Note 3. Share-Based Compensation

The Company has three stock equity plans: The 1997 Employee Stock Option Plan, the 2000 Stock Option Plan and the 2007 Equity Incentive Plan. As of September 30, 2011, no additional awards may be issued under either the 1997 Employee Stock Option Plan or the 2000 Stock Option Plan. There are 2,500,000 shares authorized for issuance under the 2007 Equity Incentive Plan, with 573,015 shares remaining available for future grant.

Non-director options typically vest at the rate of 25% per year over four years and are exercisable up to ten years from the date of issuance. Under these plans, the option exercise price equals the stock’s market price on the date of grant. Options and restricted stock awards may be granted to employees, officers, directors and consultants. Under the 2007 Equity Incentive Plan, restricted stock awards typically vest from within one year to four years, and the shares subject to such awards are generally not transferrable until the awards vest.

Restricted shares are granted with a per share or unit purchase price at 100% of fair market value on the date of grant. Stock-based compensation expense will be recognized over the expected vesting period of the stock options and restricted stock in an amount of equal to the fair market value of such awards on the date of grant.

The following table summarizes information regarding options outstanding and options exercisable at July 2, 2010, October 1, 2010, July 1, 2011 and September 30, 2011 and the changes during the periods then ended:

	Number of Options Outstanding (000’s)			Weighted Average Exercise Price per Share		Number of Shares Exercisable (000’s)		Weighted Average Exercise Price per Share
Balance as of March 31, 2010		2,604		$	1.85		2,402	$	1.89
Granted		156		$	0.44
Exercised		--		$	--
Expired		(27	)	$	1.61
Balance as of July 2, 2010		2,733		$	1.78		2,438	$	1.89
Granted		8		$	2.56
Exercised		--		$	--
Expired		(350	)	$	3.19
Balance as of October 1, 2010		2,391		$	1.57		2,117	$	1.67
Vested & expected to Vest, October 1, 2010		2,301		$	1.57

	Number of Options Outstanding (000’s)			Weighted Average Exercise Price per Share		Number of Shares Exercisable (000’s)		Weighted Average Exercise Price per Share
Balance as of March 31, 2011		2,161		$	1.65		1,933	$	1.74
Granted		368		$	1.52
Exercised		(16	)	$	0.57
Expired		(37	)	$	1.69
Balance as of July 1, 2011		2,476		$	1.64		1,980	$	1.72
Granted		160		$	0.95
Exercised		(27	)	$	0.83
Expired		--		$	--
Balance as of September 30, 2011		2,609		$	1.60		1,972	$	1.74
Vested & expected to Vest, September 30, 2011		2,531		$	1.60

Information regarding stock options outstanding as of September 30, 2011 is as follows:

	Options Outstanding
Price Range	Shares (in 000s)	Weighted Average Exercise Price		Weighted Average Remaining Life
$0.44 - $1.00	798	$	0.73	8.35
$1.25 - $2.50	1,498	$	1.82	5.15
$2.56 - $5.34	313	$	2.83	4.00

	Options Exercisable
Price Range	Shares (in 000s)	Weighted Average Exercise Price		Weighted Average Remaining Life
$0.44 - $1.00	518	$	0.69	7.78
$1.25 - $2.50	1,141	$	1.91	4.54
$2.56 - $5.34	313	$	2.83	4.00

The intrinsic value of options exercised during the three and six month periods ended September 30, 2011 was $5,414 and $21,132, respectively. The intrinsic value of options exercised during the three and six month periods ended October 1, 2010 was zero, since no stock options were exercised.

During fiscal 2011 and fiscal 2012, restricted shares were issued to certain individuals. The restricted share transactions are summarized below:

	Shares (000’s)			Weighted Average Grant Date Fair Value Per Share
Unvested, March 31, 2010		25		$	0.63
Granted		70		$	0.44
Vested		(25	)	$	0.63
Expired		--		$	--
Unvested, July 2, 2010		70		$	0.44
Granted		169		$	0.67
Vested		--		$	--
Expired		--			--
Unvested, October 1, 2010		239		$	0.60

	Shares (000’s)			Weighted Average Grant Date Fair Value Per Share
Unvested, March 31, 2011		70		$	0.44
Granted		55		$	1.51
Vested		(70	)	$	0.44
Expired		--			--
Unvested, July 1, 2011		55		$	1.51
Granted		198		$	0.98
Vested		--		$	--
Expired		--		$	--
Unvested, September 30, 2011		253		$	1.10

The Company estimates the fair value of stock-based awards utilizing the Black-Scholes pricing model for stock options and using the intrinsic value for restricted stock. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The Black-Scholes fair value calculations involve significant judgments, assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods. The factors include:

	●	The time period that option awards are expected to remain outstanding has been determined based on the average of the original award period and the remaining vesting period in accordance with the SEC’s short-cut approach pursuant to SAB No. 107, “Disclosure About Fair Value of Financial Statements”. The expected term assumption for awards issued during the six month periods ended September 30, 2011 and October 1, 2010 was 6.3 years. As additional evidence develops from the employee’s stock trading history, the expected term assumption will be refined to capture the relevant trends.
	●	The future volatility of the Company’s stock has been estimated based on the weekly stock price from the acquisition date of Picometrix LLC (May 2, 2005) to the date of the latest stock grant. The expected volatility assumption for awards issued during the six month periods ending September 30, 2011 and October 1, 2010 averaged 67% and 68%, respectively. As additional evidence develops, the future volatility estimate will be refined to capture the relevant trends.
	●	A dividend yield of zero has been assumed for awards issued during the six month periods ended September 30, 2011 and October 1, 2010, based on the Company’s actual past experience and the fact that Company does not anticipate paying a dividend on its shares in the near future.
	●	The Company has based its risk-free interest rate assumption for awards issued during the six month periods ended September 30, 2011 and October 1, 2010 on the implied yield available on U.S. Treasury issues with an equivalent expected term, which averaged 1.7% and 2.2% during the respective periods.
	●	The forfeiture rate, for awards issued during the six month periods ended September 30, 2011 and October 1, 2010, were approximately 17.0% and 25.8%, respectively, and was based on the Company’s actual historical forfeiture history.

The Company’s stock-based compensation expense is classified in the table below:

	Three months ended				Six months ended
	September 30, 2011		October 1, 2010		September 30, 2011		October 1, 2010
Cost of Products Sold	$	25,000	$	4,000	$	29,000	$	7,000
Research and Development expense		73,000		11,000		86,000		15,000
General and Administrative expense		100,000		37,000		116,000		45,000
Sales and Marketing expense		11,000		4,000		14,000		7,000
Total Stock Based Compensation	$	209,000	$	56,000	$	245,000	$	74,000

At September 30, 2011, the total stock-based compensation expense related to unvested stock options and restricted shares granted to employees under the Company’s stock option plans but not yet recognized was approximately $452,000. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 1.8 years and will be adjusted for subsequent changes in estimated forfeitures.