3. Share-based compensation:

The following table presents share-based compensation expense included in our unaudited condensed consolidated statements of operations:


	Three Months Ended January 31,				Six Months Ended January 31,
	2013		2012		2013		2012
Cost of product sales	$	242	$	187	$	406	$	319
Cost of engineering sales		295		-		695		-
Research and product development		860		905		1,168		1,524
Selling and marketing		192		421		532		674
General and administrative		1,721		1,637		3,153		2,884
Total share-based compensation expense before tax	$	3,310	$	3,150	$	5,954	$	5,401

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


	Three Months Ended January 31,				Six Months Ended January 31,
	2013		2012		2013		2012
Peformance based EPS related condition compensation expense	$	1,447	$	1,710	$	2,503	$	2,668
Performance based TSR related condition compensation expense		893		802		1,607		1,577
Total performance-based stock compensation expense		2,340		2,512		4,110		4,245
Time based stock options and restricted stock awards		970		638		1,844		1,156
Total share-based compensation expense before tax	$	3,310	$	3,150	$	5,954	$	5,401

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.

We did not grant any stock options during the three months ended January 31, 2012. During the six months ended January 31, 2013 and 2012, we granted 98,818 and 123,226 non-qualified stock options, respectively, with weighted average grant-date fair values of $24.80 and $16.36, 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 January 31, 2013 and the six months ended January 31, 2013 and 2012:


	Three Months Ended January 31,			Six Months Ended January 31,
	2013			2013			2012
Expected option term (1)		5.38 years			5.41 years			5.34 years
Expected volatility factor (2)		41	%		41	%		42	%
Risk-free interest rate (3)		0.75	%		0.78	%		0.95	%
Expected annual dividend yield (4)		0.54	%		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.

We had 327,479 and 454,222 performance contingent restricted stock units, or “RSUs”, outstanding as of January 31, 2013 and 2012, respectively. These RSUs represent the target awards and 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 RSUs outstanding at January 31, 2013 end on July 31, 2013, 2014, and 2015. The three-year performance cycles for restricted stock shares/units outstanding at January 31, 2012 ended or will end on July 31, 2012, 2013, and 2014. The actual number of RSUs 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 contingent RSUs with either an EPS related performance condition or a TSR related performance condition as determined against a specified peer group. During the three and six months ended January 31, 2013, we granted 505 and 31,269 RSUs, respectively, with an EPS related performance condition and 389 and 24,056 RSUs, respectively, with a TSR related performance condition. During the three months ended January 31, 2012, we granted 36,674 RSUs with an EPS related performance condition and 36,674 RSUs with a TSR related performance condition. As of January 31, 2013, of the 327,479 RSUs outstanding, 195,469 had an EPS related performance condition and 132,010 had a TSR related performance condition.

We estimate the fair value of RSUs that vest based on time or with an EPS related condition by the quoted market price of our common stock on the date of grant. We estimate the fair value of performance based RSUs 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 RSUs with an EPS related condition, we recognize compensation expense over the performance period, net of estimated forfeitures, based on the number of RSUs 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.

For RSUs 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 RSUs with a TSR related condition is not contingent on the performance outcome. The weighted average grant date fair value of RSUs granted with a TSR related condition was $106.36 for the six months ended January 31, 2013. The fair value of the RSUs with a TSR related condition at date of grant was estimated using a Monte-Carlo Simulation model with the following assumptions:


	Six Months Ended January 31,
	2013			2012
Stock Price (1)	$	70.04		$	57.81
Expected volatility factor (2)		28	%		29	%
Risk-free interest rate (3)		0.32	%		0.33	%
Expected annual dividend yield (4)		0.0	%		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%.

During the six months ended January 31, 2013, we issued approximately $4,035 of common stock pursuant to the exercise of stock options, employee stock purchase plan, restricted stock plans, and non-employee director stock plan. We have also repurchased shares from employees for their taxes on vested employee restricted stock awards of $4,443.