Stock-Based Compensation

Our stock-based compensation plans include the 2005 Equity Incentive Plan (the “2005 Plan”) and the 1987 Employee Stock Purchase Plan (“ESPP”).

2005 EQUITY INCENTIVE PLAN | Our equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The 2005 Plan provides stock-based incentive compensation (“awards”) to both our eligible employees and non-employee directors. Awards that may be granted under the 2005 Plan include non-qualified and incentive stock options, restricted stock units (“RSU”s), performance-based restricted stock units (“PRSU”s), restricted stock awards, stock appreciation rights, and stock bonus awards. To date, awards granted under the 2005 Plan consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the 2005 Plan vest over 4 years. Stock options granted under the 2005 Plan have a maximum contractual term of 10 years. On May 10, 2011, our stockholders approved an amendment to the 2005 Plan to increase the shares reserved for future issuance by 5 million. As of December 31, 2011, the 2005 Plan had a total of 29.6 million shares reserved for future issuance, of which 19.0 million shares were available for future grants.

In 2007, we began granting PRSUs to selected members of our senior management. The PRSUs vest upon: (1) Altera achieving net income (including equity compensation expense) from continuing operations as a percentage of net sales above a certain percentage; and (2) the grantees satisfying certain service requirements. No PRSUs were granted in 2011. For 2010 and 2009, 0.3 million and 0.6 million PRSUs were granted, respectively.

Historically, we used equity awards in the form of stock options as one of the means for recruiting and retaining highly skilled talent. RSUs and PRSUs are the most frequently issued type of long-term equity-based award for eligible employees.

A summary of activity for our RSUs and PRSUs for 2011 and information regarding RSUs and PRSUs outstanding and expected to vest as of December 31, 2011 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Grant-Date Fair Market Value Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding, December 31, 2010	7,613		$	22.95
Grants	3,736		$	42.03
Vested	(2,662	)	$	22.06
Forfeited	(511	)	$	28.17
Outstanding, December 31, 2011	8,176		$	31.62	1.6	$	303,321
Vested and expected to vest, December 31, 2011	7,191		$	31.62	1.5	$	266,790


(1)	Aggregate intrinsic value represents the closing price per share of our stock on December 31, 2011, multiplied by the number of RSUs and PRSUs outstanding or vested and expected to vest as of December 31, 2011.

The total fair value of RSUs and PRSUs vested and expensed during 2011, 2010 and 2009 was $71.8 million, $53.4 million and $50.0 million, respectively.

A summary of stock option activity for 2011 and information regarding stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2011 is as follows:



(In thousands, except per share amounts and terms)	Number of Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value⁽¹⁾
Outstanding, December 31, 2010	10,179		$	20.61
Grants	806		$	42.37
Exercises	(4,807	)	$	21.29
Forfeited/Cancelled/Expired	(40	)	$	21.78
Outstanding, December 31, 2011	6,138		$	22.96	3.7	$	91,028
Exercisable, December 31, 2011	5,171		$	20.18	2.8	$	87,490
Vested and expected to vest, December 31, 2011	6,015		$	22.61	3.6	$	90,792


(1)	For those stock options with an exercise price below the closing price per share on December 31, 2011, aggregate intrinsic value represents the difference between the exercise price and the closing price per share of our common stock on December 31, 2011, multiplied by the number of stock options outstanding, exercisable, or vested and expected to vest as of December 31, 2011.

For 2011, 2010 and 2009, 4.8 million, 20.0 million and 1.5 million non-qualified stock option shares were exercised, respectively. The total intrinsic value of stock options exercised for 2011, 2010 and 2009 was $97.7 million, $139.6 million and $6.2 million, respectively. The aggregate intrinsic value represents the difference between the exercise price and the selling price received by option holders upon the exercise of stock options during the period. The total cash received from employees as a result of employee stock option exercises during 2011, 2010 and 2009 was $102.3 million, $437.4 million and $25.8 million, respectively.

The total fair value of options vested and expensed during 2011, 2010 and 2009 was $4.7 million, $3.6 million and $7.4 million, respectively.

1987 EMPLOYEE STOCK PURCHASE PLAN | Our ESPP has two consecutive, overlapping twelve-month offering periods, with a new period commencing on the first trading day on or after May 1 and November 1 of each year and terminating on the last trading day on or before April 30 and October 31. Each twelve-month offering period generally includes two six-month purchase periods. The purchase price at which shares are sold under the ESPP is 85% of the lower of the fair market value of a share of our common stock on (1) the first day of the offering period, or (2) the last trading day of the purchase period. If the fair market value at the end of any purchase period is less than the fair market value at the beginning of the offering period, each participant is automatically withdrawn from the current offering period following the purchase of shares on the purchase date and is automatically re-enrolled in the immediately following offering period.

On May 10, 2011, our stockholders approved an amendment to the ESPP to increase the shares reserved for future issuance by 1 million. As of December 31, 2011, 2.6 million shares were available for future issuance under the ESPP. Sales under the ESPP were 0.7 million shares of common stock at an average price of $26.12 per share for 2011, 1.0 million shares of common stock at an average price of $16.89 per share for 2010 and 1.2 million shares of common stock at an average price of $13.80 per share for 2009.

VALUATION AND EXPENSE INFORMATION | The assumptions used to estimate the fair value of stock options, ESPP shares, RSUs and PRSUs were as follows:



	2011			2010			2009
Stock options:
Expected term (in years)	5.0			3.9			5.0
Expected stock price volatility	32.7		%	31.9		%	34.1		%
Risk-free interest rate	0.3		%	1.6		%	2.2		%
Dividend yield	0.6		%	0.8		%	1.0		%
Weighted-average estimated fair value	$	12.92		$	21.96		$	5.90

ESPP shares:
Expected term (in years)	0.8			0.7			0.8
Expected stock price volatility	35.9		%	31.4		%	50.3		%
Risk-free interest rate	0.1		%	0.3		%	0.4		%
Dividend yield	0.7		%	0.8		%	1.2		%
Weighted-average estimated fair value	$	12.03		$	6.68		$	5.10

RSUs and PRSUs:
Risk-free interest rate	0.6		%	0.8		%	1.2		%
Dividend yield	0.7		%	0.8		%	1.1		%
Weighted-average estimated fair value	$	41.30		$	26.87		$	17.21

For stock options, our expected term represents the weighted average period from the date of grant to exercise, cancellation, or expiration. For ESPP shares, the expected term represents the average term from the first day of the offering period to the purchase date.

Our expected stock price volatility assumption for stock options is estimated using a combination of implied volatility for publicly traded options on our stock with a term of one year or more and our historical stock price volatility. Our expected stock price volatility assumption for ESPP shares is estimated using a combination of implied volatility for publicly traded options on our stock with a term of six months and our historical stock price volatility.

The interest rate used to value stock options and ESPP shares approximates the risk-free interest rate of a zero-coupon Treasury bond on the date of grant with a maturity date that approximates the expected term of the award.

In addition, we apply an expected forfeiture rate when amortizing stock-based compensation expense. During 2009, we changed the expected forfeiture rate from 10.2% to 8.0% based on recent and expected employee turnover rates. This change in accounting estimate resulted in a $3.4 million increase in our stock-based compensation expense ($0.1 million increase in Cost of sales, $1.4 million increase in Research and development expense, and $1.9 million increase in Selling, general and administrative expense) for 2009.

Our stock-based compensation expense included in the consolidated statements of income for the three years ended December 31, 2011 was as follows:



(In thousands)	2011			2010			2009

Cost of sales	$	1,655		$	1,241		$	1,933
Research and development expense	36,410			27,298			27,067
Selling, general, and administrative expense	44,685			33,579			35,446
Pre-tax stock-based compensation expense	82,750			62,118			64,446
Income tax benefit	(20,278		)	(18,298		)	(18,481		)
Net stock-based compensation expense	$	62,472		$	43,820		$	45,965

No stock-based compensation was capitalized during any period presented above. As of December 31, 2011, unrecognized stock-based compensation cost related to outstanding unvested stock options, RSUs, PRSUs and ESPP shares that are expected to vest was approximately $183.6 million. This unrecognized stock-based compensation cost is expected to be recognized over a weighted average period of approximately 2.5 years. To the extent the actual forfeiture rate is different from what we have anticipated, stock-based compensation related to these awards will be different from our expectations.

We settle employee stock option exercises, ESPP purchase, RSUs and PRSUs vesting with newly issued common shares.