On June 5, 2014, our shareholders approved the Activision Blizzard, Inc. 2014 Incentive Plan (the “2014 Plan”) and the 2014 Plan became effective. The 2014 Plan authorizes the Compensation Committee of our Board of Directors to provide stock-based compensation in the form of stock options, share appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other performance- or value-based awards structured by the Compensation Committee within parameters set forth in the 2014 Plan, including custom awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of our common stock, or factors that may influence the value of our common stock or that are valued based on our performance or the performance of any of our subsidiaries or business units or other factors designated by the Compensation Committee, as well as incentive bonuses, for the purpose of providing incentives and rewards for superior performance to the directors, officers, employees of, and consultants to, Activision Blizzard and its subsidiaries.

While the Compensation Committee has broad discretion to create equity incentives, our stock-based compensation program for the most part currently utilizes a combination of options and restricted stock units. Options have time-based vesting schedules, generally vesting annually over a period of three to five years, and all options expire ten years from the grant date. Restricted stock units either have time-based vesting schedules, generally vesting in their entirety on an anniversary of the date of grant, or vesting annually over a period of three to five years, or vest only if certain performance measures are met. In addition, under the terms of the 2014 Plan, the exercise price for the options must be equal to or greater than the closing price per share of our common stock on the date the award is granted, as reported on NASDAQ.

Upon the effective date of the 2014 Plan, we ceased making awards under the following equity incentive plans (collectively, the “Prior Plans”), although such plans will remain in effect and continue to govern outstanding awards: (i) Activision, Inc. 1998 Incentive Plan, as amended; (ii) Activision, Inc. 1999 Incentive Plan, as amended; (iii) Activision, Inc. 2001 Incentive Plan, as amended; (iv) Activision, Inc. 2002 Incentive Plan, as amended; (v) Activision, Inc. 2002 Executive Incentive Plan, as amended; (vi) Activision, Inc. 2002 Studio Employee Retention Incentive Plan, as amended; (vii) Activision, Inc. 2003 Incentive Plan, as amended; (viii) Activision, Inc. 2007 Incentive Plan; and (ix) Activision Blizzard, Inc. 2008 Incentive Plan.

As of the date it was approved by our shareholders, there were 46 million shares available for issuance under the 2014 Plan. The number of shares of our common stock reserved for issuance under the 2014 Plan has been, and may be further, increased from time to time by: (i) the number of shares relating to awards outstanding under any Prior Plan that: (a) expire, or are forfeited, terminated or cancelled, without the issuance of shares; (b) are settled in cash in lieu of shares; or (c) are exchanged, prior to the issuance of shares of our common stock, for awards not involving our common stock; (ii) if the exercise price of any option outstanding under any Prior Plan is, or the tax withholding requirements with respect to any award outstanding under any Prior Plan are, satisfied by withholding shares otherwise then deliverable in respect of the award or the actual or constructive transfer to the Company of shares already owned, the number of shares equal to the withheld or transferred shares; and (iii) if a share appreciation right is exercised and settled in shares, a number of shares equal to the difference between the total number of shares with respect to which the award is exercised and the number of shares actually issued or transferred. As of December 31, 2014, we had approximately 40 million shares of our common stock reserved for future issuance under the 2014 Plan. Shares issued in connection with awards made under the 2014 Plan are generally issued as new stock issuances.

Our employee stock options have features that differentiate them from exchange-traded options. These features include lack of transferability, early exercise, vesting restrictions, pre- and post-vesting termination provisions, blackout dates, and time-varying inputs. A binomial-lattice model was selected because it is better able to explicitly address these features than closed-form models such as the Black-Scholes model, and is able to reflect expected future changes in model inputs, including changes in volatility, during the option's contractual term.

We have estimated expected future changes in model inputs during the option's contractual term. The inputs required by our binomial-lattice model include expected volatility, risk-free interest rate, risk-adjusted stock return, dividend yield, contractual term, and vesting schedule, as well as measures of employees' forfeiture, exercise, and post-vesting termination behavior. Statistical methods were used to estimate employee rank-specific termination rates. These termination rates, in turn, were used to model the number of options that are expected to vest and post-vesting termination behavior. Employee rank-specific estimates of Expected Time-To-Exercise (“ETTE”) were used to reflect employee exercise behavior. ETTE was estimated by using statistical procedures to first estimate the conditional probability of exercise occurring during each time period, conditional on the option surviving to that time period and then using those probabilities to estimate ETTE. The model was calibrated by adjusting parameters controlling exercise and post-vesting termination behavior so that the measures output by the model matched values of these measures that were estimated from historical data.

The following tables present the weighted-average assumptions and the weighted-average fair value at grant date using the binomial-lattice model:

	Employee and Director Options
	For the Years Ended December 31,
	2014			2013			2012
Expected life (in years)		5.97			6.44			7.05
Risk free interest rate		1.82	%		1.86	%		1.12	%
Volatility		37.09	%		39.00	%		40.76	%
Dividend yield		0.98	%		1.08	%		1.65	%
Weighted-average fair value at grant date	$	5.87		$	4.97		$	3.47

To estimate volatility for the binomial-lattice model, we use methods that consider the implied volatility method based upon the volatilities for exchange-traded options on our stock to estimate short-term volatility, the historical method (annualized standard deviation of the instantaneous returns on Activision Blizzard's stock) during the option's contractual term to estimate long-term volatility, and a statistical model to estimate the transition or “mean reversion” from short-term volatility to long-term volatility. Based on these methods, for options granted during the year ended December 31, 2014, the expected stock price volatility ranged from 29.72% to 38.00%.

As is the case for volatility, the risk-free rate is assumed to change during the option's contractual term. Consistent with the calculation required by a binomial-lattice model, the risk-free rate reflects the expected movement in the interest rate from one time period to the next (“forward rate”) as opposed to the interest rate from the grant date to the given time period (“spot rate”). The expected dividend yield assumption for options granted during the year ended December 31, 2014 is based on the Company's historical and expected future amount of dividend payouts.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is an output from the binomial-lattice model. The expected life of employee stock options depends on all of the underlying assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will exercise their options when the stock price equals or exceeds an exercise multiples, of which the multiple is based on historical employee exercise behaviors.

As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2014, 2013, and 2012 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

We developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees' exercise and post-vesting termination behavior. Our ability to accurately estimate the fair value of stock-based payment awards at the grant date depends upon the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates. Although the fair value of employee stock options is determined using an option-pricing model, the estimates that are produced by this model may not be indicative of the fair value observed between a willing buyer and a willing seller. Unfortunately, it is difficult to determine if this is the case, as markets do not currently exist that permit the active trading of employee stock option and other stock-based instruments.

Stock option activities for the year ended December 31, 2014 are as follows (amounts in millions, except number of shares, which are in thousands, and per share amounts):

				Weighted-average
		Weighted-average		remaining	Aggregate
	Shares	exercise price		contractual term	intrinsic value
Outstanding stock options at December 31, 2013	38,804	$	12.63
Granted	6,020		20.41
Exercised	(14,386)		11.97
Forfeited	(939)		14.00
Expired	(13)		10.39
Outstanding stock options at December 31, 2014	29,486		14.50	6.03	$	168
Vested and expected to vest at December 31, 2014	28,391	$	14.32	5.06	$	167
Exercisable at December 31, 2014	19,254	$	12.70	4.51	$	145

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e. the difference between our closing stock price on the last trading day of the period and the exercise price, times the number of shares for options where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the market value of our stock. The total intrinsic value of options actually exercised was $117 million, $104 million, and $25 million for the years ended December 31, 2014, 2013, and 2012, respectively. The total grant date fair value of options vested was $19 million, $29 million, and $47 million for the years ended December 31, 2014, 2013, and 2012, respectively.

At December 31, 2014, $33 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.58 years.

We grant restricted stock units, which represent the right to receive shares of our common stock, and restricted stock awards, which are issued and outstanding upon grant but subject to the risk of forfeiture (collectively referred to as “restricted stock rights”), under the 2014 Plan to employees around the world, and we assumed, as a result of the Business Combination, the restricted stock rights granted by Activision, Inc. Vesting for restricted stock rights is contingent upon the holders' continued employment with us and may be subject to other conditions (which may include the satisfaction of a performance measure). If the vesting conditions are not met, unvested restricted stock rights will be forfeited. Holders of restricted stock are restricted from selling the shares until they vest. Upon vesting of restricted stock rights, we may withhold shares otherwise deliverable to satisfy minimum tax withholding requirements.

The following table summarizes our restricted stock rights activity for the year ended December 31, 2014 (amounts in thousands except per share amounts):

			Weighted-
	Restricted Stock		Average Grant
	Rights		Date Fair Value
Unvested restricted stock rights balance at December 31, 2013		22,565	$	12.63
Granted		4,111		20.07
Vested		(7,120)		12.23
Forfeited		(1,966)		12.01
Unvested restricted stock rights balance at December 31, 2014		17,590		11.85

At December 31, 2014, approximately $69 million of total unrecognized compensation cost was related to restricted stock rights and is expected to be recognized over a weighted-average period of 1.26 years. Of the total unrecognized compensation cost, $23 million was related to performance-vesting restricted stock rights, which is expected to be recognized over a weighted-average period of 1.30 years. The total grant date fair value of vested restricted stock rights was $92 million, $57 million and $45 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The income tax benefit from stock option exercises and restricted stock rights was $89 million, $77 million, and $20 million for the years ended December 31, 2014, 2013, and 2012, respectively.

The following table sets forth the total stock-based compensation expense included in our consolidated statements of operations for the years ended December 31, 2014, 2013, and 2012 (amounts in millions):

	For the Years Ended December 31,
	2014		2013		2012
Cost of sales - online	$	1	$	---	$	---
Cost of sales - software royalties and amortization		17		17		9
Product development		22		33		20
Sales and marketing		8		7		8
General and administrative		56		53		89
Stock-based compensation expense before income taxes		104		110		126
Income tax benefit		(38)		(40)		(46)
Total stock-based compensation expense, net of income tax benefit	$	66	$	70	$	80

The following table summarizes stock-based compensation included in our consolidated balance sheets as a component of “Software development” (amounts in millions):

	Software
	Development
Balance at December 31, 2011	$	10
Stock-based compensation expense capitalized and deferred during period		27
Amortization of capitalized and deferred stock-based compensation expense		(18)
Balance at December 31, 2012	$	19
Stock-based compensation expense capitalized and deferred during period		34
Amortization of capitalized and deferred stock-based compensation expense		(31)
Balance at December 31, 2013	$	22
Stock-based compensation expense capitalized and deferred during period		27
Amortization of capitalized and deferred stock-based compensation expense		(23)
Balance at December 31, 2014	$	26