STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

STOCK-BASED COMPENSATION

We account for stock-based compensation in accordance with the applicable authoritative guidance, which requires the measurement of stock-based compensation on the date of grant based on the fair value of the award, and the recognition of the expense over the requisite service period for the employee. Compensation related to restricted stock units is the intrinsic value on the date of grant, which is the closing price of our common stock less the employee exercise price, if any. Compensation related to stock options is determined using a stock option valuation model.

Valuation Assumptions

We use the Black-Scholes valuation model to determine the fair value of stock options. The Black-Scholes model requires the input of highly subjective assumptions, which are summarized in the table below for the three and nine months ended September 30, 2012 and October 2, 2011:

	Three Months Ended		Nine Months Ended
	September 30, 2012	October 2, 2011	September 30, 2012	October 2, 2011
Expected dividend yield	—	—	—	—
Expected stock price volatility	81%	78%	81%	77%
Risk-free interest rate	0.7%	1.1%	0.8%	2.0%
Expected life of options in years	5	5	5	5

We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. Expected volatility is based on the historical volatility of our common stock; and the risk-free interest rate is the rate on a U.S. Treasury Bill, with a maturity approximating the expected life of the option. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, the expected dividend yield is zero.

Our stock-based compensation for the three and nine months ended September 30, 2012 and October 2, 2011 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Stock-based compensation by type of award:
Stock options	$	365	$	443	$	1,091	$	1,763
Restricted stock units	1		24		22		92
Employee stock purchase plan	5		5		15		20
	$	371	$	472	$	1,128	$	1,875
Stock-based compensation by category of expense:
Cost of sales	$	17	$	13	$	49	$	69
Research, development and engineering	68		62		215		303
Selling, general and administrative	286		397		864		1,503
	$	371	$	472	$	1,128	$	1,875

We did not capitalize any stock-based compensation as inventory in the three and nine months ended September 30, 2012 and October 2, 2011, as such amounts were immaterial. As of September 30, 2012, we had $2.8 million in unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options which will be recognized over a weighted-average period of 2.7 years.