NOTE 10 — Stock-Based Awards and Other Equity Instruments

Pursuant to the Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan, we may grant restricted stock, restricted stock awards, RSUs, stock options and other stock-based awards to directors, officers, employees and consultants. As of December 31, 2011, we had approximately 19 million shares of common stock reserved for new stock-based awards under the 2005 Stock and Annual Incentive Plan. We issue new shares to satisfy the exercise or release of stock-based awards.

Modification of Stock-Based Awards. In connection with the spin-off, existing Expedia stock-based awards, which included RSUs, stock options and warrants, were primarily converted as follows:

•

each vested stock option to purchase shares of Expedia common stock converted into an option to purchase shares of Expedia common stock and an option to purchase shares of TripAdvisor common stock,

•

each unvested stock option to purchase shares of Expedia common stock converted into a stock option to purchase shares of common stock of the applicable company for which the employee was employed following the spin-off,

•

all RSUs converted into RSUs of the applicable company for which the employee was employed following the spin-off, and

•

each vested and unvested warrant converted into a warrant to purchase shares of Expedia common stock and a warrant to purchase shares of TripAdvisor common stock.

The adjustments to the number of shares subject to each option and the option exercise prices were based on the relative market capitalization of Expedia and TripAdvisor as of the date of the spin-off. These modifications resulted in a one-time expense of $11 million due to the modification of vested stock options that remain unexercised at the date of the spin-off.

The following table presents a summary of our stock option activity:


	Options ⁽¹⁾			Weighted Average Exercise Price ⁽¹⁾		Remaining Contractual Life		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Balance as of January 1, 2009		4,917		$	46.58
Granted		5,162			15.66
Exercised		(439	)		35.76
Cancelled		(639	)		32.92

Balance as of December 31, 2009		9,001			30.34
Granted		2,908			52.42
Exercised		(1,834	)		24.96
Cancelled		(972	)		30.96

Balance as of December 31, 2010		9,103			35.90
Granted		3,725			43.19
Exercised		(1,176	)		24.16
Cancelled		(1,030	)		32.48
Adjustments due to the spin-off ⁽²⁾		4,288
Exercised—post spin-off		(112	)		14.13

Balance as of December 31, 2011 ⁽³⁾		14,798			17.96		5.0	$	168,743

Exercisable as of December 31, 2011		3,440			22.82		3.7		26,468

Vested and expected to vest after December 31, 2011		12,900			18.18		4.9		144,962

(1)	Reflects the one-for-two reverse stock split on December 20, 2011.

(2)	Reflects the equitable adjustment to the exercise prices and number of outstanding stock options necessary to maintain the intrinsic value of those awards immediately prior to and following the spin-off.

(3)	Outstanding options as of December 31, 2011 represent options outstanding after giving effect to the one-for-two reverse stock split and spin-off adjustments made in order to maintain the intrinsic value of those awards immediately prior to and immediately following the transaction.

The aggregate intrinsic value of outstanding options shown in the stock option activity table above represents the total pretax intrinsic value at December 31, 2011, based on our closing stock price of $29.02 as of the last trading date. The total intrinsic value of stock options exercised was $30 million, $41 million and $6 million for the years ended December 31, 2011, 2010 and 2009.

During the three years ended December 31, 2011, we awarded stock options as our primary form of stock-based compensation. The fair value of stock options granted during the years ended December 31, 2011, 2010 and 2009 were estimated at the date of grant using the Black-Scholes option-pricing model, assuming the following weighted average assumptions:


	2011			2010			2009
Risk-free interest rate		1.87	%		2.18	%		1.75	%
Expected volatility		49.94	%		51.75	%		49.96	%
Expected life (in years)		4.68			4.72			4.72
Dividend yield		1.38	%		1.25	%		—
Weighted-average estimated fair value of options granted during the year	$	16.90		$	18.56		$	6.62

The 2011, 2010 and 2009 weighted average fair value has been adjusted for the one-for-two reverse stock split in December 2011.

Our expected dividend rate was zero prior to our first dividend declaration on February 10, 2010 as we did not historically pay cash dividends on our common stock and did not anticipate doing so for the foreseeable future. For stock options granted after February 10, 2010, including our annual employee grants, we used an annualized dividend yield based on the first quarterly per share dividend declared by our Executive Committee, acting on behalf of the Board of Directors.

The following table presents a summary of our stock options outstanding and exercisable at December 31, 2011:


					Options Outstanding						Options Exercisable
Range of Exercise Prices					Shares		Weighted- Average Price Per Share		Remaining Contractual Life		Shares		Weighted- Average Exercise Price
					(In thousands)				(In years)		(In thousands)
$	0.01	-	$	5.00		52	$	4.30		1.2		52	$	4.30
	5.01	-		10.00		3,974		7.27		4.2		763		7.09
	10.01	-		15.00		208		13.77		2.9		105		13.55
	15.01	-		20.00		4,461		18.62		6.2		17		17.13
	20.01	-		25.00		3,484		21.30		5.1		516		21.43
	25.01	-		30.00		1,898		26.60		4.4		1,266		26.89
	30.01	-		37.00		721		36.15		3.4		721		36.15

	0.01	-		37.00		14,798		17.96		5.0		3,440		22.82

RSUs, which are stock awards that are granted to employees entitling the holder to shares of our common stock as the award vests, were our primary form of stock-based award prior to 2009. Awards that settle in cash and the resulting liability are insignificant. Our RSUs generally vest over five years, but may accelerate in certain circumstances, including certain changes in control.

The following table presents a summary of RSU activity:


	RSUs ⁽¹⁾			Weighted Average Grant-Date Fair Value ⁽¹⁾
	(In thousands)
Balance as of January 1, 2009		4,523		$	42.82
Granted		494			18.20
Vested and released		(1,181	)		43.38
Cancelled		(553	)		42.02

Balance as of December 31, 2009		3,283			39.00
Granted		263			52.42
Vested and released		(950	)		34.58
Cancelled		(279	)		41.76

Balance as of December 31, 2010		2,317			40.24
Granted		221			52.35
Vested and released		(832	)		39.32
Cancelled		(137	)		41.98
Adjustments due to the spin-off ⁽²⁾		725
Vested and released—post spin-off		(12	)		13.45

Balance as of December 31, 2011 ⁽³⁾		2,282			21.47

(1)	Reflects the one-for-two reverse stock split on December 20, 2011.

(2)	Reflects the equitable adjustment to the number of unvested RSUs necessary to maintain the fair value of those awards immediately prior to and following the spin-off.

(3)	Outstanding RSUs as of December 31, 2011 represent RSUs outstanding after giving effect to one-for-two reverse stock split and spin-off adjustments made in order to maintain the fair value of those awards immediately prior to and immediately following the transaction.

The total market value of shares vested and released during the years ended December 31, 2011, 2010 and 2009 was $37 million, $43 million and $27 million. Included in RSUs outstanding at December 31, 2011 are 400,000 of RSUs awarded to our Chief Executive Officer, for which vesting is tied to achievement of performance targets.

In 2011, 2010 and 2009, we recognized total stock-based compensation expense of $64 million, $53 million and $56 million. The total income tax benefit related to stock-based compensation expense was $12 million, $15 million and $18 million for 2011, 2010 and 2009.

Cash received from stock-based award exercises for the years ended December 31, 2011 and 2010 was $34 million and $51 million. Our employees that held IAC vested stock options prior to the IAC/InterActiveCorp ("IAC") spin-off in August 2005 received vested stock options in both Expedia and IAC. In addition, our employees that held vested Expedia options prior to the TripAdvisor spin-off on December 20, 2011 received vested stock options in both Expedia and TripAdvisor. As these IAC and TripAdvisor stock options are exercised, we receive a tax deduction. Total current income tax benefits during the years ended December 31, 2011 and 2010 associated with the exercise of IAC and Expedia stock-based awards held by our employees were $21 million and $23 million, of which we recorded less than $1 million in 2011 and 2010 as a reduction of goodwill.

As of December 31, 2011, there was approximately $79 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock-based awards, which is expected to be recognized in expense over a weighted-average period of 2.37 years.

As of December 31, 2011, we had 8.0 million fully vested stock warrants with expiration dates through May 2012 outstanding and a weighted average exercise price of $24.07. Each stock warrant is exercisable for a certain number of shares of our common stock or a fraction thereof.