7. Stock

Based Compensation

2008 Equity Incentive Plan

For the three months ended March 31, 2012, the only active share-based compensation plan was the 2008 Equity Incentive Plan (the "Incentive Plan"). The terms of awards granted during the three months ended March 31, 2012 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the three months ended March 31, 2012:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding at December 31, 2011		1,766,401		$	3.63
Granted		15,300		$	4.21
Exercised		(87,801	)	$	2.69
Canceled or forfeited		(23,376	)	$	3.18

Outstanding at March 31, 2012		1,670,524		$	3.69	$	1,957

The weighted-average grant date fair value of the options granted under the Company's stock plans as calculated using Black-Scholes was $2.88 and $2.58 per share for the three months ended March 31, 2012 and April 2, 2011, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:


	Three Months Ended
	March 31, 2012			April 2, 2011
Average risk free interest rate		0.92	%		2.14	%
Expected life (in years)		4.55 years			4.75 years
Dividend yield		0.0	%		0.0	%
Average volatility		93	%		91	%

Option-pricing models require the input of various subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company's stock price history over a period commensurate with the expected term of the options, trading volume of the Company's stock, look-back volatilities and Company specific events that affected volatility in a prior period. The Company had elected to use the simplified method for estimating the expected term prior to July 3, 2011. Effective July 3, 2011, the expected term of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is based on the history of exercises and cancellations on all past option grants made by the Company, the contractual term, the vesting period and the expected remaining term of the outstanding options. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

The following table shows stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and April 2, 2011 (in thousands):


	Three Months Ended
	March 31, 2012		April 2, 2011
Cost of revenues	$	18	$	14
Research and development		19		21
Sales and marketing		29		27
General and administrative		81		54

	$	147	$	116

Approximately $9 thousand and $7 thousand of the stock based compensation expense recognized was capitalized into inventory as a component of overhead at March 31, 2012 and April 2, 2011, respectively.

Information regarding stock options outstanding, exercisable and expected to vest at March 31, 2012 is summarized below:


					Weighted Average		Aggregate
	Number of		Weighted Average		Remaining Contractual		Intrinsic Value
	Shares		Exercise Price		Life (Years)		(thousands)
Options outstanding		1,670,524	$	3.69		3.60	$	1,957
Options vested and expected to vest		1,565,335	$	3.71		3.46	$	1,838
Options exercisable		1,236,446	$	3.79		2.80	$	1,506

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company's closing price as of March 30, 2012, that would have been received by option holders had all option holders exercised their stock options as of that date. This amount changes based on the fair market value of the Company's stock. The total intrinsic value of options exercised for the three months ended March 31, 2012 and April 2, 2011 were approximately $127 thousand and $19 thousand, respectively.

As of March 31, 2012, there was $935 thousand of total unrecognized compensation cost, net of forfeitures, related to non-vested share-based compensation arrangements under the Incentive Plan. The cost is expected to be recognized over a weighted average period of 2.87 years.

Summary of Restricted Stock Units and Awards

The Company recognizes the estimated compensation expense of restricted stock units and awards, net of estimated forfeitures, over the vesting term. The estimated compensation expense is based on the fair value of the Company's common stock on the date of grant.

Information regarding the restricted stock units outstanding, vested and expected to vest as of March 31, 2012 is summarized below:


	Number of Shares		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (thousands)
Restricted stock units outstanding		90,189		1.59	$	398
Restricted stock units vested and expected to vest		71,645		1.44	$	316

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company's closing price as of March 30, 2012, that would have been received by option holders had all option holders exercised their stock options as of that date. There were no restricted stock units granted, vested, released and or forfeited for the three months ended March 31, 2012 and April 2, 2011.

There were no restricted stock awards granted, vested, released and or forfeited for the three months ended March 31, 2012 and April 2, 2011. There were 10,126 shares outstanding at March 31, 2012 with a weighted average grant date fair value of $3.95.