NOTE 3 - SHAREHOLDERS’ EQUITY

In the first quarter of 2010 the Company adopted the 2009 Incentive Plan (the “2009 Plan”). This plan replaced the Company’s 1993 Stock Incentive Plan, the 1996 Stock Incentive Plan, the 1999 Non-Qualified Stock Option Plan, the 2007 New Hire Incentive Plan, the Clarity Visual Systems, Inc. 1995 Plan and Non-Qualified Stock Option Plan as well as any individual inducement awards, which are collectively referred to as the “Prior Plans.” The 2009 Plan authorizes the issuance of 1,300,000 shares of common stock. In addition, up to 2,963,375 shares subject to awards outstanding under the Prior Plans may become available for issuance under the 2009 Plan to the extent that these shares cease to be subject to the original awards (such as by expiration, cancellation or forfeiture of the awards). The maximum number of shares that may be issued under the 2009 Plan is 4,263,375 shares, including shares that may become available from the Prior Plans.

Stock options

The 2009 Plan provides for the granting of stock options. Options granted generally vest and become exercisable over a three-year period and expire seven to ten years after the date of grant. Options were last granted in the second quarter of fiscal 2008.

Information regarding outstanding options is as follows:


	Number of Shares			Weighted Average Exercise Prices
Options outstanding at September 24, 2010		1,236,932		$	10.41
Granted		—			—
Exercised		—			—
Forfeited		(1,112	)		6.02
Expired		(64,842	)		20.78

Options outstanding at July 1, 2011		1,170,978		$	9.84

No options were exercised during the first nine months of 2011. As of July 1, 2011 there were 1,170,978 options outstanding and exercisable, with a weighted average exercise price of $9.84 per share, an aggregate intrinsic value of $12, and a weighted average remaining contractual life of 3.6 years.

Restricted stock

The 2009 Plan provides for the issuance of restricted stock (“nonvested shares” per the FASB Accounting Standards Codification^TM (“ASC”) Topic 718, “Compensation – Stock Compensation”). With the exception of certain grants made to the Company’s Chief Executive Officer, Chief Financial Officer, and certain of its Vice Presidents, which vest upon the achievement of certain objective performance conditions, the shares issued generally vest over a one- to three-year period based upon the passage of time.

Information regarding outstanding restricted stock awards is as follows:


	Number of Shares			Weighted Average Grant Date Fair Value
Restricted stock outstanding at September 24, 2010		1,249,891		$	3.98
Granted		689,167			2.30
Vested		(481,413	)		3.11
Canceled		(14,167	)		2.67

Restricted stock outstanding at July 1, 2011		1,443,478		$	3.48

Employee Stock Purchase Plan

In fiscal 2005 the Company adopted the 2004 Employee Stock Purchase Plan (“the Purchase Plan”), which replaced the 1994 Employee Stock Purchase Plan. The Purchase Plan provides that eligible employees may contribute, through payroll deductions, up to 10% of their earnings toward the purchase of the Company’s common stock at 85% of the fair market value at specific dates. The fair value of the purchase rights is estimated on the first day of the offering period using the Black-Scholes model. In 2010 the Company’s shareholders approved an amendment to the Purchase Plan which increased the number of shares of common stock that may be purchased under the Purchase Plan from 400,000 shares to 1,400,000 shares. As of July 1, 2011 approximately 915,000 shares remained available for purchase.

Valuation and Expense Information

The following table summarizes share based compensation expense related to share based payment awards and employee stock purchases for the three and nine months ended July 1, 2011 and June 25, 2010. The expense was allocated as follows:


	Three Months Ended July 1, 2011		Three Months Ended June 25, 2010		Nine Months Ended July 1, 2011		Nine Months Ended June 25, 2010
Cost of sales	$	14	$	33	$	44	$	141

Research and development	$	56	$	47	$	159	$	177
Sales and marketing		148		105		380		409
General and administrative		479		188		1,003		586

Share based compensation expense included in operating expenses	$	683	$	340	$	1,542	$	1,172

Share based compensation expense related to employee stock options and restricted stock awards	$	697	$	373	$	1,586	$	1,313

The Company recognizes compensation expense for all share based payment awards made to its employees and directors including employee stock options and employee stock purchases related to the Purchase Plan based on estimated fair values. The Company calculates the value of employee stock options on the date of grant using the Black-Scholes model. This model is also used to estimate the fair value of employee stock purchases related to the Purchase Plan. The Company values restricted stock awards at the closing price of the Company’s shares on the date of grant. As share based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based on historical and anticipated future experience.

Dilutive Effect of Employee Stock Benefit Plans

Average basic shares outstanding for the three and nine months ended July 1, 2011 were 19,506,000 and 19,362,000, respectively. Average basic shares outstanding for the three and nine months ended June 25, 2010 were 19,079,000 and 18,898,000, respectively. ASC Topic 260, “Earnings per Share,” requires that employee equity share options, nonvested shares and similar equity instruments granted by the Company be treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits or deficiencies that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. There was no dilutive effect of in-the-money employee stock options or nonvested shares for the three and nine months ended July 1, 2011 or for the nine months ended June 25, 2010 due to the Company incurring a net loss in each of those periods. For the three months ended June 25, 2010 diluted shares outstanding were 19,436,000. The dilutive effect of in-the-money employee stock options in that period was approximately 5,000 shares, based on the Company’s average share price for the same period of $2.45. The dilutive effect of nonvested stock awards options in that period was approximately 352,000 shares. For the three months ended June 25, 2010 options and nonvested stock awards amounting to approximately 1,378,000 shares were excluded from the calculation of diluted shares as their effect would have been anti-dilutive.