(13) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

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. The fair value of restricted stock units and restricted stock is determined based on the quoted market price of our common stock on the date of grant. 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. The fair value of our stock options is based on the multiple-award valuation method. The determination of the fair value of stock options and ESPP is affected by our stock price, as well as assumptions regarding subjective and complex variables such as expected employee exercise behavior and our expected stock price volatility over the expected term of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. The key assumptions for the Black-Scholes valuation calculation are:

Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.

Expected volatility. For our expected volatility assumption we use a combination of historical stock price volatility and implied volatility based on the price of options publicly traded on our common stock.

Expected term. The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

Expected dividends.

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


	Stock Option Grants			ESPP
	Year Ended March 31,			Year Ended March 31,
	2011	2010	2009	2011	2010	2009
Risk-free interest rate	0.3- 2.6%	1.4- 3.1%	1.0- 3.8%	0.2- 0.3%	0.2- 0.4%	0.5- 2.1%
Expected volatility	39- 45%	40- 48%	32- 53%	34- 38%	35- 57%	35- 75%
Weighted-average volatility	42%	45%	42%	36%	39%	66%
Expected term	4.2 years	4.2 years	4.3 years	6-12 months	6-12 months	6-12 months
Expected dividends	None	None	None	None	None	None

Stock-Based Compensation Expense

Employee stock-based compensation expense recognized during the fiscal years ended March 31, 2011, 2010 and 2009 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 Consolidated Statements of Operations (in millions):


	Year Ended March 31,
	2011	2010	2009
Cost of goods sold	$ 2	$ 2	$ 2
Marketing and sales	21	16	20
General and administrative	40	33	47
Research and development	111	110	134
Restructuring and other charges	2	26	-
Stock-based compensation expense	$ 176	$ 187	$ 203

During the fiscal years ended March 31, 2011, 2010 and 2009, we did not recognize any provision for or benefit from income taxes related to our stock-based compensation expense.

As of March 31, 2011, our total unrecognized compensation cost related to stock options was $36 million and is expected to be recognized over a weighted-average service period of 1.5 years. As of March 31, 2011, our total unrecognized compensation cost related to restricted stock, restricted stock units and notes payable in shares of common stock (collectively referred to as "restricted stock rights") was $255 million and is expected to be recognized over a weighted-average service period of 1.9 years. Of the $255 million of unrecognized compensation cost noted above, $24 million relates to performance-based restricted stock units for which we ceased recognizing stock-based compensation expense during fiscal year 2010 because we determined that the performance attainment was neither probable nor improbable of achievement.

For the fiscal year ended March 31, 2011, we recognized $2 million of tax costs from the exercise of stock options, net of $3 million of deferred tax write-offs; of this amount $1 million of excess tax benefit related to stock-based compensation was reported in the financing activities on our Consolidated Statements of Cash Flows. For the fiscal year ended March 31, 2010, we recognized $14 million of tax benefits from the exercise of stock options for which we did not have any deferred tax asset write-offs; all of which represented excess tax benefits related to stock-based compensation and was reported in financing activities. For the fiscal year ended March 31, 2009, we recognized $2 million of tax benefits from the exercise of stock options for which we did not have any deferred tax asset write-offs; all of which represented excess tax benefits related to stock-based compensation and was reported in financing activities.

Summary of Plans and Plan Activity

Equity Incentive Plans

Our 2000 Equity Incentive Plan (the "Equity Plan") allows us to grant options to purchase our common stock and to grant restricted stock, restricted stock units and stock appreciation rights to our employees, officers and directors. Pursuant to the Equity Plan, incentive stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers and directors, at not less than 100 percent of the fair market value on the date of grant.

We also have options and restricted stock units outstanding that were granted under the VG Holding Corp. 2005 Stock Incentive Plan (the "VGH 2005 Plan"), which we assumed in connection with our acquisition of VGH.

In connection with our acquisition of VGH, we also established the 2007 Electronic Arts VGH Acquisition Inducement Award Plan (the "VGH Inducement Plan"), which allowed us to grant restricted stock units to service providers, who were employees of VGH or a subsidiary of VGH immediately prior to the consummation of the acquisition and who became employees of EA following the acquisition. The restricted stock units granted under the VGH Inducement Plan vest pursuant to either (1) time-based vesting schedules over a period of up to four years or (2) the achievement of pre-determined performance-based milestones, and in all cases are subject to earlier vesting in the event we terminate a recipient's employment without "cause" or the recipient terminates employment for "good reason." We do not intend to grant any further awards under the VGH Inducement Plan.

In addition, in connection with our acquisition of VGH, in exchange for outstanding stock options and restricted stock, we granted service-based non-interest bearing notes payable solely in shares of our common stock to certain employees of VGH, who became employees of EA following the acquisition. These notes payable vest over a period of four years, subject to earlier vesting in the event we terminate a recipient's employment without "cause" or the recipient terminates employment for "good reason."

Options granted under the Equity Plan generally expire ten years from the date of grant and are generally exercisable as to 24 percent of the shares after 12 months, and then ratably over the following 38 months. The material terms of options granted under the VGH 2005 Plan are similar to our Equity Plan.

Stock Options

The following table summarizes our stock option activity for the fiscal year ended March 31, 2011:

	Options (in thousands)	Weighted-Average Exercise Prices	Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding as of March 31, 2010	16,131	$ 30.28
Granted	174	17.23
Exercised	(341)	16.14
Forfeited, cancelled or expired	(3,065)	26.45
Outstanding as of March 31, 2011	12,899	31.39
Vested and expected to vest	12,670	$ 31.54	5.2	$ 9
Exercisable	9,481	$ 34.52	4.3	$ 4

As of March 31, 2011, the weighted-average contractual term for our stock options outstanding was 5.3 years and the aggregate intrinsic value of our stock options outstanding was $9 million. The aggregate intrinsic value represents the total pre-tax intrinsic value based on our closing stock price as of March 31, 2011, 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 fiscal years 2011, 2010 and 2009 were $6.03, $7.81 and $10.28, respectively. The total intrinsic values of stock options exercised during fiscal years 2011, 2010 and 2009 were $1 million, $3 million and $46 million, respectively. The total estimated fair values (determined as of the grant date) of stock options vested during fiscal years 2011, 2010 and 2009 were $24 million, $26 million and $83 million, respectively. We issue new common stock from our authorized shares upon the exercise of stock options.

A total of 16.9 million options, or 11.8 million restricted stock units, were available for grant under our Equity Plan as of March 31, 2011.

The following table summarizes outstanding and exercisable stock options as of March 31, 2011:


	Options Outstanding				Options Exercisable
		Weighted-
		Average	Weighted-			Weighted-
	Number	Remaining	Average		Number	Average
Range of	of Shares	Contractual	Exercise	Potential	of Shares	Exercise	Potential
Exercise Prices	(in thousands)	Term (in years)	Prices	Dilution	(in thousands)	Prices	Dilution
$0.65 - $19.99	3,477	7.57	$ 17.06	1.0%	1,618	$ 16.95	0.5%
20.00 - 39.99	5,479	4.21	24.45	1.7%	4,353	25.31	1.3%
40.00 - 59.99	3,206	5.07	51.15	1.0%	2,773	51.23	0.8%
60.00 - 65.93	737	2.97	64.68	0.2%	737	64.68	0.2%
$0.65 - $65.93	12,899	5.26	31.39	3.9%	9,481	34.52	2.8%

Potential dilution is computed by dividing the options in the related range of exercise prices by 333 million shares of common stock, which were issued and outstanding as of March 31, 2011.

At our Annual Meeting of Stockholders, held on August 5, 2010, our stockholders approved amendments to the Equity Plan to (1) increase the number of shares authorized for issuance under the Equity Plan by 5.3 million shares and (2) remove the provision that provides for automatic grants to our non-employee directors upon appointment to the Board of Directors and annually upon re-election.

Restricted Stock Rights

We grant restricted stock rights under our Equity Plan to employees worldwide (except in certain countries where doing so is not feasible due to local legal requirements). Restricted stock units entitle holders to receive shares of common stock at the end of a specified period of time. Upon vesting, the equivalent number of common shares is typically issued net of required tax withholdings, if any. Restricted stock is issued and outstanding upon grant; however, restricted stock award holders are restricted from selling the shares until they vest. Upon granting or vesting of restricted stock, as the case may be, we will typically withhold shares to satisfy tax withholding requirements. Restricted stock rights are subject to forfeiture and transfer restrictions. Vesting for restricted stock rights is based on the holders' continued employment with us. If the vesting conditions are not met, unvested restricted stock rights will be forfeited. Generally, our restricted stock rights vest according to one of the following vesting schedules:

·Three-year vesting with 33.33 percent cliff vesting at the end of each of the first and second years, and 33.34 percent cliff vesting at the end of the third year;

·Four-year vesting with 25 percent cliff vesting at the end of each year;

·Three-year vesting with 25 percent cliff vesting at the end of each of the first and second years, and 50 percent cliff vesting at the end of the third year;

·26 month vesting with 50 percent cliff vesting at the end of 13 months and 50 percent cliff vesting at the end of 26 months; or

·100 percent after one year.

Each restricted stock right granted reduces the number of shares available for grant by 1.43 shares under our Equity Plan. The following table summarizes our restricted stock rights activity, excluding performance-based restricted stock unit activity which is discussed below, for the fiscal year ended March 31, 2011:

	Restricted Stock Rights	Weighted-Average Grant
	(in thousands)	Date Fair Values
Balance as of March 31, 2010	14,300	$ 24.45
Granted	8,090	17.38
Vested	(6,520)	21.81
Forfeited or cancelled	(1,899)	21.32
Balance as of March 31, 2011	13,971	22.01

The weighted-average grant date fair value of restricted stock rights is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of restricted stock rights granted during fiscal years 2011, 2010 and 2009 were $17.38, $18.10 and $32.42, respectively. The total grant date fair values of restricted stock rights that vested during fiscal years 2011, 2010 and 2009 were $142 million, $129 million and $90 million, respectively.

Performance-Based Restricted Stock Units

Our performance-based restricted stock units vest contingent upon the achievement of pre-determined performance-based milestones. If these performance-based milestones are not met, the restricted stock units will not vest, in which case, any compensation expense we have recognized to date will be reversed.

The following table summarizes our performance-based restricted stock unit activity for the fiscal year ended March 31, 2011:

	Performance-Based Restricted Stock Units	Weighted-Average Grant
	(in thousands)	Date Fair Values
Balance as of March 31, 2010	2,326	$ 49.04
Granted	120	15.39
Forfeited or cancelled	(453)	49.11
Balance as of March 31, 2011	1,993	47.00

The weighted-average grant date fair value of performance-based restricted stock units is based on the quoted market price of our common stock on the date of grant. The weighted-average grant date fair values of performance-based restricted stock units granted during fiscal years 2011, 2010 and 2009 were $15.39, $20.93 and $46.05, respectively. The total grant date fair values of performance-based restricted stock units that vested during fiscal years 2010 and 2009 were $5 million and $3 million, respectively. No performance-based restricted stock units vested during fiscal year 2011.

ESPP

Pursuant to our ESPP, eligible employees may authorize payroll deductions of between 2 percent and 10 percent of their compensation to purchase shares at 85 percent of the lower of the market price of our common stock on the date of commencement of the offering or on the last day of each six-month purchase period.

At our Annual Meeting of Stockholders, held on August 5, 2010, our stockholders approved amendments to the ESPP to increase the number of shares authorized under the ESPP by 2 million shares. As of March 31, 2011, we had 5 million shares of common stock reserved for future issuance under the ESPP.

During fiscal year 2011, we issued approximately 2.2 million shares under the ESPP with exercise prices for purchase rights ranging from $12.95 to $12.99. During fiscal years 2011, 2010 and 2009, the estimated weighted-average fair values of purchase rights were $4.67, $6.50 and $13.04, respectively.

We issue new common stock out of the ESPP's pool of authorized shares. The fair values above were estimated on the date of grant using the Black-Scholes option-pricing model assumptions.

Deferred Compensation Plan

We have a Deferred Compensation Plan ("DCP") for the benefit of a select group of management or highly compensated employees and Directors, which is unfunded and intended to be a plan that is not qualified within the meaning section 401(a) of the Internal Revenue Code. The DCP permits the deferral of the annual base salary and/or Director fees up to a maximum amount. The deferrals are held in a separate trust, which has been established by us to administer the DCP. The trust is a grantor trust and the specific terms of the trust agreement provide that the assets of the trust are available to satisfy the claims of general creditors in the event of our insolvency. The assets held by the trust are classified as trading securities and are held at fair value on our Consolidated Balance Sheets. The assets and liabilities of the DCP are presented in other assets and other liabilities on our Consolidated Balance Sheets, respectively, with changes in the fair value of the assets and in the deferred compensation liability recognized as compensation expense. As of March 31, 2011 and 2010, the estimated fair value of the assets was $12 million in each period. As of March 31, 2011 and 2010, $13 million and $12 million, respectively, was recorded to recognize undistributed deferred compensation due to employees.

401(k) Plan and Registered Retirement Savings Plan

We have a 401(k) plan covering substantially all of our U.S. employees, and a Registered Retirement Savings Plan covering substantially all of our Canadian employees. These plans permit us to make discretionary contributions to employees' accounts based on our financial performance. We contributed an aggregate of $9 million, $10 million and $7 million to these plans in fiscal years 2011, 2010 and 2009, respectively.

Stock Repurchase Program

On February 1, 2011, our Board of Directors authorized a program to repurchase up to $600 million of our common stock over the next 18 months. 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 the program and the repurchase program may be modified, suspended or discontinued at any time. During fiscal year 2011, we repurchased and retired approximately 3 million shares of our common stock for approximately $58 million, net of commissions.