NOTE 11. STOCK-BASED COMPENSATION

Employee Stock Participation Plan ("ESPP")

Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of our common stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.

The following table summarizes our ESPP transactions during the fiscal periods presented (in thousands, except per share amounts):

As of
October 2,
2011

Six Months Ended
October 2, 2011

Shares of
Common Stock

Weighted
Average
Price per
Share

Authorized to issue

4,500

Reserved for future issuance

1,436

Issued

5.72

Equity Incentive Plans

We currently have two equity incentive plans, in which shares are available for future issuance, the Exar Corporation 2006 Equity Incentive Plan (the "2006 Plan") and one other equity plan assumed upon our August 2007 acquisition of Sipex, the Sipex Corporation 2006 Equity Incentive Plan ( the "Sipex Plan").

The 2006 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms of awards granted or denominated in common stock or units of common stock, as well as cash bonus awards. RSUs granted under the 2006 Plan are counted against authorized shares available for future issuance on a basis of two shares for every RSU issued. The 2006 Plan allows for performance-based vesting and partial vesting based upon level of performance. Grants under the Sipex Plan are only available to former Sipex employees or employees of Exar hired after the Sipex acquisition. At October 2, 2011, there were approximately 4.7 million shares available for future grant under all our equity incentive plans.

In August 2011, we announced our Fiscal 2012 Key Personnel and Executive Incentive Program ("2012 Incentive Program"). Under the 2012 Incentive Program, each participant's award is denominated in stock and subject to achievement of certain financial performance goals and the participant's annual MBOs. If we believe that it is probable that the performance measures under this program will be achieved, the stock-based compensation for the awards could result in additional expense ranging from $0.4 million to $3.9 million in fiscal year 2012 for performance at various levels. For the three and six months ended October 2, 2011, we did not recognize any compensation expense related to these awards.

Stock Option Activities

Our stock option transactions during the six months ended October 2, 2011 are summarized as follows:


	Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value ⁽¹⁾ (in thousands)		In-the-money Options Vested and Exercisable (in thousands)
Balance at March 27, 2011		5,729,464		$	7.61		4.74	$	147		103
Granted		1,460,795			6.05
Exercised		(29,798	)		6.21
Cancelled		(168,678	)		7.18
Forfeited		(312,338	)		6.85

Balance at October 2, 2011		6,679,445		$	7.32		4.80	$	16		98

Vested and expected to vest, October 2, 2011		6,413,573		$	7.37		4.74	$	16

Vested and exercisable, October 2, 2011		2,929,200		$	8.33		3.74	$	13

(1)

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our common stock of $5.71 and $6.08 as of October 2, 2011 and March 27, 2011, respectively. These are the values which would have been received by option holders if all option holders exercised their options on that date.

RSU Activities

Our RSU transactions during the six months ended October 2, 2011 are summarized as follows:


	Shares			Weighted Average Grant- Date Fair Value		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value⁽¹⁾ (in thousands)		Unrecognized Stock-based Compensation Cost⁽²⁾ (in millions)
Unvested at March 27, 2011		557,098		$	7.17		1.09	$	3,387	$	2.3
Granted		130,650			5.99
Issued and released		(237,830	)		7.25
Forfeited		(20,248	)		6.42

Unvested at October 2, 2011		429,670		$	6.81		1.41	$	2,453	$	2.1

Vested and expected to vest, October 2, 2011		406,934		$	6.81		1.36	$	2,324

(1)	The aggregate intrinsic value of RSUs represents the closing price per share of our stock at the end of the periods presented, multiplied by the number of unvested RSUs or the number of vested and expected to vest RSUs, as applicable, at the end of each period.

(2)	For RSUs, stock based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs less estimated forfeitures, was recognized on a straight-line basis, over the vesting period.

In July 2009, we granted performance-based RSUs covering 99,000 shares to certain executives, issuable upon meeting certain performance targets in our fiscal year 2010 and vesting annually over a three year period beginning July 1, 2010. The annual vesting requires continued service through each annual vesting date. In the three and six months ended October 2, 2011, we recognized approximately $27,000 and $54,000, respectively, of compensation expense related to these awards.

In April 2010, we granted performance-based RSUs covering 56,000 shares to our CEO, issuable upon meeting certain performance targets in our fiscal year 2011 and vesting annually over a three year period beginning May 3, 2010. The annual vesting requires continued service through each annual vesting date. In the three and six months ended October 2, 2011, we recognized approximately $30,000 and $60,000, respectively, of compensation expense related to these awards.

In April 2011 we granted performance-based RSUs covering 45,000 shares to our Vice President of Sales, issuable upon meeting certain performance targets in our fiscal years 2012 and 2013. Provided certain financial measures in fiscal year 2012 are met, 15,000 of these shares will vest in three equal installments annually over the three year period beginning at the filing of our Form 10-K for fiscal year 2012. The remaining two tranches of 15,000 shares each will vest upon meeting certain financial measures in fiscal year 2012 and fiscal year 2013, respectively. In the three months ended July 3, 2011, we recognized approximately $34,000 of compensation expense related to these awards. For the three months ended October 2, 2011, we reversed the expense previously accrued related to these awards based on current projections of the satisfaction of the performance criteria.

In August 2011, we announced our 2012 Incentive Program. Under the 2012 Incentive Program, each participant's award is denominated in stock and subject to achievement of certain financial performance goals and the participant's annual MBOs. For the three and six months ended October 2, 2011, we did not recognize any compensation expense related to these awards.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense related to stock options and RSUs during the fiscal periods presented (in thousands):


	Three Months Ended				Six Months Ended
	October 2, 2011		September 26, 2010		October 2, 2011		September 26, 2010
Cost of sales	$	69	$	98	$	128	$	318
Research and development		488		665		790		2,221
Selling, general and administrative		620		751		1,143		2,297

Total Stock-based compensation expense	$	1,177	$	1,514	$	2,061	$	4,836

Unrecognized Stock-Based Compensation Expense

The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs for the periods indicated below as follows:


	October 2, 2011				March 27, 2011
	Amount (in thousands)		Weighted Average Expected Remaining Period (in years)		Amount (in thousands)		Weighted Average Expected Remaining Period (in years)
Options	$	7,290		2.6	$	7,290		2.4
RSUs ⁽¹⁾		2,055		1.8		2,336		1.8

Total Stock-based compensation expense	$	9,345			$	9,626

(1)	For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recognized on a straight-line basis over the vesting period.

Valuation Assumptions

We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based compensation represent our estimates, but these estimates involve inherent uncertainties and the application of management judgments which include the expected term of the share-based awards, stock price volatility and forfeiture rates. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

We used the following weighted average assumptions to calculate the fair values of options granted during the fiscal periods presented:


	Three Months Ended						Six Months Ended
	October 2, 2011			September 26, 2010			October 2, 2011			September 26, 2010
Expected term of options (years)		4.3			4.4			4.3			4.4
Risk-free interest rate		0.9	%		1.3	%		0.9%–1.5	%		1.3%–2.1	%
Expected volatility		42	%		39	%		41%–42	%		39	%
Expected dividend yield		—			—			—			—
Weighted average estimated fair value	$	2.01		$	2.31		$	2.12		$	2.46