Stock-Based Employee Benefit Plans

Equity instruments are granted to employees, directors and consultants in certain instances, as defined in the respective plan agreements.

Stock Options and Restricted Stock Awards

On May 15, 2007, the Company's shareholders approved the 2007 Stock Plan, as amended (the "Plan") which provides for issuance of stock options, restricted shares, restricted stock units and performance-based awards. Under the plan, 4.7 million shares have been reserved and authorized for issuance to any non-employee directors and employees. The Plan provides the Board of Directors discretion in creating employee equity incentives. Unless otherwise stipulated in the plan document, the Board of Directors determines stock option exercise prices, which may not be less than the fair value of Radisys common stock at the date of grant, vesting periods and the expiration periods which are a maximum of 10 years from the date of grant.

On May 15, 2008, the shareholders approved the Long-Term Incentive Plan (the “LTIP”). The LTIP provides for the grants of awards payable in shares of common stock or cash upon the achievement of performance goals set by the Company’s Compensation and Development Committee (“the Committee”). The number of shares of the Company’s common stock initially reserved for issuance under the LTIP is 2.0 million shares with a maximum of 500,000 shares in any calendar year to one participant.

On May 3, 2011 the Company registered 600,000 shares of its common stock under the RadiSys Corporation Inducement Stock Plan for CCPU Employees (the "CCPU Plan"). The CCPU Plan was adopted without shareholder approval in reliance upon the exception provided under Nasdaq Listing Rule 5635(c)(4) relating to awards granted in connection with the hiring of new employees, including grants to transferred employees in connection with a merger or acquisition. Awards under the CCPU Plan are made only to employees of Continuous Computing or its subsidiaries and became effective upon the completion of the Continuous Computing acquisition. The CCPU Plan provides for the issuance of stock options, restricted shares and restricted stock units. In 2011, the Company issued 368,000 shares under the CCPU Plan and no future awards will be granted.

The Company assumed the stock plans of Continuous Computing on July 8, 2011. Under the terms of the Company's merger agreement with Continuous Computing, options outstanding under these plans were converted to options to purchase shares of the Company's common stock. Options issued under these plans vest over four years from the original grant date and have an expiration date of 10 years from the original grant date. The exercise price of each converted option is equal to the product of the original exercise price and the original number of options granted divided by the number of converted options received. These stock plans have been suspended and no future awards will be granted under these plans. A total of 319,000 shares of common stock were issued under the Continuous Computing stock plans.

In accordance with the merger agreement with Continuous Computing the options were required to be converted into multiple awards on the acquisition date, with the resulting awards being non-contingent and contingent options. Both the non-contingent and contingent awards continue to vest under the original service conditions of the awards. However, the contingent awards contain post-vesting restrictions tied to payment of certain merger contingencies such as the earn-out and indemnification agreements. The assumed options were valued using a Black-Scholes option-pricing model. In addition, we utilized the Finnerty Asian Put Option Approach to estimate the discount associated with the post-vesting restrictions for the contingent options. The resulting discount applied was 10%.

In November 2009, the Company completed a stock option exchange program. The Company's eligible employees were permitted to exchange some or all of their outstanding options, with an exercise price greater than $9.44 per share (which is equal to the 52-week high closing price of our common stock as of the start of this offer), that were granted on or before October 5, 2008, whether vested or unvested, for restricted stock units, except for employees in Canada who received new stock options with new vesting schedules and exercise prices. All employees of Radisys and its subsidiaries, other than members of our Board of Directors, executive officers and employees located in the Netherlands and Israel were eligible to participate in the exchange offer. The option exchange took place on November 3, 2009. Pursuant to the option exchange 848,800 eligible options were canceled and replaced with 169,600 restricted stock units and 35,000 stock options. The new restricted stock units and stock options have a new three year vesting period that began on November 3, 2009. The exchange resulted in $173,000 in additional stock compensation expense which will be recognized over the new three year vesting period.

As of December 31, 2011, the Company had 2,197,233 common shares available for future grant under its equity plans.

The following table summarizes stock option activity for 2011 (in thousands, except average prices and weighted average remaining contractual lives):



	Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance, December 31, 2010	2,698		$	11.84	4.05	$	948
Granted	433		7.73
Assumed in acquisition	319		0.69
Exercised	(18	)	4.02
Forfeited	(120	)	8.61
Expired	(412	)	16.04
Balance, December 31, 2011	2,900		$	9.58	3.80	$	1,334
Options exercisable at December 31, 2011	2,001		$	11.04	2.59	$	318
Options vested as of December 31, 2011 and expected to vest after December 31, 2011	2,900		$	9.58	3.80	$	1,334

The aggregate intrinsic value in the table above represents the total pretax value, based on the Company's closing common stock price of $5.06 at December 31, 2011 that would have been received by the option holders had all option holders exercised their in-the-money options on December 31, 2011.

Total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $46,000, $132,000 and $206,000. The total amount of cash received from the exercise of options in 2011, 2010 and 2009 was $70,000, $537,000 and $678,000.

As of December 31, 2011, the Company had $3.6 million in unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of 2.15 years.

The following table summarizes nonvested activity for 2011:



	Nonvested Stock
	Restricted Stock Units				LTIP Awards
	Restricted Shares		Weighted-Average Fair Value		Restricted Shares		Weighted-Average Fair Value
Balance, December 31, 2010	390		$	8.08	731		$	8.24
Granted	357		7.45		448		8.43
Vested	(161	)	8.20		—		—
Forfeited	(76	)	7.60		(335	)	8.28
Balance, December 31, 2011	510		$	7.68	844		$	8.33

The total fair value of restricted stock units that vested in 2011, 2010 and 2009 was $1.0 million, $1.5 million and $1.3 million. As of December 31, 2011, the Company had $3.4 million in unrecognized compensation expense related to restricted stock units which is expected to be recognized over a weighted-average period of 1.5 years and $2.9 million in unrecognized compensation expense related to LTIP awards which is expected to be recognized over a weighted-average period of 1.0 year.

Employee Stock Purchase Plan

In December 1995, the Company established an Employee Stock Purchase Plan (“ESPP”). All employees of Radisys and its subsidiaries who customarily work 20 or more hours per week, including all officers, are eligible to participate in the ESPP. Separate offerings of common stock to eligible employees under the ESPP (an “Offering”) commence on February 15, May 15, August 15 and November 15 of each calendar year (“Enrollment Dates”) and continue for a period of 18 months. Multiple separate Offerings are in operation under the ESPP at any given time. An employee may participate in only one Offering at a time and may purchase shares only through payroll deductions permitted under the provisions stipulated by the ESPP. The purchase price is the lesser of 85% of the fair market value of the common stock on date of grant or that of the purchase date (“look-back feature”). Pursuant to the provisions of the ESPP, as amended, the Company is authorized to issue up to 5.7 million shares of common stock under the ESPP. At December 31, 2011, 574,000 shares were available for issuance under the plan.

During the second quarter of 2009, the Board of Directors approved an amendment to the Company’s ESPP to provide for a one-year holding period with respect to common stock shares purchased by participants under the ESPP. The one-year holding period took effect during the fourth quarter of 2009. Due to the holding period, the Company applies a discount to the ESPP stock compensation to reflect the decreased liquidity. The Company utilizes the Finnerty Asian Put Option Approach to estimate the discount. Inputs for the model include the length of the holding period, volatility and risk-free rate. The discount applied in the fourth quarter of 2011 was 10.0%.

The following table summarizes shares issued under the ESPP (in thousands, except per share amounts):



	Year Ended December 31,
	2011		2010		2009
Shares issued under the ESPP	251		311		660
Cash received for the purchase of shares under the ESPP	$	1,572	$	2,049	$	4,076
Weighted-average purchase price per share	$	6.27	$	6.60	$	6.18

Stock-Based Compensation Expense

The Company uses the Black-Scholes model to measure the grant-date fair value of stock options and ESPP shares. The grant-date fair value of stock options that are expected to vest is recognized on a straight-line basis over the requisite service period, generally, three years. The grant date fair value of ESPP shares that are expected to vest is recognized on a straight-line basis over the requisite service period, generally, 18 months, subject to modification at the date of purchase due to the ESPP look-back feature. The estimate of the number of options, ESPP shares and restricted stock units granted under the 2007 stock plan expected to vest is determined based on historical experience.

The Company estimates the fair value of stock options and purchase rights under the ESPP using a Black-Scholes option-pricing model. The calculation includes several assumptions that require management’s judgment. The expected term of the option or share is determined based on assumptions about patterns of employee exercises, and represents a probability-weighted-average time period from grant until exercise of stock options, subject to information available at time of grant. Determining expected volatility generally begins with calculating historical volatility for a similar long-term period and then considering the ways in which the future is reasonably expected to differ from the past.

The Company uses three employee populations. The expected term computation is based on historical vested option exercise and post-vest forfeiture patterns and is also factored by an estimate of the expected term for fully vested and outstanding options. The estimate of the expected term for options that were fully vested and outstanding was determined as the midpoint between the evaluation date and the contractual term date of the option.

The risk free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the option or share.

The fair value of nonvested stock is the market value as of the grant date. The grant-date fair value of the restricted stock units that are expected to vest is recognized on a straight-line basis over the requisite service period, which is three years. The grant-date fair value of the LTIP awards is recognized ratably over the service period which equals the measurement period of the award. The measurement period is the period of time over which performance objectives are expected to be achieved. Since the number of shares that may be issued under the LTIP and the service period are both variable, the Company reevaluates the LTIP awards on a quarterly basis and adjusts the number of shares expected to be awarded based upon financial results of the Company as compared to the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the date of adjustment based upon the estimated probable number of shares to be awarded. Adjustments made to compensation expense resulting from a change in the estimated probable vesting date of the awards are made on a prospective basis.

The fair value calculations for stock options and ESPP shares used the following assumptions for the years ended December 31:



	Stock Options									Assumed Options			Employee Stock Purchase Plan
	2011			2010			2009			2011			2011			2010			2009
Estimated fair value	$	4.23		$	5.41		$	3.96		$	7.77		$	2.09		$	4.57		3.9
Expected life (in years)	4.4			4.3			4.1			2.7			1.5			1.5			1.5
Interest rate	0.91		%	1.34		%	1.64		%	0.66		%	0.12		%	0.33		%	0.44	%
Volatility	70		%	71		%	60		%	64		%	42		%	88		%	98	%
Dividend yield	—			—			—			—			—			—			—

For the years ended December 31, 2011, 2010 and 2009, stock-based compensation was recognized and allocated in the Consolidated Statements of Operations as follows (in thousands):



	2011		2010		2009
Cost of sales	$	838	$	816	$	1,050
Research and development	1,434		1,303		2,176
Selling, general and administrative	3,445		4,039		5,060
Restructuring	—		—		234
Total stock-based compensation expense	$	5,717	$	6,158	$	8,520

401(k) Savings Plan

The Company established a 401(k) Savings Plan (“401(k) Plan”), a defined contribution plan, as of January 1, 1989 and amended through January 1, 2007, in compliance with Section 401(k) and other related sections of the Internal Revenue Code and corresponding Regulations issued by the Department of Treasury and Section 404(c) of Employee Retirement Income Security Act of 1974 (“ERISA”), to provide retirement benefits for its U.S employees. Under the provisions of the plan, eligible employees are allowed pre-tax contributions of up to 30% of their annual compensation or the maximum amount permitted by the applicable statutes. Additionally, eligible employees can elect to make catch-up contributions, within the limits set forth by pre-tax contributions, or to the maximum amount permitted by the applicable statutes. Pursuant to the provisions of the 401(k) Plan, the Company may contribute 50% of pre-tax contributions made by eligible employees, adjusted for loans and withdrawals, up to 6% of annual compensation for each eligible employee. The Company may elect to make supplemental contributions as periodically determined by the Board of Directors at their discretion. The contributions made by the Company on behalf of eligible employees become 100% vested after three years of service, or 33% per year after one year of service. The Company’s total contributions to the 401(k) Plan amounted to $721,000, $885,000 and $1.1 million in 2011, 2010 and 2009, respectively. In addition, some of the Company’s employees outside the U.S are covered by various defined contribution plans, in compliance with the statutes of respective countries. The participants pay for the 401(k) Plan administrative expenses.

Deferred Compensation Plan

The Company has a Deferred Compensation Plan, providing its directors and certain eligible employees with opportunities to defer a portion of their compensation as defined by the provisions of the plan. The Company credits additional amounts to the deferred compensation plan to make up for reductions of Company contributions under the 401(k) Plan. The deferred amounts are credited with earnings and losses under investment options chosen by the participants. The Company sets aside deferred amounts, which are then invested in long-term insurance contracts. All deferred amounts and earnings are 100% vested at all times, but are subject to the claims of creditors of the Company under a bankruptcy proceeding. Benefits are payable to a participant upon retirement, death, and termination of employment and paid as elected by the participant in accordance with the terms of the plan. The Plan also permits scheduled in-service distributions. Deferred amounts may be withdrawn by the participant in case of financial hardship as defined in the plan agreement.