Note 2 — Stock-Based Compensation Expense

Stock-based compensation expense included in continuing operations, net of estimated forfeitures, related to the Company's stock options, Employee Stock Purchase Plan ("ESPP") and restricted stock unit awards by expense category was as follows:


	Three Months Ended
	April 1, 2012		April 3, 2011
	(In thousands)
Cost of revenues	$	3,512	$	1,813
Research and development		12,308		6,223
Selling, general and administrative		15,014		5,631

Total stock-based compensation expense	$	30,834	$	13,667

In connection with the SandForce acquisition, the Company assumed stock options and restricted stock units ("RSUs") originally granted by SandForce. Stock-based compensation expense in the first quarter of 2012 included $4.5 million of expense related to the accelerated vesting of stock options and RSUs for certain SandForce employees and $2.4 million related to stock options and RSUs assumed.

The Company has issued RSUs that will not vest unless specified performance criteria are met. In the first quarter of 2012, the compensation committee of the board of directors authorized additional vesting of performance-based RSUs where the Company's performance had been adversely affected as a result of the flooding that occurred in Thailand in the fourth quarter of 2011 and as a result, vesting levels would have been lower. The Company recognized $4.4 million of stock-based compensation expense related to the additional vesting. No executive officers were included in the group of employees that received additional vesting. Executive officers hold RSUs, the vesting of which depends on the Company's performance compared to specified peer companies over a three-year period. In the first quarter of 2012, the Company revised its estimate of the number of awards that will ultimately vest based on the Company's latest financial performance. As a result, the Company recognized $2.4 million of stock-based compensation expense related to the change in estimate.

Stock Options

The fair value of each option grant is estimated as of the date of grant using a reduced-form calibrated binomial lattice model ("lattice model"). The following table summarizes the weighted-average assumptions that the Company applied in the lattice model:


	Three Months Ended
	April 1, 2012			April 3, 2011
Estimated grant date fair value per share	$	2.86		$	2.08
Expected life (years)		4.46			4.45
Risk-free interest rate		1	%		2	%
Volatility		47	%		47	%

The following table summarizes changes in stock options outstanding:


	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Options outstanding at December 31, 2011		64,245		$	6.19
Assumed in SandForce acquisition		7,542		$	0.75
Granted		4,980		$	8.51
Exercised		(11,129	)	$	5.87
Canceled		(1,352	)	$	9.89

Options outstanding at April 1, 2012		64,286		$	5.71		4.27	$	198,711

Options exercisable at April 1, 2012		38,200		$	6.31		2.87	$	98,143

Restricted Stock Units

The cost of service-based and performance-based RSUs is determined using the fair value of the Company's common stock on the date of grant. For performance-based RSUs, the Company also considers the probability that those RSUs will vest.

Service-based:

The vesting of service-based RSUs requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in service-based RSUs outstanding:

		$xxxxxxx			$xxxxxxx
	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested service-based RSUs at December 31, 2011		12,085		$	5.94
Assumed in SandForce acquisition		1,576			6.17
Granted		6,438			8.42
Vested		(2,587	)		5.93
Forfeited		(300	)		6.14

Unvested service-based RSUs at April 1, 2012		17,212		$	6.89

As of April 1, 2012, the total unrecognized compensation expense related to the service-based RSUs, net of estimated forfeitures, was $104.0 million and will be recognized over the next 3.1 years on a weighted-average basis. The total grant date fair value of service-based RSUs granted was $54.2 million and $46.4 million for the three months ended April 1, 2012 and April 3, 2011, respectively. The total fair value of the shares that vested was $22.0 million and $10.3 million for the three months ended April 1, 2012 and April 3, 2011, respectively.

Performance-based:

The vesting of performance-based RSUs is contingent upon the Company meeting specified performance criteria and requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in performance-based RSUs outstanding:


	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested performance-based RSUs at December 31, 2011		4,729		$	5.98
Granted		2,942			8.53
Vested		(1,446	)		5.85
Forfeited		(467	)		6.23

Unvested performance-based RSUs at April 1, 2012		5,758		$	7.30

As of April 1, 2012, the total unrecognized compensation expense related to performance-based RSUs, net of estimated forfeitures, was $36.3 million and, if the performance conditions are fully met, will be recognized over the next 3 years. The total grant date fair value of performance-based RSUs granted was $25.1 million and $26.1 million for the three months ended April 1, 2012 and April 3, 2011, respectively. The total fair value of the shares issued upon the vesting of performance-based RSUs was $12.3 million and $6.3 million for the three months ended April 1, 2012 and April 3, 2011, respectively.

A total of 9,117,372 shares of common stock were reserved for future issuance upon exercise of options and RSUs assumed in the SandForce acquisition. Those options and RSUs are included in the preceding tables. The options vest over four years and have ten year terms. The RSUs vest over two to four years.

Employee Stock Purchase Plan

Compensation expense for the Company's ESPP is calculated using the fair value of the employees' purchase rights under the Black-Scholes model. Under the ESPP, rights to purchase shares are granted during the second and fourth quarters of each year. No shares related to the ESPP were issued during the three months ended April 1, 2012 or April 3, 2011.