3. Share-based compensation:

The following table presents share-based compensation expense included in our unaudited condensed Consolidated Statements of Operations:


	Three months Ended October 31,
	2012			2011
Cost of product sales		$	164		$	132
Cost of engineering sales			400			-
Research and product development			308			619
Selling and marketing			340			253
General and administrative			1,432			1,247
Total share-based compensation expense before tax		$	2,644		$	2,251

We recognize compensation expense on performance-based restricted stock grants with earnings per share, or “EPS,”-related and total shareholder return, or “TSR,”-related conditions along with time-based stock options and restricted stock award conditions as follows:


	For the Three Months Ended October 31,
	2012			2011
Peformance based EPS-related condition		$	1,056		$	958
Performance based TSR-related condition			714			775
Total performance-based expense			1,770			1,733
Time based stock options and restricted stock awards			874			518
Total share-based compensation expense before tax		$	2,644		$	2,251

We estimate 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 our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our outstanding stock options granted during fiscal years 2013 and 2012.

During the three months ended October 31, 2012, we granted 97,300 non-qualified stock options. The weighted-average grant-date fair values of options granted were $24.77 and $16.36 per share during the three months ended October 31, 2012 and 2011, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes valuation model with the following assumptions for the three months ended October 31, 2012 and 2011 as follows:


	Three Months Ended October 31,
	2012			2011
Expected option term (1)		5.42 years			5.34 years
Expected volatility factor (2)		41	%		38	%
Risk-free interest rate (3)		0.78	%		0.95	%
Expected annual dividend yield (4)		0.57	%		0.87	%

(1)	The option life term factor was estimated using historical data.

(2)	The expected volatility factor for each grant is determined based on the review of the weighted average of historical daily price changes of our common stock over the most recent expected option term.

(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 October 31, 2012 and 2011, we had 326,585 and 407,137, respectively, target performance contingent restricted stock units outstanding. These awards 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 restricted stock units outstanding at October 31, 2012 end on July 31, 2013, 2014, and 2015. The three-year performance cycles for restricted stock shares/units outstanding at October 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. We grant performance restricted stock units with either an EPS related performance condition or a TSR related performance condition as determined against a specified peer group condition. During the three months ended October 31, 2012, we granted 30,474 performance restricted stock units with an EPS related performance condition and 23,668 performance restricted stock units with a TSR related performance condition. As of October 31, 2012, of the 326,585 restricted stock units outstanding, 194,964 had an EPS related performance condition and 131,621 had a TSR related performance condition.

We estimate the fair value of restricted stock and restricted stock units that vest based on time by the quoted market price of our common stock. We estimate 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, we recognize compensation expense over the performance period, net of estimated forfeitures, 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 our common stock on the date of grant.

For awards with a TSR-related condition, we recognize 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 2011, 2012, and 2013. The total compensation expense for awards with a TSR-related condition is not contingent on the performance outcome. The weighted average grant date fair values of restricted stock units granted with a TSR-related condition was $106.36 per share for the three months ended October 31, 2012. The fair value of the restricted stock units with a TSR-related condition at date of grant was estimated using a Monte-Carlo Simulation model with the following assumptions:


	Three Months Ended October 31, 2012
Stock Price (1)		$70.04
Expected volatility factor (2)		28%
Risk-free interest rate (3)		0.32%
Expected annual dividend yield (4)		0.0%

(1)	The stock price is the weighted average closing price of our common stock on the date of grant.

(2)	The expected volatility factor 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%.