NOTE 3—STOCK-BASED COMPENSATION

We currently have one active plan, the Amended and Restated Tree.com 2008 Stock and Annual Incentive Plan, under which future awards may be granted, which currently covers outstanding stock options to acquire shares of our common stock and restricted stock units ("RSUs"), and provides for the future grant of these and other equity awards. Under the Third Amended and Restated Tree.com 2008 Stock and Annual Incentive Plan, we are authorized to grant stock options, RSUs and other equity-based awards for up to 3.35 million shares of Tree.com common stock. The active plan described above authorizes us to grant awards to employees, officers and directors. Finally, this active plan also governs certain equity awards of IAC that were converted into equity awards of Tree.com in connection with the spin-off.

In addition, the plan described above has a stated term of ten years and provides that the exercise price of stock options granted will not be less than the market price of our common stock on the grant date. The plan does not specify grant dates or vesting schedules, as those determinations have been delegated to the Compensation Committee of our board of directors. Each grant agreement reflects the vesting schedule for that particular grant as determined by the Compensation Committee.

Prior to the spin-off, our employees received equity awards that were granted under various IAC stock and annual incentive plans. Upon spin-off, these IAC awards were converted into awards of both Tree.com and other former IAC companies, which vested in 2012. We recognized non-cash compensation expense for these awards granted to our employees in 2011 and 2012.

Non-cash stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the years ended December 31, 2012 and 2011 (in thousands):

	2012			2011

Cost of revenue	$	6		$	11
Selling and marketing expense		750			425
General and administrative expense		3,205			3,025
Product development		626			316

Non-cash stock-based compensation expense before income taxes		4,587			3,777
Income tax benefit		(1,812	)		(1,492	)

Non-cash stock-based compensation expense after income taxes	$	2,775		$	2,285

The forms of stock-based awards granted to Tree.com employees are principally RSUs, restricted stock and stock options. RSUs are awards in the form of units, denominated in a hypothetical equivalent number of shares of Tree.com common stock and with the value of each award equal to the fair value of Tree.com common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Compensation Committee at the time of grant. Each stock-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Certain restricted stock awards also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. Tree.com recognizes expense for all stock-based awards for which vesting is considered probable. For stock-based awards, the accounting charge is measured at the grant date as the fair value of Tree.com common stock awarded and expensed ratably as non-cash compensation over the vesting term. For performance-based awards, the expense is measured at the grant date as the fair value of our common stock awarded and expensed as non-cash compensation using a graded vesting attribution model considering the probability of the targets being achieved.

The amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.

Tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the consolidated statement of operations are reported as a component of financing cash flows. In 2012, while there were excess tax benefits from stock-based compensation, the tax benefits were not reflected in the consolidated statement of operations because of the utilization of NOLs. There were no excess tax benefits from stock-based compensation for the year ended December 31, 2011.

As of December 31, 2012, there was approximately $0.6 million, $4.6 million and $0.1 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, RSUs and restricted stock, respectively. These costs are expected to be recognized over a weighted-average period of approximately 1.9 years for stock options, 2.0 years for RSUs and 0.1 years for restricted stock.

Stock Options

A summary of changes in outstanding stock options is as follows:

			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

					(In years)		(In thousands)
Outstanding at January 1, 2012	1,046,746		$	9.09
Granted	150,000			7.43
Exercised	(96,987	)		7.54
Forfeited	—			—
Expired	(27,256	)		10.35

Outstanding at December 31, 2012	1,072,503		$	8.97		5.7	$	9,819

Options exercisable	230,073		$	12.60		3.9	$	1,350

Substantially all options outstanding at December 31, 2012 are vested or are expected to vest over a weighted-average period of approximately 1.9 years.

The fair value of each stock option award is estimated on the grant date using the Black-Scholes option pricing model. In 2012, a stock option to purchase 150,000 shares was granted to the Chairman and CEO, which vests over a period of three years from the grant date. The exercise price and the fair value related to this stock option grant was $7.43 and $3.63, respectively. In 2011, stock options to purchase 153,868 shares were granted to the Chairman and CEO, which also vest over a period of three years. The weighted average exercise price and the weighted average fair value related to these stock option grants were $5.89 and $2.60, respectively.

The Black-Scholes option pricing model incorporates various assumptions, including expected volatility and expected term. For purposes of this model, no dividends have been assumed. The risk-free interest rates are based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date. The expected term of options granted is based on analyses of historical employee termination rates and option exercise patterns, giving consideration to expectations of future employee behavior. The following are the weighted average assumptions used in the Black-Scholes option pricing model for years ended December 31, 2012 and December 31, 2011, respectively: volatility factors of 45% and 44%, risk-free interest rates of 2.0% and 3.6%, expected terms of 7.0 and 7.0 years, and a dividend yield of zero for both years.

In connection with the spin-off, our Chairman and CEO was awarded two grants of 589,950 stock options, each of which represented the right to acquire 2.5% of the fully diluted equity at exercise prices representing total equity values of the Company of $100 million and $300 million. These stock options all cliff vest at the end of five years. The weighted average exercise price and the weighted average fair value related to these stock option grants were $16.95 and $4.19, respectively. In 2009, we entered into an Option Cancellation Agreement with the Chairman and CEO, in which he surrendered for cancellation in its entirety one stock option award to purchase 589,850 shares of the Company's common stock at an exercise price of $25.43 per share.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of 2012 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, 2012. The intrinsic value changes based on the fair market value of our common stock. The total intrinsic value of stock options exercised during the years ended December 31, 2012 and 2011 was $345,000 and $17,000, respectively.

Cash received from stock option exercises and the related actual tax benefit realized were $731,000 and $144,000 for the year ended December 31, 2012 and $21,000 and $7,000 for the year ended December 31, 2011.

The following table summarizes the information about stock options outstanding and exercisable as of December 31, 2012:

	Options Outstanding						Options Exercisable

Range of Exercise Prices	Outstanding at December 31, 2012		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Exercisable at December 31, 2012		Weighted Average Exercise Price
$.01 to $4.99		4,228		0.81	$	3.27		4,228	$	3.27
$5.00 to $7.45		306,685		8.65		6.65		54,105		5.92
$7.46 to $9.99		619,045		5.01		8.44		29,195		7.60
$10.00 to $14.99		15,087		1.72		12.40		15,087		12.40
$15.00 to $19.99		80,795		2.42		15.02		80,795		15.02
$20.00 to $24.99		46,663		2.43		20.19		46,663		20.19

		1,072,503		5.68	$	8.97		230,073	$	12.60

Restricted Stock Units and Restricted Stock

Nonvested RSUs and restricted stock outstanding as of December 31, 2012 and changes during the year ended December 31, 2012 were as follows:

	RSUs					Restricted Stock

	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2012		933,051		$	6.48		299,642		$	6.70
Granted		364,868			12.56		—			—
Vested		(424,530	)		7.07		(112,141	)		5.45
Forfeited		(116,278	)		6.75		—			—

Nonvested at December 31, 2012		757,111		$	9.09		187,501		$	7.44

The weighted average grant date fair value of RSUs granted during the years ended December 31, 2012 and 2011 at market prices equal to Tree.com's common stock on the grant date was $12.56 and $6.17, respectively.

The total fair value of RSUs that vested during the years ended December 31, 2012 and 2011 was $4.3 million and $1.9 million, respectively.

Our Chairman and CEO was granted 350,000 shares of restricted stock in 2009, which was treated as a modification of the cancelled stock option award of 589,850 shares discussed above. These shares of restricted stock had a weighted average grant date fair value of $5.42. The incremental non-cash compensation expense for this modification is $0.7 million, which is being recognized over the vesting period of four years. During the year ended December 31, 2010, our Chairman and CEO was granted 150,000 shares of restricted stock. These shares of restricted stock had a weighted average grant date fair value of $8.27 and a total fair value of $1.2 million. During the year ended December 31, 2011, our Chairman and CEO was granted 24,642 shares of restricted stock. The shares of restricted stock had a weighted average grant date fair value of $5.55 and a total fair value of $0.1 million. There were no restricted stock awards granted in 2012.

During February of 2013, 100,000 shares of restricted stock that were previously granted to our Chairman and CEO vested.