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<!-- Begin Block Tagged Note 3 - us-gaap:DisclosureOfCompensationRelatedCostsShareBasedPaymentsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. Stock-Based Compensation</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">At July 3, 2010, the 2005 Stock Incentive Plan, as amended and restated (2005 Plan), is our one
active stock-based employee compensation plan under which new awards may be granted. Awards under
the 2005 Plan include incentive stock options, non-qualified option grants and restricted stock.
Amounts recognized in our financial statements related to stock-based compensation were as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000">Three Months Ended</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000">Six Months Ended</td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left">(in thousands)</td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">July 3, 2010</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">July 4, 2009</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">July 3, 2010</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">July 4, 2009</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr style="font-size: 1px">
<td colspan="9" align="left" style="border-top: 1px solid #000000">     </td>
<td> </td>
<td colspan="7" align="left" style="border-top: 1px solid #000000">   </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cost of sales
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">253</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">245</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">501</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">486</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Marketing and selling
</div></td>
<td> </td>
<td> </td>
<td align="right">510</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">512</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">961</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">967</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Research and development
</div></td>
<td> </td>
<td> </td>
<td align="right">300</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">302</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">585</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">589</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">General and administrative
</div></td>
<td> </td>
<td> </td>
<td align="right">1,238</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,201</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,083</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,434</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total stock-based
compensation expense
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">2,301</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2,260</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4,130</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4,476</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Options granted under the 2005 Plan generally become exercisable for twenty-five percent of the
shares on the first anniversary date of the grant and 6.25 percent at the end of each quarter
thereafter. Options are granted with an exercise price equal to the fair market value of the
common stock on the date of the grant.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Options granted under our 2005 Plan generally have a stated expiration, if not exercised or earlier
terminated, seven
years after the date of grant. Options that were granted under our 2000 Equity Incentive Plan
(2000 Plan) generally have a stated expiration, if not exercised or earlier terminated, ten years
after the date of grant.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">Stock option activity under our 2005 Plan and 2000 Plan for the six months ended July 3, 2010 was
as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="64%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Weighted average</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Aggregate</td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Options</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">exercise price</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Intrinsic</td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">outstanding</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">per share</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">Value</td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="center" colspan="2" nowrap="nowrap">(in thousands)</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at January 2, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">7,161,545</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15.08</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td> </td>
<td align="right">1,118,850</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18.77</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Exercised
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,152,016</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">14.08</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Cancelled or expired
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(263,164</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">17.78</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at July 3, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">6,865,215</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15.74</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">43,959</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Options exercisable at July 3, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">4,084,516</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15.84</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">25,783</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">The total intrinsic value of options exercised during the three and six months ended July 3, 2010
was $5.0 million and $7.8 million, respectively. As of July 3, 2010, we had $13.5 million of
unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options
granted under our 2005 Plan. We expect that cost to be recognized over a weighted average period
of 2.8 years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Restricted stock awards are granted under the 2005 Plan. Restricted stock awards are subject to
forfeiture if employment or service terminates prior to the release of the restrictions.
Restricted stock generally vest over a three or four year period. During the vesting period,
ownership of the shares cannot be transferred. Restricted stock is considered issued and
outstanding at the grant date and has the same dividend and voting rights as other common stock.
We recognize compensation expense for the fair value of the restricted stock grants issued based on
the closing stock price on the date of grant. The 2005 Plan does not designate the specific number
of shares available for restricted stock grants, as these are issued from the full pool of shares
available under the plan. The option pool is reduced by two shares for each restricted share
granted.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">Restricted stock activity under our 2005 Plan for the six months ended July 3, 2010 was as follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Unvested Shares</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2">Weighted average</td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">outstanding</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000">grant date fair value</td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at January 2, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">233,525</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">15.79</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td> </td>
<td align="right">120,480</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">18.83</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Vested
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(30,647</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">16.08</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Cancelled
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(13,850</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">15.89</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at July 3, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">309,508</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">16.94</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">As of July 3, 2010, we had $3.9 million of unrecognized compensation cost, net of estimated
forfeitures, related to unvested restricted stock awards granted under our 2005 Plan. We expect
that cost to be recognized over a weighted average period of 2.9 years.
</div>
</div>
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Disclosure of compensation-related costs for share-based compensation which may include disclosure of policies, compensation plan details, allocation of stock compensation, incentive distributions, share-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.
Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 123R
-Paragraph 64, 65, A240
Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher AICPA
-Name Statement of Position (SOP)
-Number 93-6
-Paragraph 53
Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Staff Accounting Bulletin (SAB)
-Number Topic 14
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