EMPLOYEE EQUITY INCENTIVE PLAN

12 Months Ended

Dec. 31, 2012

EMPLOYEE EQUITY INCENTIVE PLAN [Abstract]

EMPLOYEE EQUITY INCENTIVE PLAN

19. EMPLOYEE EQUITY INCENTIVE PLAN

The Company's 2002 employee equity incentive plan ("2002 Plan") allows the Company to offer a variety of incentive awards to employees, consultants or external service advisors of the Company. Options to purchase 105,000,000 ordinary shares are authorized under the 2002 Plan. In 2005, the shareholders authorized additional 32,000,000 options under the 2002 Plan. Under the terms of the 2002 Plan, options are generally granted at prices equal to the fair market value of the Company's shares listed on the Nasdaq National Market. The majority of the options will vest over four years where 25% of the options will vest at the end of the first year, 6.25% will vest quarterly in the second year through the fourth year. The stock options expire 10 years from the date of grant.

As of December 31, 2012, options to purchase 43,054,457 shares of ordinary shares were outstanding, and options to purchase 15,910,383 ordinary shares were available for future grant.

The Company's 2006 Equity Incentive Plan ("2006 Plan") allows the Company to offer a variety of incentive awards to employees, consultants or advisors of the Company. 40,000,000 nonvested ordinary shares are authorized under the 2006 Plan. In December 2008, the shareholders authorized additional 140,000,000 nonvested ordinary shares under the 2006 Plan.

For the nonvested shares granted in 2010, the fair market value at the grant date was used to determine the cost of the nonvested shares. As of December 31, 2012, 22,555,000 shares were outstanding and 1,857,500 shares were available for future grant. The majority of nonvested shares will vest over four years where 25% of the nonvested shares will vest at the end of the first year, and 6.25% will vest quarterly from the second year through the fourth year.

The Company recognizes the compensation costs net of estimated forfeitures on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized in future periods.

Stock options

A summary of the stock option activities is as follows:

	Outstanding options
				Weighted		Weighted average
	Number of			average		grant-date
	options			exercise price		fair value
Options outstanding at January 1, 2010		48,111,920		$	0.08	$	0.09
Granted		6,800,000		$	0.15	$	0.06
Forfeited		(6,926,580	)	$	0.08	$	0.04
Exercised		(5,498,560	)	$	0.06	$	0.04
Options outstanding at December 31, 2010		42,486,780		$	0.07	$	0.05
Granted		19,800,000		$	0.10	$	0.10
Forfeited		(5,034,283	)	$	0.09	$	0.05
Exercised		(6,566,880	)	$	0.05	$	0.03
Options outstanding at December 31, 2011		50,685,617		$	0.10	$	0.07
Forfeited		(2,921,040	)	$	0.11	$	0.08
Exercised		(4,710,120	)	$	0.06	$	0.03
Options outstanding at December 31, 2012		43,054,457		$	0.10	$	0.08

There were no options granted during the year ended December 31, 2012.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for each applicable period.

Option grants	2010			2011
Weighted average risk-free interest rate		1.21	%		0.46	%
Weighted average expected option life		2.75 years			2.75 years
Weighted average volatility rate		62	%		62	%
Weighted average dividend yield		-			-

(1) Risk-free interest rate

Risk-free interest rate was estimated based on the yield to maturity of treasury bonds of the United States with a maturity period close to the expected life of the options.

(2) Expected life

The expected life was estimated based on historical and other economic data trended into the future.

(3) Volatility

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of KongZhong over a period comparable to the expected life of the options.

(4) Dividend yield

The dividend yield was estimated by the Company based on its expected dividend policy over the expected life of the options.

(5) Exercise price

The exercise price of the options was determined by the Board of Directors.

(6) Fair value of underlying ordinary shares

The closing market price of the ADSs of KongZhong as of the grant date was used to determine the fair value of the ordinary shares on that date.

The weighted average per share fair value of options granted in each year was as follows:

	For the years ended December 31,
	2010		2011
Stock options	$	0.06	$	0.10

The total intrinsic value of options exercised during the year ended December 31, 2010, 2011 and 2012 was $617,438, $377,622 and $212,849 respectively.

The following table summarizes information with respect to stock options outstanding at December 31, 2012:

	Options outstanding								Options exercisable
			Weighted		Weighted						Weighted		Weighted
			average		average		Aggregate				average		average		Aggregate
	Number		exercise		remaining		intrinsic		Number		exercise		remaining		intrinsic
	outstanding		price		contractual life		value		exercisable		price		contractual life		value
Average exercise price
$0.07		11,394,377		-		-		378,863		11,394,380		-		-		378,863
$0.09		2,000,000		-		-		32,500		1,875,000		-		-		30,469
$0.10		16,172,000		-		-		137,462		4,022,000		-		-		34,187
$0.12		2,000,000		-		-		-		500,000		-		-		-
$0.13		6,175,560		-		-		-		5,145,560		-		-		-
$0.15		5,312,520		-		-		-		3,287,520		-		-		-
Total		43,054,457	$	0.10		7.38 year		548,825		26,224,460	$	0.10		6.70 years		443,519

The number of the options expected to vest was 16,829,997 with a weighted-average exercise price of $0.11 and the weighted-average remaining contractual term of 8.44 years. The aggregate intrinsic value of the option expected to vest was $105,306 as of December 31, 2012.

Nonvested shares

A summary of the nonvested share activities is as follows:

	Number of			Weight average
	nonvested			grant-date
	shares outstanding			fair value
Nonvested shares outstanding at January 1, 2010		136,174,167		$	0.11
Granted		14,000,000		$	0.18
Forfeited		(29,450,000	)	$	0.09
Vested		(43,130,834	)	$	0.11
Nonvested shares outstanding at December 31, 2010		77,593,333		$	0.13
Granted		16,160,000		$	0.10
Forfeited		(1,975,000	)	$	0.09
Vested		(35,303,333	)	$	0.12
Nonvested shares outstanding at December 31, 2011		56,475,000		$	0.12
Vested		(33,920,000	)	$	0.12
Nonvested shares outstanding at December 31, 2012		22,555,000		$	0.13

There were no nonvested shares granted or forfeited during the year ended December 31, 2012.

The total intrinsic value of shares vested in the year of 2010, 2011 and 2012 was $7,644,940, $3,653,895 and $4,647,040 respectively.

The following table summarizes information with respect to nonvested shares outstanding at December 31, 2012:

	Nonvested share outstanding
			Aggregate
	Number		intrinsic
	outstanding		value
Grant date
December 19, 2008		-		-
February 3, 2009		2,000,000		207,000
April 1, 2009		940,000		97,290
July 10, 2009		2,325,000		240,638
July 15, 2009		-		-
June 22, 2010		5,250,000		543,375
October 3, 2011		12,040,000		1,246,140
Total		22,555,000		2,334,443

The Company recorded share-based compensation expenses of $5,000,256, $4,579,522 and $4,464,497 for the years ended December 31, 2010, 2011 and 2012, respectively. The amount of stock-based compensation currently estimated to be expensed from 2013 through 2015 related to unvested share-based payment awards at December 31, 2012 is $2,640,491. This amount will be recognized as presented in the following table.

Year
2013	$	1,549,546
2014		751,532
2015		339,413
Total		2,640,491

That cost is expected to be recognized over a weighted average period of 2.31 years. To the extent the actual forfeiture rate is different from the Company's original estimate, share-based compensation related to these awards may require to be adjusted.