NOTE 11.

SHARE-BASED COMPENSATION

In accordance with ASC 718, “Compensation-Stock Compensation,” we recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. The following table summarizes total share-based compensation expense, net of tax, related to restricted stock units during the three and nine months ended December 31, 2011 and 2010, which is included in our condensed consolidated statements of income (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2011			2010			2011			2010
Cost of revenues	$	187		$	168		$	698		$	475
Research and development		226			195			641			684
Sales and marketing		475			365			1,402			1,139
General and administrative		624			570			1,453			1,249
Share-based compensation expense before income taxes		1,512			1,298			4,194			3,547
Income tax benefit		(526	)		(476	)		(1,459	)		(1,327	)
Total share-based compensation expense after income taxes	$	986		$	822		$	2,735		$	2,220
Net impact of share-based compensation on:
Basic net income per share	$	0.05		$	0.04		$	0.12		$	0.10
Diluted net income per share	$	0.04		$	0.04		$	0.12		$	0.10

Share-based compensation has been classified in the condensed consolidated statements of income or capitalized on the condensed consolidated balance sheets in the same manner as cash compensation paid to employees. Capitalized share-based compensation costs at December 31, 2011 and March 31, 2011 were $175,000 and $107,000, respectively, which were included in inventories on our condensed consolidated balance sheets.

Cash Flow Impact

The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended December 31, 2011 and 2010 were $231,000 and $1.4 million, respectively, and for the nine months ended December 31, 2011 and 2010 were $717,000 and $1.9 million, respectively.

Equity Compensation Plans

Our share-based compensation plans are described below.

2005 Equity Incentive Plan. Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance cash awards, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. On October 27, 2010, our shareholders approved an amendment to the Equity Incentive Plan to (i) increase the aggregate number of shares of common stock reserved for issuance under the Equity Incentive Plan by 500,000 shares, (ii) clarify that we may continue to grant performance cash awards under the Equity Incentive Plan and (iii) reapprove the Internal Revenue Code Section 162(m) performance criteria and award limits of the Equity Incentive Plan to permit us to continue to grant awards to key officers that qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. As of December 31, 2011, the Equity Incentive Plan provides for the issuance of a maximum of 5,886,000 shares, of which 296,000 shares of common stock were then available for future issuance. Shares that are canceled or forfeited from an award and shares withheld in satisfaction of tax withholding obligations are again available for issue under the Equity Incentive Plan.

Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. See the “Stock Options” section in this Note for additional information.

Restricted stock units awarded to employees generally vest over a period of four years and the awards may also be subject to accelerated vesting upon achieving certain performance-based milestones and continuous employment during the vesting period. Restricted stock units awarded to non-employee directors generally vest in full one year after the grant date based on continuous service. See the “Restricted Stock Units” section in this Note for additional information.

1992 Outside Directors' Stock Option Plan. Under our 1992 Outside Directors' Stock Option Plan (the “Directors Plan”), options to purchase shares of common stock were automatically granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified stock options and were granted at the fair market value on the date of grant and expired ten years from the date of grant. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. The Directors Plan provided for the issuance of a maximum of 250,000 shares. As of December 31, 2011, there were no stock options outstanding under the Directors Plan. Additionally, no shares of common stock were available for future issuance because the time period for granting options expired in June 2002 in accordance with the terms of the Directors Plan.

Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.

Stock Options

Prior to April 1, 2006, we granted stock options to employees, with an exercise price equal to the closing market price of our common stock on the date of grant and with cliff-vesting terms over four years, conditional on continuous employment with the Company. In addition, prior to April 1, 2006, we granted stock options to non-employee directors with an exercise price equal to the closing market price of our common stock on the date of grant and became exercisable over a period of one year based on monthly vesting terms, conditional on continuous service to the Company. There were no stock options granted since the beginning of fiscal 2007 and we did not grant stock options during the nine months ended December 31, 2011. We have recognized compensation expense during the requisite service period of the stock option. As of December 31, 2011, we had no unrecognized compensation expense related to stock options granted.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2011 and the changes during the nine-month period then ended:

				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Number of			Price		Contractual		Value
	Shares			Per Share		Life (Years)		(In thousands)
Outstanding at March 31, 2011		406,000		$	12.10
Granted		-			-
Exercised		(113,000	)		5.12
Canceled or forfeited		(2,000	)		5.31
Outstanding at December 31, 2011		291,000		$	14.84		2.00	$	3,738
Vested and expected to vest at December 31, 2011		291,000		$	14.84		2.00	$	3,738
Exercisable at December 31, 2011		291,000		$	14.84		2.00	$	3,738

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of December 30, 2011, (the last trading day for the quarterly period ended December 31, 2011), that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended December 31, 2011 and 2010 was $370,000 and $3.9 million, respectively, and during the nine months ended December 31, 2011 and 2010 was $2.3 million and $5.0 million, respectively. Cash proceeds from stock options exercised during the three months ended December 31, 2011 and 2010 were $146,000 and $839,000, respectively, and during the nine months ended December 31, 2011 and 2010 were $576,000 and $1.3 million, respectively.

Restricted Stock Units

We grant restricted stock unit awards to employees and directors as part of our share-based compensation program which began in fiscal 2007. The restricted stock unit awards entitle holders to receive shares of common stock at the end of a specified period of time. Vesting for restricted stock unit awards is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the vesting conditions are not met, unvested restricted stock unit awards will be forfeited. Generally, the restricted stock unit awards vest according to one of the following time-based vesting schedules:

Restricted stock unit awards to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.

·	Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.

From time to time, restricted stock unit awards granted to employees may be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the “Compensation Committee”), in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.

The fair value of restricted stock unit awards used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of December 31, 2011, the total unrecognized compensation expense related to restricted stock unit awards granted amounted to $20.8 million, which is expected to be recognized over a weighted average service period of 2.29 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the nine months ended December 31, 2011:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value(1)
Unvested at March 31, 2011		940,000		$	22.09
Granted		436,000			27.25
Vested(2)		(234,000	)		22.04
Canceled or forfeited		(16,000	)		23.32
Unvested at December 31, 2011		1,126,000		$	24.08

____________________________________________________________________

(1)	The weighted average grant date fair value of restricted stock units is based on the number of shares and the closing market price of our common stock on the date of grant.

(2)	The number of restricted stock units vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.

Total intrinsic value of restricted stock units vested during the three months ended December 31, 2011 and 2010 was $608,000 and $118,000, respectively, and during the nine months ended December 31, 2011 and 2010 was $6.5 million and $5.9 million, respectively. The total grant date fair value of restricted stock units vested during the three months ended December 31, 2011 and 2010 was $598,000 and $129,000, respectively, and during the nine months ended December 31, 2011 and 2010 was $5.1 million and $5.7 million, respectively.