On January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan), which authorized 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs, and restricted stock. The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 2006 Plan was replaced on May 13, 2015 by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan). Expiration dates of options outstanding as of December 31, 2018 under the 2006 Plan range from 2019 to 2024.

On January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan), which authorized 7.7 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, PSUs, RSUs, and restricted stock. The 2015 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 13, 2015. PSUs, RSUs, and restricted stock granted under the 2015 Plan reduce the shares authorized for issuance under the 2015 Plan by 2.5 shares of common stock for each share underlying the award. Options granted under the 2015 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding as of December 31, 2018 under the 2015 Plan range from 2025 to 2026.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. All remaining options outstanding as of December 31, 2018 under the 2010 Directors Plan will expire in 2019.

The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the years ended December 31, 2018, 2017 and 2016, which was recognized as follows:

(In thousands)	2018			2017			2016
Stock-based compensation expense included in cost of sales	$	418		$	379		$	389
Selling, general and administrative expense		3,989			4,063			3,341
Research and development expense		2,748			2,991			2,965
Stock-based compensation expense included in operating expenses		6,737			7,054			6,306
Total stock-based compensation expense		7,155			7,433			6,695
Tax benefit for expense associated with non-qualified options, PSUs, RSUs and restricted stock		(1,432	)		(1,699	)		(963	)
Total stock-based compensation expense, net of tax	$	5,723		$	5,734		$	5,732

With our adoption of ASU 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in January 2017, we elected to discontinue our past practice of estimating forfeitures and now account for forfeitures as they occur.

The following table is a summary of our stock options outstanding as of December 31, 2017 and 2018 and the changes that occurred during 2018:

	Number of Options (in thousands)			Weighted Average Exercise Price (per share)		Weighted Avg. Remaining Contractual Life in Years		Aggregate Intrinsic Value (in thousands)
Stock options outstanding, December 31, 2017		5,148		$	22.65		4.87	$	6,109
Stock options granted		—		$	—
Stock options exercised		(96	)	$	15.46
Stock options forfeited		(73	)	$	16.49
Stock options expired		(597	)	$	22.58
Stock options outstanding, December 31, 2018		4,382		$	22.91		4.10	$	—
Stock options exercisable, December 31, 2018		4,131		$	23.37		3.93	$	—

At December 31, 2018, total unrecognized compensation expense related to non-vested stock options was approximately $0.8 million, which is expected to be recognized over an average remaining recognition period of one year.

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December 31, 2018, 2.5 million options were available for grant under the shareholder-approved plans.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during 2018, 2017 and 2016 was $0.2 million, $3.4 million and $1.1 million, respectively. The fair value of options fully vesting during 2018, 2017 and 2016 was $2.5 million, $4.3 million and $5.7 million, respectively.

The following table further describes our stock options outstanding as of December 31, 2018:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Options Outstanding at 12/31/18 (In thousands)		Weighted Avg. Remaining Contractual Life in Years		Weighted Average Exercise Price		Options Exercisable at 12/31/18 (In thousands)		Weighted Average Exercise Price
$14.88 – $18.96		1,257		5.93	$	15.87		1,006	$	15.99
$18.97 – $23.45		739		5.68	$	19.12		739	$	19.12
$23.46 – $30.35		1,223		3.18	$	23.87		1,223	$	23.87
$30.36 – $41.92		1,163		2.29	$	31.93		1,163	$	31.93
		4,382						4,131

We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options.

The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.

There were no stock options granted in 2017 or 2018. The weighted-average estimated fair value of stock options granted to employees during the year ended December 31, 2016 was $5.22 per share, with the following weighted-average assumptions:

We based our estimate of expected volatility for the year ended December 31, 2016 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts. The expected life of our stock options is based upon historical exercise and forfeiture activity of our previous stock-based grants with a ten-year contractual term.

Under the 2015 Plan, awards other than stock options, including PSUs, RSUs, and restricted stock, may be granted to certain employees and officers.

Under our market-based PSU program, the number of shares of common stock earned by a recipient pursuant to the PSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the PSUs, with the shares earned distributed upon the vesting of the PSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted PSUs vests and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2015 Plan. The recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs. The dividend credits are vested and earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs.

During the first quarter of 2017, the Compensation Committee of the Board of Directors approved a one-time PSU grant of 0.5 million shares that contain performance conditions and vest at the end of a three-year period if such performance conditions are met. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.

The fair value of RSUs and restricted stock is equal to the closing price of our stock on the business day immediately preceding the grant date. RSUs and restricted stock vest ratably over four-year and one-year periods, respectively.

We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2017 and 2018 and the changes that occurred during 2018. The unvested awards outstanding as of December 31, 2017 have been adjusted for the actual shares vested in 2018 for our market-based PSUs.

(In thousands, except per share amounts)	Number of shares			Weighted Average Grant Date Fair Value
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2017		1,292		$	21.33
PSUs, RSUs and restricted stock granted		690		$	14.48
PSUs, RSUs and restricted stock vested		(217	)	$	19.94
PSUs, RSUs and restricted stock forfeited		(195	)	$	21.29
Unvested RSUs and restricted stock outstanding, December 31, 2018		1,570		$	18.52

At December 31, 2018, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $17.8 million, which is expected to be recognized over an average remaining recognition period of 3.0 years. In addition, there was $9.1 million of unrecognized compensation expense related to the unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period if achievement of the performance obligation becomes probable. For the years ended December 31, 2018 and 2017, no compensation expense was recognized related to these performance-based PSUs.

The market based PSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the PSUs granted to employees during the year ended December 31, 2018, 2017 and 2016 was $16.59 per share, $24.17 per share and $23.50 per share, respectively, with the following assumptions:

	2018	2017			2016
Expected volatility	27.98% to 31.58%		27.03	%		29.79	%
Risk-free interest rate	2.11% to 2.99%		1.78	%		1.17	%
Expected dividend yield	1.83% to 2.49%		1.74	%		1.80	%