NOTE

STOCK-BASED COMPENSATION

Except for the stock compensation expense section, all amounts consist of both continuing and discontinued operations.

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

Nine Months Ended

January 1, 2017

Weighted

Shares of

Average

Common Stock

Price per Share

Authorized to issue

4,500

Reserved for future issuance

1,298

Issued

7.54

Equity Incentive Plans

At the annual meeting of stockholders on

September

18,

2014

(the “Annual Meeting”), our stockholders approved the Exar Corporation

2014

Equity Incentive Plan

(“2014

Plan”). The

2014

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.

Prior to the Annual Meeting, we maintained the Exar Corporation

2006

Equity Incentive Plan (the

“2006

Plan”) and the Sipex Corporation

2006

Equity Incentive Plan (the “Sipex

2006

Plan”). As of

June

30,

2014,

a total of

6,555,492

shares of our common stock were then subject to outstanding awards granted under the

2006

Plan and the Sipex

2006

Plan, and an additional

669,008

shares of our common stock were then available for new award grants under the

2006

Plan. As part of the stockholder approval of the

2014

Plan at the Annual Meeting, we agreed that no new awards will be granted under the

2006

Plan and the Sipex

2006

Plan, although awards made under these plans will remain subject to the terms of each such plan.

The maximum number of shares of our common stock that

may

be issued or transferred pursuant to awards under the

2014

Plan equals the sum of:

(1)

5,170,000

shares, plus

(2)

the number of any shares subject to stock options granted under the

2006

Plan and the Sipex

2006

Plan

and outstanding as of the date of the Annual Meeting which expire, or for any reason are cancelled or terminated, after the date of the Annual Meeting without being exercised, plus

(3)

the number of any shares subject to restricted stock and restricted stock unit awards granted under the

2006

Plan and the Sipex

2006

Plan that are outstanding and unvested as of the date of the Annual Meeting which are forfeited, terminated, cancelled, or otherwise reacquired after the date of the Annual Meeting without having become vested. Awards other than a stock option or stock appreciation right granted under the

2014

Plan are counted against authorized shares available for future issuance on a basis of

two

shares for each award issued. As of

January

2017,

there were

approximately

3.3

million shares available for future grants under the

2014

Plan.

Stock Option Activities

Our stock option transactions during the

nine

months ended

January

2017

are summarized below:

						Weighted
						Average				In-the-money
				Weighted		Remaining		Aggregate		Options
	Outstanding			Average		Contractual		Intrinsic		Vested and
	Options /			Exercise		Term		Value		Exercisable
	Quantity			Price per Share		(in years)		(in thousands)		(in thousands)
Balance at March 27, 2016		7,722,383		$	7.96		4.40	$	87		48
Granted		1,466,800			7.30
Exercised		(2,045,504	)		6.97
Cancelled		(614,454	)		9.84
Forfeited		(1,055,074	)		7.53
Balance at January 1, 2017		5,474,151			8.02		4.66		16,195		4,787

Vested and expected to vest, January 1, 2017		4,909,103			8.12		4.50		14,140
Vested and exercisable, January 1, 2017		2,491,344		$	8.85		3.19	$	5,620

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

$10.78

and

$5.26

as of

January

2017

and

March

27,

2016,

respectively.

These are the values which would have been received by option holders if all option holders exercised their options on that date.

January

2012,

we granted

480,000

performance-based stock options to our then CEO. The options were scheduled to vest in

four

equal annual installments at the end of fiscal years

2013

through

2016

if certain predetermined market based financial measures were met. If the financial measures were not met, each installment would be rolled over to the subsequent fiscal year. In

January

2014,

we granted

140,000

performance-based stock options to our then CEO. The options were scheduled to vest at the end of fiscal year

2017

if certain predetermined financial measures were met. Due to the departure of our then CEO in

October

2015,

we recorded a reversal of

$34,000

of compensation expense for these options in fiscal year

2016

as the requisite service period for vesting was not completed. No additional compensation expense for these options was recorded since the termination date of our former CEO.

July

2016

we granted

280,000

and

120,000

performance-based stock options to our CEO and Chief Financial Officer (“CFO”), respectively. The options vest based on the achievement of company performance targets relating to our non-GAAP earnings per share in future periods. If criteria are met, the options are scheduled to vest with

four

equal annual installments during the next

four

years, subject to the CEO’s and CFO’s continued service with us. As of

January

2017,

we recorded

$0.2

million compensation expense associated with a portion of such performance-based stock options for which the vesting criteria has been determined by the Compensation Committee of the Board of Directors.

Options exercised for the periods indicated below were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	January 1,		December 27,		January 1,		December 27,
	2017		2015		2017		2015
Intrinsic value of options exercised	$	1,367	$	39	$	4,085	$	637

RSU Activities

Our RSU transactions during the

nine

months ended

January

2017

are summarized as follows:

						Weighted
						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
				Grant-Date		Term		Value
	Shares			Fair Value		(in years)		(in thousands)
Unvested at March 27, 2016		590,833		$	9.39		1.45	$	3,108
Granted		622,039			8.63
Issued and released		(209,236	)		8.94
Forfeited		(215,029	)		9.68
Unvested at January 1, 2017		788,607		$	8.83		1.81	$	8,501
Vested and expected to vest, January 1, 2017		608,111					1.62		6,555

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.

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.

March

2012,

we granted

300,000

performance-based RSUs (“PRSUs”)

to our then CEO. The PRSUs were scheduled to vest in

three

equal installments at the end of fiscal year

2013

through

2015

with

three

-year vesting periods for each installment if certain predetermined financial measures were met. If the financial measures were not met, each installment would be forfeited at the end of its respective fiscal year. Due to the departure of our then CEO in

October,

2015,

we recorded a reversal of

$41,000

for these PRSUs in fiscal year

2016,

as the requisite service period required for vesting was not completed. No additional compensation expense for these options was recorded since the termination date of our former CEO.

July

2013,

as part of the acquisition of Cadeka, in order to encourage retention of

five

former Cadeka employees, we agreed to recommend to our Board of Directors in

July

2015

a bonus, which, if approved by the Board of Directors, would be settled in RSUs subject to fulfillment of the service period. The ultimate approval of these awards was subject to the discretion of the Board of Directors. We recorded no compensation expense for these awards in the

three

and

nine

months ended

January

2017.

We recorded

$0.2

million of non-cash compensation expense for these awards in the

three

and

nine

months ended

December

27,

2015.The

expense is reported in the other current liabilities line on the condensed consolidated balance sheet as the total amount of bonus was to be settled in variable number of RSUs at the completion of the requisite service period. Such non-cash compensation expense was recorded as part of stock compensation expense in the condensed consolidated statements of operations. In

July

2015,

the Board of Directors ultimately determined not to approve the granting of these RSUs. In fiscal year

2016

we paid

three

of these

five

former Cadeka employees

$75,000

in cash in exchange for a release of claims, including any claim such former employees

may

have to the RSUs described above. As a result of obtaining these releases, the proportional amount of liability net of cash payments was removed from our condensed consolidated balance sheet, with a corresponding increase in additional paid in capital. For the

two

remaining employees, an amount of

$1.2

million is included in other liabilities as of

January

2017,

pending the earlier of a settlement with such former employees or the expiration of the relevant statute of limitations.

October

2013,

we granted

70,000

PRSUs to certain executives. The

first

50%

of the PRSUs was scheduled to start vesting in

three

equal installments at the end of fiscal year

2015

with a

three

-year vesting period if certain performance measures were met. The

second

50%

of the PRSUs was scheduled to start vesting in

three

equal installments at the end of fiscal year

2016

with a

three

-year vesting period if certain performance measures were met. We recorded approximately

$5,000

and

$42,000

of compensation expense for these awards in the

three

and

nine

months ended

January

2017,

respectively. We recorded

$18,000

and

$96,000

of compensation expense for these awards in the

three

and

nine

months ended

December

27,

2015,

respectively. One of the executives’ employment was terminated in fiscal year

2015.

August

and

December

2014,

we granted

88,448

PRSUs to certain former iML employees. The PRSUs are scheduled to start vesting in

three

equal annual installments upon achievement of certain performance measures. We modified all stock awards outstanding in

June

2016

for iML employees impacted by the sale of iML. Under the modification, a certain portion of outstanding stock awards vested at the close of the transaction based on continued employment as of that date. As a result, we recorded a

one

-time reversal of

$311,000

in stock compensation expense related to these stock awards in the

three

months ended

July

2016.

The fair value of modified awards that are expected to vest is being recognized ratably over the estimated requisite service period. We recorded approximately

$0.2

million and

$0.7

million of stock compensation expense related to these modified awards in the

three

months and

nine

months ended

January

2017,

respectively, which is included in discontinued operations.

July

2016,

we granted

60,000

and

30,000

PRSUs to our CEO and CFO, respectively, which vests based on the achievement of company stock price targets in future periods. If the performance criteria are met, the PRSUs will vest over a

three

-year period, with

one

third

of the PRSUs vesting after

months from the date of grant and the remaining PRSUs vesting in equal quarterly installments over the remaining

two

years, subject to the CEO’s and CFO’s continued service with Exar. The value of these awards is estimated using a Monte-Carlo simulation model using the following valuation assumptions:

Expected term of grants (years)	3
Risk-free interest rate	0.76	%
Expected volatility	50	%

For the

three

and

nine

months ended

January

2017,

we recorded approximately

$56,000

and

$80,000

of stock compensation expense related to these PRSUs, respectively.

July

2016,

we announced the Fiscal Year

2017

Management Incentive Program

(“2017

Incentive Program”). Under this program, each participant’s award is denominated in shares of our common stock and is subject to attainment of Exar’s performance goals as established by the Compensation Committee of the Board of Directors for fiscal year

2017.

We recorded a stock compensation expense of

$2.2

million in the

nine

months ended

January

2017.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense related to stock options and RSUs for continuing operations during the fiscal periods presented

(in thousands):

	Three Months Ended				Nine Months Ended
	January 1,		December 27,		January 1,		December 27,
	2017		2015		2017		2015
Cost of sales	$	474	$	98	$	889	$	257
Research and development		926		117		1,696		509
Selling, general and administrative		2,234		596		4,546		3,044
Total stock-based compensation expense	$	3,634	$	811	$	7,131	$	3,810

The amount of stock-based compensation cost capitalized in inventory was immaterial for all periods presented.

Unrecognized Stock-Based Compensation Expense

The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs, net of reversals,

as of

January

2017:

	January 1, 2017
			Weighted
			Average
			Remaining
	Amount		Recognition
	(in thousands)		Period (in years)
Options	$	4,887		2.59
RSUs		4,557		2.58
PRSUs		630		1.69
Total unrecognized stock-based compensation expense	$	10,074