6. STOCK-BASED COMPENSATION

The fair value of stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. There were no stock options granted in fiscal years 2011 and 2010. The fair value of nonvested restricted common stock awards is generally the market value of the Company’s equity shares on the date of grant. The nonvested common stock awards require the employee to fulfill certain obligations, including remaining employed by the Company for one, two or four years (the vesting period) and in certain cases meeting performance criteria. The performance criteria primarily consist of the achievement of the Company’s annual incentive plan goals. For nonvested restricted common stock awards which solely require the recipient to remain employed with the Company, the stock compensation expense is amortized over the anticipated service period. For nonvested restricted common stock awards which require the achievement of performance criteria, the Company reviews the probability of achieving the performance goals on a periodic basis. If the Company determines that it is probable that the performance criteria will be achieved, the amount of compensation cost derived for the performance goal is amortized over the service period. If the performance criteria are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company recognizes compensation costs on a straight-line basis over the requisite service period for time vested awards. For awards that vest based on performance conditions, the Company uses the accelerated model for graded vesting awards.

In the third quarter of 2011 the Company granted compensation awards that consisted of a grant of 260,000 shares of restricted stock and a grant of 380,000 shares of phantom stock to be settled in cash. The 260,000 shares of restricted stock and the 380,000 shares of phantom stock will vest at the end of the first 10 consecutive trading day period following the grant date during which the Company’s common stock trades at a price per share equal to or greater than $5.25, prior to September 12, 2016. The vesting of the awards upon achieving a closing stock price of $5.25 for 10 consecutive days is considered a market condition. The accounting for the phantom stock award requires the Company to periodically assess the fair market value of the award, with increases or decrease in the fair market value being reflected in the statement of operations. As of September 12, 2011, the fair market value of the awards was approximately $1.1 million, which will be expensed over a derived service period currently estimated to be approximately 12 months. However, if the market condition occurs before the estimated service period of 12 months or if there are material changes in the underlying data used in the fair market valuation, the $1.1 million fair market valuation may increase or decrease and the period over which the fair market valuation is recognized in the statement of operations may increase or decrease. The stock based compensation expense relating to these awards are immaterial for the three months ended September 24, 2011.

A summary of award activity under the stock option plans as of September 24, 2011 and changes during the nine month period is as follows. All options were vested as of September 24, 2011.


	Nine months ended September 24, 2011
	Shares			Weighted Average Exercise Price
Balance, December 25, 2010		2,899,261		$	6.45
Options granted		—			—
Options forfeited/cancelled		(949,111	)		9.10
Options exercised		(19,700	)		3.68

Balance, September 24, 2011		1,930,450		$	5.17

Exercisable, September 24, 2011		1,930,450

The following table summarizes information about stock options outstanding and exercisable at September 24, 2011:


	Options Outstanding and Exercisable
Range of Exercise Prices	Number Outstanding and Exercisable		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price
$ 0.01—$ 3.50		130,000		5.00	$	3.49
$ 3.75—$ 4.82		1,080,310		2.60		4.45
$ 5.00—$ 8.72		602,040		3.12		5.70
$10.00—$13.00		100,100		5.00		10.00
$14.31—$16.16		18,000		1.00		16.01

		1,930,450		3.03	$	5.17

Aggregate intrinsic value on September 24, 2011	$	1,700

In June 2010, the Company issued a warrant to purchase 200,000 shares of the Company’s stock at $3.49. The warrant vests ratably over a two year period and, as of September 24, 2011, 125,000 shares had vested. The intrinsic value of the warrant at September 24, 2011 was $0.

NonVested Restricted Common Stock

A summary of the activity for nonvested restricted common stock awards as of September 24, 2011 and changes during the nine months then ended is presented below:


	Shares			Weighted Average Grant Fair Value
Balance, December 25, 2010		2,033,607		$	3.79
Granted		1,891,012			4.12
Forfeited		(1,125	)		2.75
Vested		(69,125	)		3.23

Balance, September 24, 2011		3,854,369		$	3.97

Stock-Based Compensation

The following table summarizes stock-based compensation expense within each of the categories below as it relates to employee stock options and nonvested restricted common stock awards for the nine months ended September 24, 2011 and September 25, 2010 (no net tax benefits were recognized):


	Nine Months Ended
	September 24, 2011		September 25, 2010
Cost of product revenues	$	433,000	$	471,000
Research and development		418,000		318,000
Selling, general and administrative		1,326,000		1,101,000

Total	$	2,177,000	$	1,890,000

The total unrecognized compensation cost related to nonvested restricted common stock awards is expected to be recognized over a weighted average period of 3 years and as of September 24, 2011 is $8.6 million. The total unrecognized compensation cost related to the phantom stock award granted to the CEO is currently estimated at $1.1 million, to be recognized over a derived service life of approximately 12 months.