(10) Stock-based Compensation

The Company has stock-based compensation plans under which it grants stock options and restricted stock awards. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period. The Company’s stock-based compensation expenses were allocated as follows (in thousands):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Product costs	$	62	$	29	$	164	$	95
Customer research and development		93		202		285		505
Other research and development		239		659		728		1,718
Selling, general and administrative		670		542		2,062		1,874

Total	$	1,064	$	1,432	$	3,239	$	4,192

As of June 30, 2011, approximately $5.3 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 3 years. The unrecognized compensation costs above exclude $1.9 million associated with performance share awards that are currently not anticipated to be fully expensed because the performance conditions for certain award periods are not expected to be met.

Stock Option Plans

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. There were no stock options granted in the three-month period ended June 30, 2011. The weighted average per share fair value of stock options granted during the three-month period ended June 30, 2010 was $7.05. The weighted average per share fair value of stock options granted during the nine-month periods ended June 30, 2011 and 2010 was $3.96 and $6.91, respectively. The assumptions used as inputs in the model were as follows:


	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2011		2010			2011			2010
Risk-free interest rates		N/A		2.2	%		1.5	%		2.0	%
Expected life (years)		N/A		4.8			4.8			4.8
Expected volatility		N/A		41.2	%		45.0	%		41.4	%
Dividend yield		N/A		0	%		0	%		0	%

The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted is determined based on the Company’s experience. Expected volatility is based on the Company’s stock price movement over a period approximating the expected term. Based on management’s judgment, dividend rates are expected to be zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical experience.

The Company’s Incentive Stock Options (ISO) are granted at a price of at least 100% of the fair market value of the common stock of the Company on the date of the grant or 110% with respect to optionees who own more than 10% of the total combined voting power of all classes of stock. ISOs expire in seven years or upon termination of employment and are exercisable at a rate of 20% per year commencing one year after the date of grant. Nonqualified stock options are granted at fair market value on the date of grant. Nonqualified stock options expire in 7 to 10 years or upon termination of employment or service as a Board member. Nonqualified stock options granted prior to May 2008 generally become exercisable with respect to 20% of the shares on each of the first five anniversaries following the grant date, and nonqualified stock options granted subsequent to May 2008 generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date.

No stock options were exercised during the three-month periods ended June 30, 2011 and 2010 and during the nine-month period ended June 30, 2011. The total pre-tax intrinsic value of options exercised during the nine-month period ended June 30, 2010 was not meaningful, as our stock price of $16.41 on June 30, 2010 was below the value of options exercised. The intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the last day of the respective fiscal period.

Restricted Stock Awards

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (Restricted Stock). Under accounting guidance these shares are considered to be non-vested shares. The Restricted Stock will be released to the key employees if they are employed by the Company at the end of the vesting period. The stock-based compensation table above includes Restricted Stock expenses of $0.2 million and $0.6 million during the three-month and nine-month periods ended June 30, 2011, respectively, and $0.2 million and $0.8 million for the three-month and nine-month periods ended June 30, 2010, respectively.

Performance Share Awards

The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (Performance Shares). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. Compensation is recognized in each period based on management’s best estimate of the achievement level of the grants’ specified performance objectives and the resulting vesting amounts. The Company recognized expenses of $0.1 million and $0.2 million related to Performance Shares for the three-month and nine-month periods ended June 30, 2011, respectively. The Company did not recognize an expense for the three-month period ended June 30, 2010 and recognized expense of less than $0.1 million for the nine-month period ended June 30, 2010.

1999 Employee Stock Purchase Plan

Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 400,000 shares of common stock. All full-time and part-time employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of June 30, 2011 and 2010, there were less than $0.1 million and $0.2 million of employee contributions, respectively, included in accrued liabilities in the accompanying condensed consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the three-month periods ended June 30, 2011 and 2010 totaled less than $0.1 million in each period. Stock compensation expense for the nine-month periods ended June 30, 2011 and 2010 totaled $0.1 million and $0.2 million, respectively. The stock-based compensation table above includes the Stock Purchase Plan expenses.