3. Share-based compensation expense:

The following table presents share-based compensation expenses for continuing operations included in the Company’s Consolidated Statements of Operations for fiscal years 2012, 2011, and 2010:


	Year Ended July 31,
	2012		2011		2010
Cost of product sales	$	802	$	570	$	445
Cost of engineering sales		1,134		—		—
Research and product development		2,680		3,181		1,558
Selling and marketing		1,686		1,110		657
General and administrative		7,094		4,777		3,131

Share-based compensation expense before tax	$	13,396	$	9,638	$	5,791

The Company recognized compensation expense on awards with performance-based awards with earnings per share (“EPS”)-related and total shareholder return (“TSR”)-related conditions along with time-based stock option and restricted stock award conditions as follows:


	Year Ended July 31,
	2012		2011		2010
Peformance based EPS-related condition awards	$	7,204	$	3,573	$	896
Performance based TSR-related condition awards		3,648		2,978		976

Total performance award expense		10,852		6,551		1,872
Time based stock options and restricted stock awards		2,544		3,087		3,919

Total share-based compensation expense before tax	$	13,396	$	9,638	$	5,791

Stock Incentive Plans

On January 29, 2010, the Company’s stockholders approved a new share-based compensation plan named the “2009 Stock Incentive Plan”. Under the Company’s 2009 Stock Incentive Plan, up to 1,600,000 shares of the Company’s common stock, $.05 par value per share, may be awarded to employees. Awards may be in the form of stock options, stock appreciation rights (“SARs”), shares of restricted stock, restricted stock units or other stock-based awards. Stock options granted under the 2009 Stock Incentive Plan may not be granted at an exercise price less than 100% of the fair market value of the common stock on the date of grant. Options may not be granted for a term in excess of ten years. Except in certain circumstances, options that vest based on continued service of the option recipient may not vest earlier than one year from the date of grant. SARs granted under the 2009 Stock Incentive Plan must have a measurement price not less than 100% of the fair market value on the date of grant. SARs may not be granted for a term in excess of ten years. Restricted stock may be granted subject to the Company’s right to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture if such shares are issued at no cost) from the recipient in the event that conditions of the grant are not satisfied prior to the end of the restriction period. Such conditions may include the achievement of performance goals or continued service with the Company. Except in certain circumstances, restricted stock that vests solely based on the passage of time will not vest prior to the first anniversary of the date of grant, be no more than one-third vested prior to the second anniversary of the date of grant, and be no more than two-thirds vested prior to the third anniversary of the date of grant. This plan was amended on January 23, 2012 to, among other things, increase the number of shares available for issuance under the plan to 2,200,000 and allow directors to participate in the plan.

On January 28, 2008, the Company’s stockholders approved a new share-based director compensation plan for the non-employee members of the Company’s Board of Directors (the “Board”) named the “Analogic Corporation Non-Employee Director Stock Plan” (the “Director Plan”). Under the Company’s Director Plan, up to 100,000 shares of the Company’s common stock, $.05 par value per share, may be awarded to directors. During fiscal years 2012, 2011, and 2010 the Company granted shares of 37,107, 3,492, and 2,325, respectively, under this plan. The Director Plan provides for an Annual Share Retainer to be granted to each participant on each February 1. The Annual Share Retainer for calendar years 2012, 2011, and 2010 had a value of $70, $55, $35, respectively. Each participant may elect to receive some or all of (i) his or her Annual Share Retainer for a given calendar year or (ii) his or her Annual Cash Retainer (which consists of the annual base cash compensation he or she receives for service on the Board and on any committees of the Board, and, if applicable, all other compensation received for service as Chairman of the Board and as a Committee Chairman) in the form of “Deferred Stock Units”, as elected by the participant no later than December 15 of the preceding calendar year. This plan was amended on January 23, 2012 to, among other things, have the payment of all outstanding Deferred Stock Units and any future Deferred Stock Units made in common stock instead of cash and that any future dividends earned on Deferred Stock Units be paid in cash instead of additional Deferred Stock Units. The total number of deferred stock units outstanding at July 31, 2012 and 2011 were 28,981 and 25,419, respectively.

During fiscal year 2007, the Company’s stockholders approved two share-based compensation plans, named the “2007 Stock Option Plan” and the “2007 Restricted Stock Plan”. Under the Company’s 2007 Stock Option Plan, options may either be non-qualified options or incentive stock options and may not be granted at an exercise price less than 100% of the fair market value of the common stock on the date of grant (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). Under the Company’s 2007 Stock Option Plan, up to 250,000 shares of the Company’s common stock, $.05 par value per share, may be awarded to employees. Options may not be granted for a term in excess of ten years (or five years in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). Except in certain circumstances, options that vest based on continued service of the optionee may not vest earlier than one year from the date of grant. Unless otherwise provided by the Compensation Committee of the Board (the “Committee”) in the specific option agreement, each option will vest as to 25% of the number of shares of common stock underlying the option on each of the second, third, fourth, and fifth anniversaries of the date of grant.

Under the Company’s 2007 Restricted Stock Plan, recipients are awarded shares of common stock, subject to the right of the Company to repurchase all or part of such shares from the recipient in the event that the conditions specified in the applicable award are not satisfied prior to the end of the applicable restriction period established for such award. Under the Company’s 2007 Restricted Stock Plan, up to 500,000 shares of the Company’s common stock, $.05 par value per share, may be awarded to employees. Such conditions may include the achievement of performance goals or continued service with the Company. Except in certain circumstances, awards that vest based on continued service may not vest earlier than in three equal installments on each of the first three anniversaries of the date of grant. The Committee may condition an award on the recipient not competing with the Company for a one-year period following termination of such recipient’s employment with the Company.

Prior to fiscal year 2007, the Company had two key employee stock option plans (one of which has lapsed as to the granting of options), two key employee stock bonus plans, two non-employee director stock option plans (one of which has lapsed as to the granting of options), and one employee stock purchase plan.

Options granted under the two key employee stock option plans generally become exercisable in installments commencing no earlier than two years from the date of grant and ending no later than six years from the date of grant. Unexercised options expire up to seven years from date of grant. Options issued under the plans are non-qualified options or incentive stock options and are issued at prices of not less than 100% of the fair market value of the common stock at the date of grant. Options granted under the two non-employee director stock option plans become exercisable in equal installments over three years commencing one year from the date of grant and remain exercisable for ten years from the date of grant. Options issued under the plans are non-qualified options and are issued at prices of 100% of the fair market value of the common stock at the date of grant.

Under the Company’s key employee stock bonus plans, restricted common stock may be granted to key employees under terms and conditions as determined by the Board. Generally, participants under the stock bonus plans may not dispose or otherwise transfer stock granted for three years from date of grant. Stock granted under these plans generally vest in four equal installments beginning in the third year from the date of grant.

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s outstanding stock options granted during fiscal years 2012, 2011, and 2010. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for fiscal years 2012, 2011, and 2010 as follows:


	Year Ended July 31,
	2012			2011			2010
Expected option term (1)		5.32 years			4.74 years			4.84 years
Expected volatility factor (2)		42	%		43	%		43	%
Risk-free interest rate (3)		0.95	%		1.18	%		2.20	%
Expected annual dividend yield (4)		0.9	%		1.0	%		1.0	%

(1)	The option life was determined by estimating the expected option life, using historical data.

(2)	The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the most recent five years, which approximates the expected option life of the grant.

(3)	The risk-free interest rate for periods equal to the expected term of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.

(4)	The expected annual dividend yield is calculated by dividing the expected annual dividends by the stock price on the date of grant.

At July 31, 2012 and July 31, 2011, the Company had target performance contingent restricted stock awards outstanding of 451,450 and 447,244, respectively. These awards, which are in the form of restricted stock shares and units, vest if specific pre-established levels of performance have been achieved at the end of a three-year performance cycle. The three year performance cycles for awards outstanding at July 31, 2012 end on July 31, 2013 and 2014. The three year performance cycles for awards outstanding at July 31, 2011 ended or will end on July 31, 2012, 2013, and 2014. The actual number of shares/units to be issued will be determined at the end of the three-year performance cycle and can range from zero to 200% of the target award. The Company grants performance awards with either an EPS related performance condition or a TSR as determined against a specified peer group condition. As of July 31, 2012, of the 451,450 restricted shares/units outstanding, 250,891 had an EPS related performance condition and 200,559 had a TSR related performance condition.

The Company estimates the fair value of restricted stock and restricted stock units based on the quoted market price of its common stock. The Company estimates the fair value of performance based restricted stock and restricted stock units with market conditions based on the use of a Monte-Carlo Simulation Model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

For awards with an EPS-related condition, the Company recognizes compensation expense over the performance period based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is done each quarter and changes in estimates can result in significant expense fluctuations due to the cumulative catch-up adjustment. The fair value of the awards with an EPS-related condition is determined by the closing price of the Company’s common stock on the date of grant.

For awards with a TSR-related condition, the Company recognizes compensation expense on a straight-line basis, net of estimated forfeitures, over an average derived service period of 2.7 years for the awards granted in fiscal years 2010, 2011, and 2012. The weighted average grant date fair values of awards granted with a TSR-related condition was $97.31, $54.27, and $47.47 per share in fiscal years 2012, 2011, and 2010 respectively. The fair value of awards with a TSR-related condition at date of grant was estimated using a Monte-Carlo Simulation model with the following assumptions:


	Year Ended July 31,
	2012			2011			2010
Stock Price (1)	$	57.81		$	41.96		$	40.06
Expected volatility factor (2)		29	%		49	%		51	%
Risk-free interest rate (3)		0.33	%		0.73	%		1.19	%
Expected annual dividend yield (4)		0.0	%		0.0	%		0.0	%

(1)	The stock price is the weighted average closing price of the Company’s common stock on the dates of grant.

(2)	The stock volatility for each grant is determined based on the historical volatility for the peer group companies over a period equal to the remaining term of the performance period from the date of grant for all awards.

(3)	The risk-free interest rate for periods equal to the performance period is based on the U.S. Treasury yield curve in effect at the time of grant.

(4)	Dividends are considered reinvested when calculating TSR. For the purpose of the fair value model, the dividend yield is therefore considered to be 0%.

Under the employee stock purchase plan, eligible participants are granted options to purchase the Company’s common stock twice a year at the lower of 85% of market value at the beginning or end of each period. Calculation of the number of options granted, and subsequent purchase of these shares, is based upon voluntary payroll deductions during each six-month period. The number of options granted to each employee under this plan, when combined with options issued under other plans, is limited to a maximum outstanding value of $25 during each calendar year.

The fair value of each option granted under the employee stock purchase plan was estimated on the expected grant date using the Black-Scholes option pricing model with the following assumptions:


	Year Ended July 31,
	2012			2011			2010
Expected option term		.5 years			.5 years			.5 years
Expected volatility factor		42	%		42	%		50	%
Risk-free interest rate		0.79	%		0.27	%		2.58	%
Expected annual dividend yield		1.0	%		1.0	%		1.1	%

At July 31, 2012, 989,093 shares were reserved for grant under the above stock option, bonus and purchase plans.

The following table sets forth the stock option and restricted stock awards transactions for fiscal year 2012:


	Stock Options Outstanding									Time-Based Unvested Restricted Stock Awards					Performance-Based Unvested Restricted Contingent Restricted Stock Awards
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value		Number of Shares/ Units			Weighted Average Grant Date Fair Value		Number of Shares/Units (1)			Weighted Average Grant Date Fair Value
Outstanding at July 31, 2011		274,522		$	55.18		4.34	$	1,466		51,800		$	44.90		447,244		$	46.95
Granted		132,333			47.09						109,338			51.11		76,084			77.54
Exercised		(35,922	)		46.79
Vesting of restricted stock		—			—						(29,811	)		53.59		(9,665	)		45.98
Cancelled (forfeited and expired)		(29,439	)		46.59						(8,256	)		43.66		(62,213	)		45.87

Outstanding at July 31, 2012		341,494			53.67		4.57		3,708		123,071			48.40		451,450			52.29
Options vested or expected to vest at July 31, 2012 (2)		329,147			53.92		4.53		3,576
Options exercisable at July 31, 2012		198,984			58.61		3.36		1,315

(1)	The number of performance-based unvested restricted stock awards is shown in this table at target. As of July 31, 2012, the maximum number of performance-based unvested restricted stock awards available to be earned is 902,900.

(2)	In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

The weighted average fair value of stock options granted during fiscal years 2012, 2011, and 2010 were $16.71, $15.42, and, $15.39 per share, respectively.

During fiscal years 2012, 2011, and 2010, the total intrinsic value of options exercised (i.e., the difference between the market price and the price paid by the employee to exercise the options) was $489, $195, and $80, respectively, and the total amount of cash received from the exercise of these options was $1,891, $1,122, and $693, respectively. The total fair value of restricted stock grants that vested during fiscal years 2012, 2011, and 2010 was $1,867, $4,138, and $1,379, respectively.

As of July 31, 2012, there was $12,751 of total unrecognized compensation cost, which assumes target performance for the performance based EPS–related condition awards, related to non-vested share-based compensation arrangements granted under the Company’s stock option and restricted stock bonus plans. That cost is expected to be recognized over a weighted-average period of 1.72 years. The Company amortizes share-based compensation on the straight-line method with the exception of performance contingent restricted stock.

The actual tax benefit realized for the tax deductions from option exercises totaled $26, $49, and $28 for fiscal years 2012, 2011, and 2010, respectively.