Note 3. Stock 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 28, 2012, 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 232,595 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 six months ended September 30, 2011 and September 28, 2012, 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, 2011		2,161		$	1.65		1,933	$	1.74
Granted		368		$	1.52
Exercised		(16	)	$	0.57
Expired or forfeited		(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 or forfeited		--		$	--
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


	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, 2012		2,267		$	1.75		1,994	$	1.88
Granted		125		$	0.63
Exercised		(5	)	$	0.44
Expired or forfeited		(5	)	$	0.44
Balance as of June 29, 2012		2,382		$	1.69		2,023	$	1.86
Granted		67		$	0.62
Exercised		--		$	0.00
Expired or forfeited		(11	)	$	2.26
Balance as of September 28, 2012		2,438		$	1.66		2,058	$	1.83
Vested & expected to Vest, September 28, 2012		2,376		$	1.69

				Options Outstanding
	Price Range	Shares (in 000s)		Weighted Average Exercise Price	Weighted Average Remaining Life
$	0.44 - $1.25	637	$	0.73	7.51
$	1.26 - $2.50	1,496	$	1.82	4.61
$	2.51 - $5.34	305	$	2.84	2.76


				Options Exercisable
Price Range		Shares (in 000s)		Weighted Average Exercise Price		Weighted Average Remaining Life
$	0.44 - $1.25		257	$	0.73		5.08
$	1.26 - $2.50		1,496	$	1.82		4.61
$	2.51 - $5.34		305	$	2.84		2.76

The intrinsic value of options exercised during the three and six month periods ended September 28, 2012 was zero and $1,100, respectively. The intrinsic value of options exercised during the three and six month periods ended September 30, 2011 was $5,414 and $21,132, respectively.

During the second quarter of fiscal 2012, restricted shares were issued to certain individuals. There were no restricted shares issued during the second quarter of fiscal 2013. The restricted share transactions are summarized below:

	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 or forfeited		--		$	--
Unvested, July 1, 2011		55		$	1.51
Granted		198		$	.98
Vested		--		$	--
Expired or forfeited		--		$	--
Unvested, September 30, 2011		253		$	1.10

	Shares (000’s)			Weighted Average Grant Date Fair Value Per Share
Unvested, March 31, 2012		246		$	0.84
Granted		--		$	--
Vested		--		$	--
Expired or forfeited		--		$	--
Unvested, June 29, 2012		246		$	0.84
Granted		--		$	--
Vested		(76	)	$	0.82
Expired or forfeited		--		$	--
Unvested, September 28, 2012		170		$	0.84

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 28, 2012 and September 30, 2011 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.

2.	The future volatility of the Company’s stock has been estimated based on the weekly stock price from the acquisition date of Picometrix (May 2, 2005) to the date of the latest stock grant. The expected volatility assumption for awards issued during the six month periods ended September 28, 2012 and September 30, 2011 averaged 66% and 67%, respectively. As additional evidence develops, the future volatility estimate will be refined to capture the relevant trends.
3.	A dividend yield of zero has been assumed for awards issued during six month periods ended September 28, 2012 and September 30, 2011, 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.
4.	The Company has based its risk-free interest rate assumption for awards issued during the six month periods ended September 28, 2012 and September 30, 2011 on the implied yield available on U.S. Treasury issues with an equivalent expected term, which averaged 0.6% and 1.7% during each of the respective periods.
5.	The forfeiture rate, for awards issued during the six month periods ended September 28, 2012 and September 30, 2011, was 16% and 17%, 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 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
Cost of Products Sold	$	4,000	$	25,000	$	7,000	$	29,000
Research, development & engineering expense		16,000		73,000		23,000		86,000
General and Administrative expense		24,000		100,000		41,000		116,000
Sales and Marketing expense		5,000		11,000		7,000		14,000
Total Stock Based Compensation	$	49,000	$	209,000	$	78,000	$	245,000

At September 28, 2012, 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 $262,000. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 2.5 years and will be adjusted for subsequent changes in estimated forfeitures.