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 December 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.

Options and restricted stock awards may be granted to employees, officers, directors and consultants. Options typically vest over a period of one to four years and are exercisable up to ten years from the date of issuance. The option exercise price equals the stock’s market price on the date of grant. Restricted stock awards typically vest over a period of six months to four years, and the shares subject to such awards are generally not transferrable until the awards vest.

The following table summarizes information regarding options outstanding and options exercisable at each of the quarterly periods through the nine months ended December 31, 2010 and December 30, 2011, respectively, 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
Granted		25		$	1.01
Exercised		--		$	--
Expired		(21	)	$	0.79
Balance as of December 31, 2010		2,395		$	1.57		2,167	$	1.65
Vested & expected to Vest, December 31, 2010		2,305		$	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
Granted		--			--
Exercised		--			--
Expired		--			--
Balance as of December 30, 2011		2,609		$	1.60		2,347	$	1.70
Vested & expected to Vest, December 30, 2011		2,531		$	1.60

Information regarding stock options outstanding as of December 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		8.10
$	1.25 - $2.50		1,498	$	1.82		4.90
$	2.56 - $5.34		313	$	2.83		3.75

				Options Exercisable
Price Range		Shares (in 000s)		Weighted Average Exercise Price		Weighted Average Remaining Life
$	0.44 - $1.00		535	$	0.69		7.56
$	1.25 - $2.50		1,499	$	1.82		5.00
$	2.56 - $5.34		313	$	2.83		3.75

The intrinsic value of options exercised during the three and nine month periods ended December 30, 2011 was zero and $21,132, respectively. The intrinsic value of options exercised during the three and nine month periods ended December 31, 2010 was zero for both periods.

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
Granted		--			--
Vested		--			--
Expired		--			--
Unvested, December 31, 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
Granted		--			--
Vested		(55	)	$	1.51
Expired		--			--
Unvested, December 30, 2011		198		$	0.98

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 nine month periods ended December 30, 2011 and December 31, 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 nine month periods ending December 30, 2011 and December 31, 2010 averaged 67% and 65%, 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 nine month periods ended December 30, 2011 and December 31, 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 nine month periods ended December 30, 2011 and December 31, 2010 on the implied yield available on U.S. Treasury issues with an equivalent expected term, which averaged 1.7% and 2.0% during the respective periods.
	●	The forfeiture rate, for awards issued during the nine month periods ended December 30, 2011 and December 31, 2010, was approximately 17.0% and 26.0%, 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				Nine month ended
	December 30, 2011		December 31, 2010		December 30, 2011		December 31, 2010
Cost of Products Sold	$	23,000	$	5,000	$	52,000	$	12,000
Research and Development expense		69,000		12,000		155,000		27,000
General and Administrative expense		133,000		65,000		249,000		110,000
Sales and Marketing expense		10,000		2,000		24,000		9,000
Total Stock Based Compensation	$	235,000	$	84,000	$	480,000	$	158,000

At December 30, 2011, the total stock-based compensation expense related to unvested stock options and restricted shares granted to employees and independent directors under the Company’s stock option plans but not yet recognized was approximately $217,000. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 2.9 years and will be adjusted for subsequent changes in estimated forfeitures.