SHARE INCENTIVE PLANS:

Stock option plans

During the 2016 annual shareholder meeting, the Company's shareholders approved the Mellanox Technologies, Ltd. Amended and Restated Global Share Incentive Plan (2006) (the "First Restated 2006 Plan"), which constitutes an amendment and restatement of the Mellanox Technologies, Ltd. Global Share Incentive Plan (2006) and its appendices (the "2006 Plan"). The Restated 2006 Plan became effective on March 14, 2016 ("Effective Date"). The approval of the First Restated 2006 Plan extended the term to February 2026.

The First Restated 2006 Plan reserves 750,000 ordinary shares for issuance under new equity awards and reduces to zero the shares available for issuance under all of the Company's other equity incentive plans in effect, including the Voltaire Ltd. 2007 Incentive Compensation Plan, the Voltaire Ltd. 2003 Section 102 Stock Option/Stock Purchase Plan, the Voltaire Ltd. 2001 Section 102 Stock Option/Stock Purchase Plan, the Voltaire Ltd. 2001 Stock Option Plan, the Kotura, Inc. Second Amended and Restated 2003 Stock Plan, the IPtronics, Inc. 2013 Restricted Stock Unit Plan, the Global Share Incentive Assumption Plan (2010), the EZchip Semiconductor Ltd. 2003 Amended and Restated Equity Incentive Plan, the EZchip Semiconductor Ltd. 2007 U.S. Equity Incentive Plan, and the Amended and Restated EZchip Semiconductor Ltd. 2009 Equity Incentive Plan (collectively, the "Prior Plans").

As of the Effective Date of the First Restated 2006 Plan, the Company ceased granting awards under the Prior Plans, and will grant new awards only from the First Restated 2006 Plan. Any shares subject to issued and outstanding awards under the Prior Plans that expire, are canceled or otherwise terminate after the Effective Date of the First Restated 2006 Plan will be added back to share reserves under the First Restated 2006 Plan. The share reserve of the 2006 Plan will no longer be available for issuance under the First Restated 2006 Plan. In addition, the First Restated 2006 Plan implements additional amendments to reflect compensation and governance best practices.

On April 25, 2017, the Company's shareholders approved the Mellanox Technologies, Ltd. Second Amended and Restated Global Share Incentive Plan (2006) (the “Second Restated 2006 Plan”), which constitutes a second amendment and restatement of the 2006 Plan, as amended and restated by the First Restated 2006 Plan. The Second Restated 2006 Plan became effective on February 14, 2017. The Second Restated 2006 Plan increases the ordinary shares reserved for issuance under the First Restated 2006 Plan by 1,640,000 shares to 2,390,000 shares plus any shares subject to issued and outstanding awards under the other equity incentive plans that existed prior to the First Restated 2006 Plan that expire, are cancelled or otherwise terminated after the effective date of the First Restated 2006 Plan. The Second Restated Plan also extends the term of the First Restated 2006 Plan to February 14, 2027. In addition, the Second Restated Plan implements additional amendments to reflect compensation and governance best practices.

Assumed EZchip restricted stock units

In connection with the acquisition of EZchip, the Company assumed 891,822 unvested EZchip RSUs and converted them into 499,894 Mellanox RSUs using an exchange ratio of 0.56. The aggregate value of the 499,894 Mellanox RSUs was $23.2 million of which $1.0 million related to service prior to the acquisition date and was included in the EZchip purchase price consideration. The remaining fair value of $22.2 million represents post-acquisition share-based compensation expense that will be recognized over the requisite service period of approximately 2.25 years from the date of acquisition. The assumed RSUs retained all applicable terms and vesting periods.

Share option activity

The following table summarizes the share option activity under all equity incentive plans:



	Options Outstanding
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2015	2,028,595		$	30.81
Options exercised	(349,131	)	$	14.58
Options canceled	(44,979	)	$	84.57
Outstanding at December 31, 2016	1,634,485		$	32.79
Options exercised	(479,105	)	$	15.95
Options canceled	(45,319	)	$	74.59
Outstanding at December 31, 2017	1,110,061		$	38.35

There were no options granted in 2017, 2016 and 2015.

The total pretax intrinsic value of options exercised in 2017 was $16.9 million. This intrinsic value represents the difference between the fair market value of the Company's ordinary shares on the date of exercise and the exercise price of each option. Based on the most recently available closing price of the Company's ordinary shares of $64.70 prior to December 31, 2017, the total pretax intrinsic value of all outstanding options was $35.5 million. The total pretax intrinsic value of exercisable options at December 31, 2017 was $35.4 million.

The total pretax intrinsic value of options exercised in 2016 was $11.1 million. Based on the most recently available closing price of the Company's ordinary shares of $40.90 prior to December 31, 2016, the total pretax intrinsic value of all outstanding options was $29.0 million. The total pretax intrinsic value of exercisable options at December 31, 2016 was $28.9 million.

The weighted average remaining contractual life of options outstanding at December 31, 2017 was 3.0 years. There were 1,107,712 options exercisable at December 31, 2017 with a weighted average exercise price $38.36 per share.

Restricted share unit activity

The following table summarizes the restricted share unit activity under all equity incentive plans:



	Restricted Share Units Outstanding
	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested restricted share units at December 31, 2015	2,205,083		$	44.39
Assumed restricted share units from the EZchip acquisition	499,894		$	46.40
Restricted share units granted	2,056,902		$	48.39
Restricted share units vested	(1,114,753	)	$	45.32
Restricted share units canceled	(322,607	)	$	46.26
Non-vested restricted share units at December 31, 2016	3,324,519		$	46.67
Restricted share units granted	1,844,350		$	49.88
Restricted share units vested	(1,364,063	)	$	46.25
Restricted share units canceled	(390,101	)	$	47.79
Non-vested restricted share units at December 31, 2017	3,414,705		$	48.45

The weighted average fair value of restricted share units granted was $49.88, $48.39 and $45.98 for the years ended December 31, 2017, 2016 and 2015, respectively. The total intrinsic value of all outstanding restricted share units was $220.9 million as of December 31, 2017.

Employee stock purchase plan activity

The ESPP is designed to allow eligible employees to purchase the Company's ordinary shares, at semi-annual intervals, with their accumulated payroll deductions. A participant may contribute up to 15% of his or her base compensation through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on the purchase date, which is the last trading day of the offering period. The purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period in which the participant is enrolled or, if lower, 85% of the fair market value per share on the purchase date. In May 2016 the shareholders approved an increase of 4,000,000 additional shares under the ESPP for a total of 6,585,712 shares reserved for issuance. No participant in the ESPP may be issued or transferred more than $25,000 worth of ordinary shares pursuant to purchase rights under the ESPP per calendar year. During the years ended December 31, 2017, 2016 and 2015, 568,876, 491,968, and 364,746 shares, respectively, were issued under the ESPP at weighted average per share prices of $38.83, $35.50 and $35.15, respectively.

Shares reserved for future issuance

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of December 31, 2017:



	Number of Shares
Share options outstanding	1,110,061
Restricted share units outstanding	3,414,705
Shares authorized for future issuance	757,786
ESPP shares available for future issuance	3,425,469
Total shares reserved for future issuance as of December 31, 2017	8,708,021

Share-based compensation

The Company accounts for share-based compensation expense for share option awards and ESPP based on the estimated fair value of the instruments as of the grant dates. There were no employee share options granted in 2017, 2016 and 2015. The following weighted average assumptions were used in the valuation of the ESPP for the years ended December 31, 2017, 2016 and 2015:



	Employee Share Purchase Plan
	Year ended December 31,
	2017		2016		2015
Dividend yield, %	—		—		—
Expected volatility	24.6	%	35.8	%	33.7	%
Risk free interest rate	1.20	%	0.45	%	0.10	%
Expected life, years	0.50		0.50		0.50

The following table summarizes the distribution of total share-based compensation expense in the Consolidated Statements of Operations:



	Year ended December 31,
	2017		2016		2015
	(in thousands)
Share-based compensation expense by caption:
Cost of goods sold	$	2,000	$	2,375	$	2,366
Research and development	40,278		40,475		28,821
Sales and marketing	15,693		15,183		10,309
General and administrative	10,893		13,085		9,268
Total share-based compensation expense	$	68,864	$	71,118	$	50,764

Share-based compensation expense by type of award:
Share options	$	115	$	2,711	$	6,680
ESPP	6,232		6,394		4,007
RSU	62,517		62,013		40,077
Total share-based compensation expense	$	68,864	$	71,118	$	50,764

Share-based compensation expense during the year ended December 31, 2016 included cash payments of $4.8 million for the settlement of accelerated RSUs for individuals terminated on the Closing Date of the EZchip acquisition.

At December 31, 2017, there was $142.2 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements. The costs are expected to be recognized over a weighted average period of approximately 2.7 years.