NOTE 10. EQUITY COMPENSATION PLANS AND SHARE-BASED COMPENSATION

Equity Compensation Plan

As of December 31, 2012, we have one equity incentive plan under which our equity securities are authorized for issuance to our employees, directors and consultants. Our share-based compensation plan is described below.

2005 Equity Incentive Plan. Our 2005 Equity Incentive Plan (the "Equity Incentive Plan") restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance cash awards, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. On November 8, 2012, our shareholders approved an amendment to the Equity Incentive Plan to, among other things, (i) increase the aggregate number of shares of common stock reserved for issuance under the Equity Incentive Plan by 900,000 shares and increase the maximum number of shares that may be issued pursuant to incentive stock options, (ii) clarify that the prohibition on repricing stock options and stock appreciation rights without prior shareholder approval also applies to prohibit the cancellation of such awards in exchange for cash, (iii) remove a 500,000-share limit on the number of shares that may be issued upon settlement of restricted stock units and other full-value awards, (iv) eliminate the requirement that no participant may be granted more than one performance award for the same performance period under the Equity Incentive Plan and (v) reapprove the Internal Revenue Code Section 162(m) performance criteria and award limits of the Equity Incentive Plan to permit us to continue to grant awards to key officers that qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. As of December 31, 2012, the Equity Incentive Plan provided for the issuance of a maximum of 6,786,000 shares, of which 1,112,000 shares of common stock were then available for future issuance. The shares available for future issuance excluded 63,000 shares issuable upon settlement of restricted stock units with performance vesting provisions that were approved by the Board of Directors but are deemed not to have been granted for accounting purposes in accordance with Accounting Standards Codification ("ASC") 718-10-55-95. See "Restricted Stock Unit Awards (Performance Vesting)" section in this Note for additional information. Shares that are canceled or forfeited from an award and shares withheld in satisfaction of tax withholding obligations are again available for issue under the Equity Incentive Plan.

Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.

Share-Based Compensation

The following table summarizes total share-based compensation expense, net of tax, related to restricted stock units during the three and nine months ended December 31, 2012 and 2011, which is included in our condensed consolidated statements of income (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
Cost of revenues	$	228		$	187		$	673		$	698
Research and development		300			226			854			641
Sales and marketing		613			475			1,885			1,402
General and administrative		638			624			1,878			1,453
Share-based compensation expense before income taxes		1,779			1,512			5,290			4,194
Income tax benefit		(641	)		(526	)		(1,898	)		(1,459	)
Total share-based compensation expense after income taxes	$	1,138		$	986		$	3,392		$	2,735
Net impact of share-based compensation on:
Basic net income per share	$	0.05		$	0.05		$	0.15		$	0.12
Diluted net income per share	$	0.05		$	0.04		$	0.15		$	0.12

Share-based compensation has been classified in the condensed consolidated statements of income or capitalized on the condensed consolidated balance sheets in the same manner as cash compensation paid to employees. Capitalized share-based compensation costs at December 31, 2012 and March 31, 2012 were $168,000 and $139,000, respectively, which were included in inventories on our condensed consolidated balance sheets.

Cash Flow Impact

The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended December 31, 2012 and 2011 were $681,000 and $231,000, respectively, and for the nine months ended December 31, 2012 and 2011 were $1.8 million and $717,000, respectively.

Stock Options

Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. We have not granted any stock options since the beginning of fiscal 2007 and we did not grant stock options during the three and nine months ended December 31, 2012. We have recognized compensation expense during the requisite service period of the stock option. As of December 31, 2012, we had no unrecognized compensation expense related to stock options granted.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2012 and the changes during the nine-month period then ended:

				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Number of			Price		Contractual		Value
	Shares			Per Share		Life (Years)		(In thousands)
Outstanding at March 31, 2012		282,000		$	15.21
Granted		-			-
Exercised		(114,000	)		14.06
Canceled or forfeited		-			-
Outstanding at December 31, 2012		168,000		$	15.99		1.03	$	3,555
Vested and expected to vest at December 31, 2012		168,000		$	15.99		1.03	$	3,555
Exercisable at December 31, 2012		168,000		$	15.99		1.03	$	3,555

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of December 31, 2012, that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended December 31, 2012 and 2011 was $1.6 million and $370,000, respectively, and during the nine months ended December 31, 2012 and 2011 was $2.7 million and $2.3 million, respectively. Cash proceeds from stock options exercised during the three months ended December 31, 2012 and 2011 were $1.3 million and $146,000, respectively, and during the nine months ended December 31, 2012 and 2011 were $1.6 million and $576,000, respectively.

Restricted Stock Units

Since fiscal 2007, we grant restricted stock unit awards to employees and directors as part of our share-based compensation program. Awards of restricted stock units may be either grants of time-based or performance-based restricted stock units that are issued at no cost to the recipient, as described below. From time to time, restricted stock unit awards granted to employees may be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the "Compensation Committee") in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.

Restricted Stock Unit Awards (Time Vesting)

Restricted stock unit awards (time vesting) entitle holders to receive shares of common stock at the end of a specified period of time. For restricted stock unit awards (time vesting), vesting is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the service vesting conditions are not met, unvested restricted stock unit awards (time vesting) will be forfeited. Generally, the restricted stock unit awards (time vesting) vest according to one of the following time-based vesting schedules:

Restricted stock unit awards (time vesting) to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.

·	Restricted stock unit awards (time vesting) to non-employee directors: 100 percent vesting after one year of continuous service to the Company.

The fair value of restricted stock unit awards (time vesting) used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of December 31, 2012, the total unrecognized compensation expense related to restricted stock unit awards (time vesting) granted amounted to $20.4 million, which is expected to be recognized over a weighted average service period of 1.9 years.

Restricted Stock Unit Awards (Performance Vesting)

Starting in fiscal 2013, we also grant restricted stock unit awards (performance vesting), which entitle holders to receive shares of common stock based on performance-based vesting criteria. For restricted stock unit awards (performance vesting), vesting is based on our achievement of corporate annual performance targets.

During the first quarter of fiscal 2013, our Board of Directors approved the grant of 84,000 shares of restricted stock unit awards (performance vesting), of which approximately 21,000 shares have been granted. Because each annual performance target is set at the start of each respective single-fiscal year performance period, only 25% of the total restricted stock unit awards (performance vesting) are deemed granted each year over the four-year period in accordance with ASC 718-10-55-95. Accordingly, 75% of the total restricted stock unit awards (performance vesting) approved are not deemed granted for accounting purposes as of December 31, 2012 pursuant to ASC 718-10-55-95. The performance periods for the fiscal 2013 grants run from April 1, 2012 through March 31, 2016, consisting of four one-year performance periods. Approximately 25% of the total 84,000 shares approved by the Board of Directors will be granted each year over such four-year period. Each grant has a vesting term of approximately one year, with vesting based upon: (1) achievement of certain pre-established corporate annual performance-related goals, as established by the Compensation Committee; and (2) the grantee's satisfying service requirements through the vesting period. The fiscal 2013 performance target was established at the grant date following ASC 718-10-55-95 and the aggregate estimated grant date fair value was $752,000 or $35.62 per share based on the closing market price of our common stock on the date of grant. The number of vested restricted stock unit awards (performance vesting) is determined at the end of each annual performance period.

The fair value of our restricted stock unit awards (performance vesting) used in our expense recognition method is measured based on the number of shares granted, the closing market price of our common stock on the date of grant and an estimate of the probability of the achievement of the performance goals. We recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition. The amount of share-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed. As of December 31, 2012, the total unrecognized compensation expense related to restricted stock unit awards (performance vesting) granted amounted to $178,000, which is expected to be recognized over a weighted average service period of 0.3 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the nine months ended December 31, 2012:

	Time-Based Restricted					Performance-Based Restricted
	Stock Units					Stock Units
				Weighted				Weighted
				Average				Average
	Number of			Grant Date		Number of		Grant Date
	Shares			Fair Value(1)		Shares		Fair Value(1)
Nonvested at March 31, 2012		1,120,000		$	24.06		-	$	-
Granted(2)		180,000			35.83		21,000		35.62
Vested(3)		(255,000	)		23.45		-		-
Canceled or forfeited		(68,000	)		26.09		-		-
Nonvested at December 31, 2012		977,000		$	26.24		21,000	$	35.62

(1)	The weighted average grant date fair value of restricted stock units is based on the number of shares and the closing market price of our common stock on the date of grant.

(2)	The shares granted for restricted stock unit awards (performance vesting) do not include the awards approved by the Board of Directors during the period that are deemed not to have been granted in accordance with ASC 718-10-55-95.

(3)	The number of restricted stock units vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.

Total intrinsic value of time-based restricted stock units vested during the three months ended December 31, 2012 and 2011 was $265,000 and $608,000, respectively, and during the nine months ended December 31, 2012 and 2011 was $9.0 million and $6.5 million, respectively. The total grant date fair value of time-based restricted stock units vested during the three months ended December 31, 2012 and 2011 was $177,000 and $598,000, respectively, and during the nine months ended December 31, 2012 and 2011 was $6.0 million and $5.1 million, respectively.