Stock-Based Compensation

We measure stock-based compensation expense at the grant date of the related equity awards, based on the fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.

Our consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:



	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012		October 30, 2011
	(In thousands)				(In thousands)
Cost of revenue	$	2,489	$	3,049	$	7,664	$	8,274
Research and development	20,056		19,308		60,148		59,594
Sales, general and administrative	10,524		10,872		33,081		33,050
Total	$	33,069	$	33,229	$	100,893	$	100,918

During the three and nine months ended October 28, 2012, we granted approximately 3.2 million and 6.8 million stock options, with an estimated total grant-date fair value of $17.9 million and $37.2 million and a weighted average grant-date fair value of $5.54 and $5.45 per option, respectively. During the three and nine months ended October 28, 2012, we granted approximately 3.5 million and 7.5 million RSUs, with an estimated total grant-date fair value of $48.2 million and $104.7 million and a weighted average grant-date fair value of $13.72 and $13.99 per RSU, respectively.

During the three and nine months ended October 30, 2011, we granted approximately 3.0 million and 6.3 million stock options, with an estimated total grant-date fair value of $21.8 million and $51.4 million and a weighted average grant-date fair value of $7.35 and $8.20 per option, respectively. During the three and nine months ended October 30, 2011, we granted approximately 3.1 million and 6.8 million RSUs, with an estimated total grant-date fair value of $43.9 million and $111.8 million and a weighted average grant-date fair value of $14.34 and $16.43 per RSU, respectively.

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest was $11.8 million and $25.4 million for the three and nine months ended October 28, 2012, respectively, and $11.8 million and $29.2 million for the three and nine months ended October 30, 2011, respectively. As of October 28, 2012 and October 30, 2011, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $226.5 million and $206.1 million, respectively, adjusted for estimated forfeitures. As of October 28, 2012 and October 30, 2011, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.8 years and 2.7 years, respectively. As of October 28, 2012 and October 30, 2011, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.9 years and 2.7 years, respectively.

Valuation Assumptions

We utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our equity incentive plans. We have determined that the use of implied volatility is expected to be reflective of market conditions and, therefore, can be expected to be a reasonable indicator of our expected volatility. We also segregate options into groups of employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a reasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan, we continue to use the Black-Scholes model.

We estimate forfeitures annually and revise the estimates of forfeiture, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

The fair value of stock options granted under our equity incentive plans and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended		Nine Months Ended
	October 28, 2012	October 30, 2011	October 28, 2012	October 30, 2011
Stock Options	(Using a binomial model)
Expected life (in years)	4.3-4.9	4.1-4.9	3.1-4.9	3.6-5.4
Risk free interest rate	1.7%-1.8%	1.9%-2.4%	1.5%-2.3%	1.9%-3.8%
Volatility	45%-49%	58%-65%	43%-49%	46%-65%
Dividend yield	—	—	—	—



	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012	October 30, 2011
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	0.5-2.0		0.5-2.0		0.5-2.0	0.5-2.0
Risk free interest rate	0.1%-0.2%		0.1%-0.2%		0.1%-0.3%	0.1%-0.7%
Volatility	47	%	61	%	44%-47%	57%-61%
Dividend yield	—		—		—	—

Equity Award Activity

The following summarizes the stock option and RSU activity under our equity incentive plans:



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 29, 2012	33,329		$	14.44
Granted	6,827		$	13.94
Exercised	(3,348	)	$	8.79
Cancelled	(3,396	)	$	16.98
Balances, October 28, 2012	33,412		$	14.66



	RSUs Outstanding		Weighted Average Grant-Date Fair Value
Restricted Stock Units	(In thousands)		(Per share)
Balances, January 29, 2012	13,638		$	15.10
Granted	7,486		$	13.99
Vested	(5,670	)	$	15.03
Cancelled	(656	)	$	15.26
Balances, October 28, 2012	14,798		$	14.55