an aggregate intrinsic value of $5 thousand and a weighted-average remaining contractual term of 4.23 years.

Nonvested Stock

Nonvested stock are shares of common stock that are subject to restrictions on transfer and risk of forfeiture until the fulfillment of specified conditions. Nonvested stock is expensed ratably over the term of the restriction period, ranging from one to five years unless there are performance restrictions placed on the nonvested stock, in which case the nonvested stock is expensed using graded vesting. Nonvested stock compensation expense for the fiscal years ended July 31, 2012, 2011, 2010, and 2009 was approximately $1.6 million, $1.6 million, $1.5 million, and $1.9 million, respectively.

A summary of the status of our nonvested stock for the fiscal year ended July 31, 2012, is as follows:


	Number of shares			Weighted average grant date fair value
	(in thousands, except fair values)
Nonvested stock outstanding, July 31, 2011		566		$	7.93
Granted		461			2.27
Vested		(266	)		7.77
Forfeited		(357	)		2.29

Nonvested stock outstanding, July 31, 2012		404		$	6.56

The fair value of nonvested shares is determined based on the market price of the Company’s common stock on the grant date. The total grant date fair value of nonvested stock that vested during the fiscal years ended July 31, 2012, 2011, 2010, and 2009 was approximately $2.1 million, $1.5 million, $1.9 million and $1.0 million, respectively. As of July 31, 2012, there was approximately $0.8 million of total unrecognized compensation cost related to nonvested stock to be recognized over a weighted-average period of 1.3 years.