Note 12. Share-based Compensation

Beginning in 2011, our stock-based compensation program consisted of a combination of: time vesting stock options with graduated vesting over a four year period; performance and market vesting common stock units, or PSUs, tied to the achievement of pre-established company performance metrics and market based goals over a three-year performance period; and, time vesting restricted stock awards, or RSUs, granted to our non-employee directors vesting over a one year period. Grants under our former stock based compensation program consisted only of time vesting stock options.

The fair values of our share-based awards are determined as follows:

•

Stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model and compensation expense is recognized over the applicable vesting period;

•

PSUs subject to company specific performance metrics, which include both performance and service conditions, are based on the market value of our stock on the date of grant. Compensation expense is based upon the number of shares expected to vest after assessing the probability that the performance criteria will be met. Compensation expense is recognized over the vesting period, adjusted for any changes in our probability assessment;

•

PSUs subject to our total shareholder return, or TSR, market metric relative to a peer group of companies, which includes both market and service conditions, are estimated using a Monte Carlo simulation. Compensation expense is based upon the number and value of shares expected to vest. Compensation expense is recognized over the applicable vesting period. All compensation cost for the award will be recognized if the requisite service period is fulfilled, even if the market condition is never satisfied; and,

•

Time vesting RSUs are based on the market value of our stock on the date of grant. Compensation expense for time vesting RSUs is recognized over the vesting period.

The vesting period for our stock awards is the requisite service period associated with each grant.

Share-based compensation expense consisted of the following for the years ended December 31, 2011, 2010 and 2009:


(in thousands)	December 31,
(in thousands)	2011		2010		2009
Stock options	$	12,154	$	11,047	$	11,547
Performance shares		1,535		—		—
Restricted shares		401		—		—
Employee Stock Purchase Plan		152		129		270

Total	$	14,242	$	11,176	$	11,817

Our share-based compensation expense is recorded as follows:


(in thousands)	December 31,
(in thousands)	2011		2010		2009
Research and development	$	3,335	$	3,329	$	3,192
Selling, general and administrative		10,907		7,847		8,625

Total	$	14,242	$	11,176	$	11,817

We currently have three option plans in place: a 1995 Stock Option and Restricted Share Plan ("1995 Plan"), a 2001 Equity Incentive Plan ("2001 Plan") and a 2005 Stock Option and Restricted Share Plan ("2005 Plan") (collectively, the "Plans"). In September 2005, the 1995 Plan expired and no additional grants will be issued from this plan. The Plans were adopted by our board of directors to provide eligible individuals with an opportunity to acquire or increase an equity interest in the Company and to encourage such individuals to continue in the employment of the Company.

On May 23, 2008, the 2005 Plan was amended and an additional 5,000,000 shares of common stock was reserved for issuance upon the exercise of stock options or the grant of restricted shares or restricted share units. This amendment was approved by stockholders at our Annual Meeting of Stockholders in May of 2010. As of December 31, 2011, there were 4,163,477 shares available for grant under the Plans.

The following table lists information about these equity plans at December 31, 2011:


	1995 Plan		2001 Plan		2005 Plan		Combined
Shares authorized for issuance		4,500,000		500,000		12,850,000		17,850,000
Shares outstanding		4,500,000		500,000		8,686,523		13,686,523

Shares available for grant		—		—		4,163,477		4,163,477

Employee Stock Option Plans

Stock options granted under the 2005 Plan must be granted at an exercise price not less than the fair value of the Company's common stock on the date of grant. Stock options granted under the 2001 Plan can be granted at an exercise price that is less than the fair value of the Company's common stock at the time of grant. Stock options granted under the 1995 Plan were granted at an exercise price not less than the fair value of the Company's common stock on the date of grant. Stock options granted from the Plans are exercisable for a period not to exceed ten years from the date of grant.

Vesting schedules for the stock options vary, but generally vest 25% per year, over four years. Shares issued under the Plans are new shares. The Plans provide for the delegation of certain administrative powers to a committee comprised of company officers.

Options granted during 2011, 2010 and 2009 had weighted average fair values of $11.41, $6.68 and $6.73 per option. The fair value of each option grant was estimated throughout the year using the Black-Scholes option-pricing model using the following assumptions for the Plans:


	2011	2010	2009
Expected dividend yield	-	-	-
Range of risk free interest rate	1.4% - 2.9%	1.9% - 3.4%	1.6% - 3.4%
Weighted-average volatility	67.8%	71.4%	77.2%
Range of volatility	62.3% - 69.3%	69.3% - 72.4%	71.5% - 79.9%
Range of expected option life (in years)	5.50 - 6.25	5.50 - 6.25	5.50 - 6.25

The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Volatility is based on the Company's historical stock price using the expected life of the grant.

We estimate forfeiture rates for all share-based awards and monitor stock options exercises and employee termination patterns in estimating the forfeiture rate.

The following table lists option grant activity for the year ended December 31, 2011:


	Share Options			Weighted average exercise price per share
Balance at December 31, 2008		6,301,714		$	10.95
Granted		1,571,009			9.94
Exercised		(51,125	)		10.67
Forfeited		(167,062	)		11.72
Expired		(64,341	)		16.13

Balance at December 31, 2009		7,590,195			10.68
Granted		2,114,784			10.12
Exercised		(649,311	)		5.53
Forfeited		(66,393	)		10.21
Expired		(435,943	)		22.74

Balance at December 31, 2010		8,553,332			10.45
Granted		1,859,778			18.08
Exercised		(1,547,787	)		9.20
Forfeited		(274,057	)		13.62
Expired		(106,025	)		27.47

Balance at December 31, 2011		8,485,241		$	12.03

The total intrinsic value of share options exercised during the year ended December 31, 2011, 2010 and 2009 was approximately $18.2 million, $5.9 million and $0.1 million, respectively.

We have 8,485,241 option grants outstanding at December 31, 2011 with exercise prices ranging from $1.00 per share to $27.21 per share and a weighted average remaining contractual life of 6.79 years. The following table lists the outstanding and exercisable option grants as of December 31, 2011:


	Number of options		Weighted average exercise price		Weighted average remaining contractual term (years)		Aggregate intrinsic value (in thousands)
Outstanding		8,485,241	$	12.03		6.79	$	130,302
Exercisable		4,392,296	$	10.64		5.30	$	73,585

As of December 31, 2011, there was $25.8 million of total unrecognized compensation cost related to unvested share-based payments (including share options) granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of shares vested during the year ended December 31, 2011 was $11.6 million.

Performance Awards

Beginning in 2011, employees receive annual grants of performance award units, or PSUs, in addition to stock options which give the recipient the right to receive common stock that is contingent upon achievement of specified pre-established company performance goals over a three year performance period. The performance goals for the PSUs granted in January 2011, which are accounted for as equity awards, are based upon the following performance measures: (i) our revenue growth over the performance period, (ii) our adjusted net income as a percent of sales at the end of the performance period, and (iii) our relative total shareholder return, or TSR, compared to a peer group of companies at the end of the performance period. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of shares greater or less than their target number of shares granted, ranging from 0% to 200% of the PSUs granted. Shares of our common stock are issued on a one-for-one basis for each PSU earned. Participants vest in their PSUs at the end of the performance period.

The fair value of the market condition PSUs was determined using a Monte Carlo simulation and utilized the following inputs and assumptions:


	December 31, 2011
(in thousands)	December 31, 2011
Closing stock price on grant date	$	17.84
Performance period starting price	$	16.85
Term of award (in years)		2.99
Volatility		69.75	%
Risk-free interest rate		1.19	%
Expected dividend yield		0.00	%
Fair value per TSR PSU	$	24.38

The performance period starting price is measured as the average closing price over the last 30 trading days prior to the performance period start. The Monte Carlo simulation model also assumed correlations of returns of the prices of our common stock and the common stocks of the comparator group of companies and stock price volatilities of the comparator group of companies.

At December 31, 2011, for the purposes of determining stock based compensation we assumed 248,942 and 16,512 performance condition PSUs and TSR based PSUs outstanding, respectively, with weighted-average grant date fair values of $ 17.84 and $ 24.38, respectively.

At December 31, 2011, there was approximately $3.2 million of unrecognized compensation cost related to all PSUs that is expected to be recognized over a weighted-average period of approximately 2.02 years.

The following table summarizes select information regarding our PSUs as of December 31, 2011:


	Share Units (in thousands)			Weighted- average grant date fair value
Balance at December 31, 2010		—		$	—
Granted		173,107			18.50
Vested		—			—
Forfeited		(8,415	)		18.49

Balance at December 31, 2011		164,692		$	18.50

Restricted Stock Awards

Beginning in 2011, we also grant our non-employee directors restricted stock awards that vest after one year of service. The fair value of a restricted stock award is equal to the closing price of our common stock on the grant date. The following summarizes select information regarding our restricted stock awards as of December 31, 2011:


	Share Units (in thousands)		Weighted- average grant date fair value
Balance at December 31, 2010		—	$	—
Granted		27,000		17.30
Vested		—		—
Forfeited		—		—

Balance at December 31, 2011		27,000	$	17.30

As of December 31, 2011, there was approximately $ 0.07 million of unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted average period of 0.14 years.

Employee Stock Purchase Plan

In 2000, the stockholders of the Company approved an employee stock purchase plan. A total of 300,000 shares originally were available under this plan. Since inception of the plan, the stockholders of the Company have approved amendments to the plan to increase the number of shares available for issuance under the plan by 600,000 shares. Under this plan, 29,982, 48,909 and 69,806 shares were sold to employees during 2011, 2010 and 2009. As of December 31, 2011 there are approximately 400,078 shares available for issuance under this plan.

Under this plan, employees may purchase common stock through payroll deductions in semi-annual offerings at a price equal to the lower of 85% of the closing price on the applicable offering commencement date or 85% of the closing price on the applicable offering termination date. Since the total payroll deductions from the plan period are used to purchase shares at the end of the offering period, the number of shares ultimately purchased by the participants is variable based upon the purchase price. Shares issued under the employee stock purchase plan are new shares. There are two plan periods: January 1 through June 30 ("Plan Period One") and July 1 through December 31 ("Plan Period Two"). The plan qualifies under Section 423 of the Internal Revenue Code.

the closing price on the applicable offering termination date. Since the total payroll deductions from the plan period are used to purchase shares at the end of the offering period, the number of shares ultimately purchased by the participants is variable based upon the purchase price. Shares issued under the employee stock purchase plan are new shares. There are two plan periods: January 1 through June 30 ("Plan Period One") and July 1 through December 31 ("Plan Period Two"). The plan qualifies under Section 423 of the Internal Revenue Code.

The fair value of the share-based payments was approximately $152,000. The fair value was estimated using the Type B model, with the following assumptions:


	2011 Plan Period			2011 Plan Period
	Two			One
Risk free interest rate		0.10	%		0.19	%
Volatility		38.0	%		37.8	%
Expected option life (in years)		0.5			0.5

Under Plan Period Two, 12,991 shares were sold to employees on December 31, 2011 at $16.47 per share, which represents the closing price on the offer termination date of $19.38 per share at 85%.

Under Plan Period One, 16,991 shares were sold to employees on June 30, 2011 at $15.14 per share, which represents the closing price on the offer termination date of $17.81 per share at 85%.