7.	Stock Based Compensation

2008 Equity Incentive Plan

For the six months ended July 2, 2011, the only active share-based compensation plan was the 2008 Equity Incentive Plan (the "Incentive Plan"). The terms of awards granted during the six months ended July 2, 2011 were consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2011.

Summary of Stock Options

The following table summarizes information regarding activity in our stock option plan during the six months ended July 2, 2011 and July 3, 2010:


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding at January 1, 2011		1,618,066		$	3.65
Granted		40,300		$	3.85
Exercised		(85,240	)	$	3.32
Canceled or forfeited		(44,317	)	$	4.66

Outstanding at July 2, 2011		1,528,809		$	3.64	$	1,463


	Number of Shares			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (thousands)
Outstanding at January 2, 2010		1,583,508		$	3.91
Granted		193,300		$	3.99
Exercised		(22,235	)	$	2.82
Canceled or forfeited		(69,491	)	$	7.62

Outstanding at July 3, 2010		1,685,082		$	3.77	$	1,417

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on the Company's closing price as of July 1, 2011, that would have been received by option holders had all option holders exercised their stock options as of that date.

The weighted-average grant date fair value of the options granted under the Company's stock plans as calculated using Black-Scholes was $2.67 and $2.71 per share for the six months ended July 2, 2011 and July 3, 2010, 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						Six Months Ended
	July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010
Average risk free interest rate		1.51	%		1.89	%		1.85	%		2.03	%
Expected life (in years)		4.75 years			4.75 years			4.75 years			4.75 years
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Average volatility		91	%		88	%		91	%		88	%

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 has elected to use the simplified method for estimating the expected term. 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 and six month periods ended July 2, 2011 and July 3, 2010 (in thousands):


	Three Months Ended				Six Months Ended
	July 3, 2010		July 3, 2010		July 3, 2010		July 3, 2010
Cost of revenues	$	28	$	30	$	55	$	62
Research and development		16		24		37		48
Sales and marketing		31		34		60		63
General and administrative		45		53		99		96

	$	120	$	141	$	251	$	269

Approximately $5,000 of the stock based compensation expense recognized was capitalized into inventory as a component of overhead at July 2, 2011 and July 3, 2010.

Information regarding stock options outstanding, exercisable and expected to vest at July 2, 2011 is summarized below:


	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (thousands)
As of July 2, 2011
Options outstanding		1,528,809	$	3.64		3.74	$	1,463
Options vested and expected to vest		1,447,145	$	3.70		3.68	$	1,354
Options exercisable		1,206,106	$	3.86		3.40	$	1,068

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the Nasdaq Global Market on the last trading day of the quarter, July 1, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on July 2, 2011. This amount changes based on the fair market value of the Company's stock. The total intrinsic value of options exercised for the six months periods ended July 2, 2011 and July 3, 2010 were approximately $51 thousand and $22 thousand, respectively.

As of July 2, 2011, there was $588 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 2.01 years.

Restricted Stock Awards/Restricted Stock Units

Effective for the 2011 fiscal year, each non-employee member of the Board will receive an annual equity award of either restricted stock or a restricted stock unit ("RSU"), at the election of such Board member, in each case equal to $20,000 worth of our common stock (determined at the fair market value of the shares at the time such award is granted) under the Company's 2008 Equity Incentive Plan. Each equity award or RSU vests in full on the one-year anniversary of the date of grant provided that the non-employee member continues to serve on the Board through such date.

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 as of July 2, 2011 is summarized below:


	Number of Shares		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (thousands)
As of July 2, 2011
Restricted stock units outstanding		15,189		1.00	$	60
Restricted stock units vested and expected to vest		13,720		1.00	$	54
Restricted stock units ending exercisable		0		0.00	$	0

The intrinsic value of the restricted stock units is calculated based on the closing price of IRIDEX shares as quoted on the Nasdaq Global Market on the last trading day of the quarter, July 1, 2011 of $3.95.

For the quarter ended July 2, 2011, the Company granted 15,189 restricted stock units to the Board of Directors with a weighted average grant date fair value of approximately $60,000 or $3.95 per share. There were no restricted stock units or awards granted in 2010. There was no restricted stock units vested, released and or forfeited during the three and six month periods ended July 2, 2011.

Information regarding the restricted stock awards outstanding as of July 2, 2011 is summarized below:


	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011		0		0
Restricted stock awards granted		10,126	$	3.95
Outstanding at July 2, 2011		10,126	$	3.95