Note 14 — Stock-Based Compensation

The cost that has been charged against income for stock-based compensation is set forth below (in thousands):

	Three Months Ended					Six Months Ended
	July 1, 2011			July 2, 2010		July 1, 2011			July 2, 2010
SFAS 123R expense	$	349		$	194	$	619		$	442
Common stock issued to employees		—			—		—			—
Restricted stock expense		105			103		201			137
Consultant compensation		(2	)		41		(13	)		70
Total	$	452		$	338	$	807		$	649

There was no net income tax benefit recognized in the income statement for share-based compensation arrangements as the Company fully offsets net deferred tax assets with a valuation allowance. In addition, the Company capitalized $41,000 and $76,000 of stock compensation to inventory for the three and six months ended July 1, 2011, and $20,000 and $43,000 respectively, for the three and six months ended July 2, 2010, and recognizes those amounts as expense in Cost of Sales as the inventory is sold.

Stock Option Plans

In fiscal year 2003, the Board of Directors approved the 2003 Omnibus Equity Incentive Plan (the “2003 Plan”) authorizing awards of equity compensation, including options to purchase common stock and restricted shares of common stock. The 2003 Plan amends, restates and replaces the 1991 Stock Option Plan, the 1995 Consultant Stock Plan, the 1996 Non-Qualified Stock Plan, and the 1998 Stock Option Plan (the “Restated Plans”). On May 19, 2010, the stockholders of STAAR approved the Restated 2003 Omnibus Plan, which increased the number of shares available for grants under the plan by 2,000,000 shares and extended the term of the plan to May 18, 2020. As of July 1, 2011, there were 1,785,863 shares authorized and available for grants under the Restated 2003 Omnibus Plan. The 2003 Plan provides for various forms of stock-based incentives. To date, of the available forms of awards under the 2003 Plan, the Company has granted only stock options, restricted stock and unrestricted share grants. Options under the plan are granted at fair market value on the date of grant, become exercisable over a three or four-year period, or as determined by the Board of Directors, and expire over periods not exceeding 10 years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the 2003 Plan). Pursuant to the plan, options for 3,484,255 shares were outstanding at July 1, 2011 with exercise prices ranging between $0.95 and $8.12 per share. Restricted stock grants under the 2003 Plan generally vest over a period of one, three or four years. There were 155,500 shares of restricted stock outstanding at July 1, 2011.

In fiscal year 1998, the Board of Directors approved the 1998 Stock Option Plan, authorizing the granting of options to purchase common stock or awards of common stock. Pursuant to the plan, options for 7,000 shares were outstanding at July 1, 2011 with an exercise price of $3.60 per share. No further awards may be made under this plan.

In fiscal year 1995, the Company adopted the 1995 Consultant Stock Plan, authorizing the granting of options to purchase common stock or awards of common stock. Pursuant to this plan, options for 25,100 shares were outstanding at July 1, 2011 with an exercise price of $1.70 per share. No further awards may be made under this plan.

Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination behavior. The expected term of options granted is derived from the historical exercise activity over the past 15 years, and represents the period of time that options granted are expected to be outstanding. Options granted with a three-year vesting life during the six months ended July 1, 2011 and July 2, 2010 had an expected term of 5.49 and 5.60 years, respectively, and were derived from historical exercise and termination activity. The Company has calculated a 10.05% estimated forfeiture rate used in the model for fiscal year 2011 option grants based on historical forfeiture experience. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	Three Months Ended						Six Months Ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010
Expected dividend yield		0	%		0	%		0	%		0	%
Expected volatility		76.68	%		81.07	%		76.93	%		80.61	%
Risk-free interest rate		1.83	%		2.13	%		1.98	%		2.31	%
Expected term (in years)		5.49			5.6			5.49			5.6

A summary of option activity under the Plans as of July 1, 2011 is presented below:

Options	Shares (000’s)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value (000’s)
Outstanding at December 31, 2010		3,331		$	4.35		—	$	—
Granted		555			5.55		—		—
Exercised		(325	)		3.75		—		—
Forfeited or expired		(45	)		4.07		—		—
Outstanding at July 1, 2011		3,516		$	4.60		6.65		3,785
Exercisable at July 1, 2011		2,409		$	4.38		5.39	$	3,295

The weighted-average grant-date fair value of options granted during the six months ended July 1, 2011 and July 2, 2010 was $3.62 and $2.68 per option. The total fair value of options vested during the six months ended July 1, 2011 and July 2, 2010 was $701,000 and $874,000, respectively. There were 324,715 and 54,999 options exercised with an intrinsic value of $611,000 and $124,000 during the six months ended July 1, 2011 and July 2, 2010.

A summary of the status of the Company’s non-vested shares as of July 1, 2011 and changes during the period is presented below:

Nonvested Shares	Shares (000’s)			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2010		885		$	2.89
Granted		555			3.62
Vested		(296	)		2.37
Forfeited		(37	)		3.52
Nonvested at July 1, 2011		1,107		$	3.37

As of July 1, 2011, the Company had $3.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.68 years.