STOCK-BASED COMPENSATION

Valuation Assumptions

We are required to estimate the fair value of share-based payment awards on the date of grant. We recognize compensation costs for stock-based payment awards to employees based on the grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest.

We determine the fair value of our share-based payment awards as follows:

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Restricted Stock Units, Restricted Stock, and Performance-Based Restricted Stock Units. The fair value of restricted stock units, restricted stock, and performance-based restricted stock units (other than market-based restricted stock units) is determined based on the quoted market price of our common stock on the date of grant. Performance-based restricted stock units include grants made (1) to certain members of executive management primarily granted in fiscal year 2009 and (2) in connection with certain acquisitions.

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Market-Based Restricted Stock Units. Market-based restricted stock units consist of grants of performance-based restricted stock units to certain members of executive management (referred to herein as “market-based restricted stock units”). The fair value of our market-based restricted stock units is determined using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model are the risk-free interest rate, expected volatility (of our common stock and of the common stock of our peer companies within the NASDAQ-100 Index), expected dividends and correlation coefficient.

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Stock Options and Employee Stock Purchase Plan. The fair value of stock options and stock purchase rights granted pursuant to our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”), respectively, is determined using the Black-Scholes valuation model based on the multiple-award valuation method. Key assumptions of the Black-Scholes valuation model are the risk-free interest rate, expected volatility, expected term and expected dividends.

The determination of the fair value of market-based restricted stock units, stock options and ESPP is affected by assumptions regarding subjective and complex variables. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes.

The estimated assumptions used in the Black-Scholes valuation model to value our stock option grants were as follows:



	Stock Option Grants								ESPP
	Three Months Ended December 31,				Nine Months Ended December 31,				Nine Months Ended December 31,
	2012		2011		2012		2011		2012		2011
Risk-free interest rate	0.4 - 1.0%		0.4 - 1.2%		0.4 - 1.0%		0.4 - 1.8%		0.1 - 0.2%		0.1	%
Expected volatility	40 - 45%		42 - 46%		40 - 46%		40 - 46%		41 - 42%		39 - 40%
Weighted-average volatility	41	%	45	%	43	%	43	%	41	%	39	%
Expected term	4.3 years		4.1 years		4.4 years		4.4 years		6 - 12 months		6 - 12 months
Expected dividends	None		None		None		None		None		None

There were no ESPP shares issued during the three months ended December 31, 2012 and 2011.

The estimated assumptions used in the Monte-Carlo simulation model to value our market-based restricted stock units were as follows:



	Three Months Ended December 31,		Nine Months Ended December 31,
	2012		2012		2011
Risk-free interest rate	0.3	%	0.2 - 0.4%		0.2 - 0.6%
Expected volatility	33	%	17 - 116%		14 - 83%
Weighted-average volatility	33	%	35	%	35	%
Expected dividends	None		None		None

There were no market-based restricted stock units granted during the three months ended December 31, 2011.

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the three and nine months ended December 31, 2012 and 2011 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. In subsequent periods, if actual forfeitures differ from those estimates, an adjustment to stock-based compensation expense will be recognized at that time.

The following table summarizes stock-based compensation expense resulting from stock options, restricted stock, restricted stock units and the ESPP included in our Condensed Consolidated Statements of Operations (in millions):



	Three Months Ended December 31,				Nine Months Ended December 31,
	2012		2011		2012		2011
Cost of revenue	$	—	$	—	$	1	$	1
Research and development	25		30		74		81
General and administrative	7		11		25		29
Marketing and sales	7		7		22		18
Stock-based compensation expense	$	39	$	48	$	122	$	129

During the three and nine months ended December 31, 2012 and 2011, we did not recognize any provision for or benefit from income taxes related to our stock-based compensation expense.

As of December 31, 2012, our total unrecognized compensation cost related to stock options was $6 million and is expected to be recognized over a weighted-average service period of 2.2 years years. As of December 31, 2012, our total unrecognized compensation cost related to restricted stock and restricted stock units (collectively referred to as “restricted stock rights”) was $271 million and is expected to be recognized over a weighted-average service period of 1.9 years years. Of the $271 million of unrecognized compensation cost, $19 million relates to market-based restricted stock units and $1 million relates to performance-based restricted stock units.

Stock Options

The following table summarizes our stock option activity for the nine months ended December 31, 2012:



	Options (in thousands)		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2012	9,774		$	34.17
Granted	292		13.10
Exercised	(17	)	13.08
Forfeited, cancelled or expired	(2,019	)	32.75
Outstanding as of December 31, 2012	8,030		33.82		4.75	$	—
Vested and expected to vest	7,968		33.97		4.72	$	—
Exercisable as of December 31, 2012	7,401		35.24		4.46	$	—

The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of December 31, 2012, which would have been received by the option holders had all the option holders exercised their options as of that date. The weighted-average grant date fair values of stock options granted during the three and nine months ended December 31, 2012 were $4.61 and $4.64, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.

Restricted Stock Rights

The following table summarizes our restricted stock rights activity, excluding performance-based and market-based restricted stock unit activity discussed below, for the nine months ended December 31, 2012:



	Restricted Stock Rights (in thousands)		Weighted- Average Grant Date Fair Value
Balance as of March 31, 2012	16,323		$	20.73
Granted	8,684		12.62
Vested	(5,751	)	20.88
Forfeited or cancelled	(1,655	)	18.91
Balance as of December 31, 2012	17,601		16.85

The weighted-average grant date fair values of restricted stock rights granted during the three and nine months ended December 31, 2012 were $13.80 and $12.62, respectively.

Performance-Based Restricted Stock Units

The following table summarizes our performance-based restricted stock unit activity for the nine months ended December 31, 2012:



	Performance- Based Restricted Stock Units (in thousands)		Weighted- Average Grant Date Fair Value
Balance as of March 31, 2012	1,421		$	50.35
Vested	(19	)	15.39
Forfeited or cancelled	(78	)	38.67
Balance as of December 31, 2012	1,324		51.54

Market-Based Restricted Stock Units

Our market-based restricted stock units vest contingent upon the achievement of pre-determined market and service conditions. If these market conditions are not met but service conditions are met, the restricted stock units will not vest; however, any compensation expense we have recognized to date will not be reversed. The number of shares of common stock to be received at vesting will range from zero percent to 200 percent of the target number of stock units based on our total stockholder return (“TSR”) relative to the performance of companies in the NASDAQ-100 Index for each measurement period, generally over a three year period. The maximum number of common shares that could vest is approximately 2.6 million for market-based restricted stock units. The following table summarizes our market-based restricted stock unit activity for the nine months ended December 31, 2012. We present shares granted at 100 percent of target of the number of stock units that may potentially vest.



	Market-Based Restricted Stock Units (in thousands)		Weighted- Average Grant Date Fair Value
Balance as of March 31, 2012	520		$	34.77
Granted	970		12.41
Vested	(111	)	34.77
Forfeited or cancelled	(62	)	34.77
Balance as of December 31, 2012	1,317		18.30

Stock Repurchase Program

In February 2011, our Board of Directors authorized a program to repurchase up to $600 million of our common stock over the following 18 months. We completed our program in April 2012. We repurchased approximately 32 million shares in the open market since under that program, including pursuant to pre-arranged stock trading plans. During the three months ended June 30, 2012, we repurchased and retired approximately 4.3 million shares of our common stock for approximately $71 million, under that plan.

In July 2012, our Board of Directors authorized a new program to repurchase up to $500 million of our common stock. Under this new program, we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws, including pursuant to pre-arranged stock trading plans. The timing and actual amount of the stock repurchases will depend on several factors including price, capital availability, regulatory requirements, alternative investment opportunities and other market conditions. We are not obligated to repurchase any specific number of shares under this program and it may be modified, suspended or discontinued at any time. During the three months ended December 31, 2012, we repurchased and retired approximately 12.2 million shares of our common stock for approximately $157 million under this new program. We continue to actively repurchase shares under this program.

During the nine months ended December 31, 2012, we repurchased and retired approximately 24.9 million shares of our common stock for approximately $336 million. Of these repurchases, approximately 20.6 million shares were repurchased under the July 2012 program for approximately $265 million.

Annual Meeting of Stockholders

At our Annual Meeting of Stockholders, held on July 26, 2012, our stockholders approved amendments to our 2000 Equity Incentive Plan (the “Equity Plan”) to increase the number of shares of common stock authorized under the Equity Plan by 6,180,000 shares, and to increase the limit on the number of shares that may be covered by equity awards to eligible persons under the Equity Plan in a fiscal year.