2. Stock-Based Compensation:

The Company compensates officers, directors, and employees with stock-based compensation under two stock plans approved by the Company’s shareholders in 2006 and 2011, and administered under the supervision of the Company’s Board of Directors. During the year ended October 2, 2010, the Company awarded stock options, restricted stock grants, and restricted stock units, under the 2006 plan. The 2006 plan expired, and no further grants were made after January 31, 2011. During the years ended September 29, 2012 and October 1, 2011, the Company awarded stock options, restricted stock grants, and restricted stock units under the 2011 plan. At September 29, 2012, a total of 517,880 shares were available for future grant under the 2011 stock plan. Shares will be available for issuance under the 2011 stock plan until January 31, 2018.

During the years ended October 1, 2011 and October 2, 2010, the Company issued shares of its common stock to participants in the Company’s Employee Stock Purchase Plan (“ESPP”) under a stock plan approved by the Company’s shareholders in 2002. During the fiscal year ended October 1, 2011, the Company's shareholders approved a 2012 ESPP which was effective on January 1, 2012. The 2002 ESPP expired, and no further share issuances occurred after December 31, 2011. During the year ended September 29, 2012, the Company issued shares of its common stock to participants under the 2012 ESPP. At September 29, 2012, a total of 740,122 shares were available for ESPP share issuances under the 2012 stock plan. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.

Stock-Based Compensation Expense

Stock-based compensation expense for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share data):



		2012		2011		2010

Stock-based compensation expense by type of award:
Employee stock options	$	1,599	$	1,383	$	1,519
Employee stock purchase plan (ESPP)		184		159		175
Restricted stock grants and units		1,650		1,162		691
Amounts capitalized as inventory		(742)		(652)		(639)
Amounts recognized in income for amounts previously
capitalized as inventory		681		649		702

Total stock-based compensation included in income
from operations		3,372		2,701		2,448
Income tax benefit on stock-based compensation		(1,161)		(931)		(828)
Net compensation expense included in net income	$	2,211	$	1,770	$	1,620

At September 29, 2012, there was $3.2 million of total stock option expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of approximately 1.5 years. At September 29, 2012, there was $1.8 million and $0.3 million of total restricted stock expense related to non-vested awards of restricted stock units and restricted stock grants, respectively, not yet recognized, which is expected to be recognized over a weighted average period of approximately 1.5 years and 1.0 years, respectively.

The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected grant life, stock price volatility, dividends, and risk-free interest rates. Each vesting period of an option award is valued separately, with this value being recognized evenly over the vesting period. The weighted average per share fair value of stock options granted during the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was $8.36, $9.45 and $6.73, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:



	2012		2011		2010
Expected life (in years)	3.5		3.0		2.9
Risk-free interest rate	0.5	%	0.8	%	1.0	%
Expected volatility	34.5	%	35.4	%	40.0	%
Dividend yield	2.5	%	1.8	%	2.1	%

The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. The Company estimates stock price volatility based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.

Awards of both restricted stock grants and restricted stock units are valued based on the market value of the Company’s shares at the date of grant. The value of restricted stock grants and restricted stock units is allocated to expense evenly over the restricted period. Employee stock purchase plan share awards are valued based on the value of the discount feature plus the fair value of the optional features, which is determined as of the date of grant using the Black-Scholes valuation model. The value of these share awards is allocated to expense evenly over each purchase period.

Stock Options

Stock options are granted at exercise prices equal to the closing market price of the Company’s stock on the date of grant. Generally, options vest proportionally on the first three anniversaries of the grant date and expire five years from the grant date.

Stock option activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):



	2012			2011			2010
	Shares		WAEP*	Shares		WAEP*	Shares		WAEP*
Options outstanding at beginning of year	1,048	$	35.80	1,329	$	34.53	1,492	$	35.56
Granted	324	$	40.14	292	$	43.61	252	$	28.62
Exercised	(491)	$	35.17	(332)	$	36.80	(16)	$	20.55
Forfeited or expired	(127)	$	43.79	(241)	$	36.91	(399)	$	35.20
Options outstanding at end of year	754	$	36.84	1,048	$	35.80	1,329	$	34.53
Options eligible for exercise at year-end	249	$	31.02	653	$	36.13	811	$	38.93
*Weighted Average Exercise Price

Options outstanding at September 29, 2012 had a weighted average remaining contractual term of 3.6 years, and an aggregate intrinsic value of $12.6 million. Options eligible for exercise at September 29, 2012 had a weighted average remaining contractual term of 2.2 years, and an aggregate intrinsic value of $5.6 million.

The total intrinsic value of stock options exercised during the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was $5.8 million, $2.3 million and $0.1 million, respectively.

Restricted Stock

The Company awards directors and key employees restricted stock grants and restricted stock units that vest over three years. For restricted stock grants awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. For restricted stock grants awarded to employees, participants are not entitled to cash dividends and voting rights on unvested shares.

Restricted stock grant activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):



	2012			2011			2010
	Shares		WAGDFV*	Shares		WAGDFV*	Shares		WAGDFV*
Unvested shares at beginning of year	30	$	33.61	29	$	27.18	36	$	28.72
Granted	12	$	49.03	13	$	42.89	20	$	26.47
Vested	(15)	$	31.26	(12)	$	28.32	(10)	$	33.71
Forfeited	-	$	-	-	$	-	(17)	$	25.85
Unvested shares at end of year	27	$	41.52	30	$	33.61	29	$	27.18
*Weighted Average Grant Date Fair Value

Restricted stock unit activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):



	2012			2011			2010
	Shares		WAGDFV*	Shares		WAGDFV*	Shares		WAGDFV*
Outstanding at beginning of year	37	$	33.37	59	$	25.51	38	$	20.55
Granted	60	$	39.26	18	$	42.50	37	$	28.62
Vested	(26)	$	32.68	(22)	$	24.71	(12)	$	20.55
Forfeited	(9)	$	29.90	(18)	$	27.50	(4)	$	21.61
Outstanding at end of year	62	$	38.90	37	$	33.37	59	$	25.51
*Weighted Average Grant Date Fair Value

Employee Stock Purchase Plan

The Company’s U.S. employees are eligible to participate in the Company’s Employee Stock Purchase Plan (“ESPP”). Employee purchases of Company stock are funded by payroll deductions over calendar six-month periods. The purchase price is 85% of the lower of the market price at either the beginning or end of the six-month period. The shares are required to be held by the employee for at least eighteen months subsequent to the purchase. Two purchase periods closed in fiscal year 2012 with the combined issuance of 18,734 shares at a weighted average price of $33.65. In fiscal years 2011 and 2010, purchases were 24,028 and 33,249 shares, respectively, with weighted average share prices of $27.72 and $20.82, respectively.