(5) Stock-Based Compensation

2006 Stock Incentive Plan

Following the completion of the Merger on March 10, 2006, the Company established a new stock incentive plan, the 2006 Stock Incentive Plan (the "2006 Plan"), governing, among other things, the grant of options, restricted stock units, and other forms of share-based payments covering shares of the Company's common stock to our employees (including officers), directors and consultants. The Company's common stock representing 12% of outstanding common stock on a fully diluted basis as of the date of the Merger was reserved for issuance under the 2006 Plan. Stock options granted under the 2006 Plan are either "time options" that vest and become exercisable over a four-year period or "time and performance options" that vest based on the achievement of certain performance targets over a five-year period following the date of grant. All options granted under the 2006 Plan will expire not later than ten years from the date of grant, but generally will terminate earlier upon termination of employment. In the event of a sale of substantially all of the assets of the Company, or a merger or acquisition of the Company, the Board of Directors may provide that awards granted under the 2006 Plan will be cashed out, continued, replaced with new awards that substantially preserve the terms of the original awards, or terminated, with acceleration of vesting of the original awards determined at the discretion of the Board of Directors.

In the quarter ended October 31, 2009, the Company completed a tender offer permitting all eligible employees and its independent directors to exchange, on a one-for-one basis, stock options granted under the 2006 Plan for new stock options granted under Serena's Amended and Restated 2006 Stock Incentive Plan (the "Amended 2006 Plan") having a lower exercise price and different vesting terms. Eligible optionholders exchanged part or all of their time-based options for new time-based options having a vesting period, generally, of three years and an exercise price of $3.00 per share, the fair market value of Serena's common stock after the closing of the tender offer. Eligible employees who were not executive officers or officers of the Company exchanged part or all of their performance-based options for new time-based options having a vesting period of three years. Executive officers and officers of the Company exchanged part or all of their performance-based options for new performance-based options having a vesting period of three years and six months, with vesting based on the achievement of EBITA targets established by Serena's board of directors.

"Roll Over" Options

In connection with the Merger, the management participants were permitted to elect to have the surviving company in the merger assume some or all of the Serena stock options that they held immediately prior to the merger and that had an exercise price of less than $24.00 per share. The number of shares subject to these "roll over" options was adjusted to be the number of shares equal to the product of (1) the difference between $24.00 and the exercise price of the option and (2) the quotient of the total number of shares of Serena's common stock subject to such option, divided by $3.75. The exercise price of these "roll over" options was adjusted to $1.25 per share. The "roll over" options are subject to terms of the original option agreements with Serena, except that in the event of a "change in control" of Serena (as defined in the 2006 Plan), the treatment of the "roll over" options upon such transaction will be determined in accordance with the terms of the 2006 Plan.

The Amended 2006 Plan does not include an evergreen provision to provide for automatic increases in the number of shares available for grant. Any increase in the number of shares available for grant under the Amended 2006 Plan would require approval from the Company's Board of Directors.

As of January 31, 2012, a total of 12,552,813 shares of common stock were reserved for issuance upon the exercise of stock options and for the future grant of stock options or awards under the Amended 2006 Plan.

The fair value of each stock option grant under the stock option plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used just prior to the completion of the tender offer for grants in the abbreviated period from February 1, 2009 through October 16, 2009, in the tender offer of October 2009 and post the tender offer for the abbreviated period from October 17, 2009 through January 31, 2010, and the fiscal years ended January 31, 2011 and 2012.


	Fiscal Year Ended January 31, 2010
	Abbreviated Period Post Tender Offer from October 17, 2009 through January 31, 2010	Tender Offer (1)	Abbreviated Period from February 1, 2009 through October 16, 2009 Just Prior to the Tender Offer (2)	Fiscal Year Ended January 31, 2011	Fiscal Year Ended January 31, 2012
Expected life (in years)	3.0 to 4.0	3.3	3.0 to 4.0	2.2 to 3.0	3.0
Risk-free interest rate	0.2% to 1.3%	1.49%	1.6% to 2.5%	0.2% to 1.5%	0.1% to 1.2%
Volatility	31% to 38%	41.5%	31% to 35%	16% to 38%	19% to 384%

(1)

The fair value of each stock option grant under the tender offer was estimated on the date of grant, or option exchange, using the Black-Scholes option-pricing model for the new options net of the fair value of the old options being exchanged just immediately before the option exchange also using the Black-Scholes option-pricing model.

(2)

All options granted during the first six months of the fiscal year ended January 31, 2010 were tendered for new options or exchanged for cash in the October 2009 tender offer and none of the options granted just prior to the tender offer in the abbreviated period from August 1, 2009 through October 16, 2009 were eligible for exchange of new options or cash in the October 2009 tender offer.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility.

With respect to the amounts set forth above, the Company's expected volatility is based on the combination of historical volatility of the Company's common stock and the Company's peer group's common stock over the period commensurate with the expected life of the options. To assist management in determining the estimated fair value of the Company's common stock, the Company engages a third-party valuation specialist to perform a valuation on a semi-annual basis as of January 31 and July 31. In estimating the fair value of the Company's common stock, the external valuation firm employs a two-step approach that first estimates the fair value of the Company as a whole, and then allocates the enterprise value to the Company's common stock. The risk-free interest rates are derived from the average U.S. Treasury constant maturity rates during the period and approximate the rate in effect at the time of grant for the respective expected term. The expected terms are based on the observed and expected time to post-vesting exercise or cancellation of options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses forecasted projections to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

General Stock Option Information

The following table sets forth the summary of option activity under our stock option programs for the fiscal years ended January 31, 2010, 2011 and 2012:


	Options Available for Grant			Number of Options Outstanding			Weighted Average Exercise Price
Balances as of January 31, 2009		2,106,014			12,777,404		$	4.58
Granted		(245,000	)		245,000		$	3.36
Exercised		—			(504,752	)	$	4.31
Cancelled		1,729,591			(1,729,591	)	$	5.04

Balances as of October 16, 2009 just prior to the October 2009 tender offer		3,590,605			10,788,061		$	4.49
Options exchanged as part of the tender offer		8,640,000			(8,640,000	)	$	5.07
New options granted as part of the tender offer		(8,640,000	)		8,640,000		$	3.00
Options repurchased in the cash tender offer		—			(300,500	)	$	5.01
Granted		(2,690,000	)		2,690,000		$	3.00
Exercised		—			(37,435	)	$	1.25
Cancelled(1)		—			(10,801	)	$	1.25
Cancelled		2,916,924			(2,916,924	)	$	3.07
Restricted stock units granted, net of cancellations(2)		(1,820,000	)		—			—

Balances as of January 31, 2010(3)		1,997,529			10,212,401		$	2.76
Granted		(1,680,000	)		1,680,000		$	3.12
Exercised		—			(62,337	)	$	1.25
Cancelled(1)		—			(18,770	)	$	1.25
Cancelled		764,642			(764,642	)	$	3.38
Restricted stock units granted, net of cancellations(2)		(200,000	)		—			—

Balances as of January 31, 2011(3)		882,171			11,046,652		$	2.79
Granted		(827,500	)		827,500		$	3.56
Exercised		—			(3,882	)	$	1.25
Cancelled(1)		—			(77,128	)	$	1.25
Cancelled		3,210,631			(3,210,631	)	$	3.02
Restricted stock units granted, net of cancellations(2)		705,000			—			—

Balances as of January 31, 2012(3)		3,970,302			8,582,511		$	2.79

(1)	Represents cancelled "Roll Over" options which are not returned to the available-for-grant stock option pool.

(2)

Restricted stock units are granted from the stock option pool. In fiscal 2010, a total of 2,300,000 units were issued net of 480,000 units that were subsequently cancelled. In fiscal 2011, a total of 300,000 units were issued net of 100,000 units that were subsequently cancelled. In fiscal 2012, a total of 45,000 units were issued net of 750,000 units that were subsequently cancelled. See "Restricted Stock Units" below for further details.

(3)

The number of options vested and expected to vest as of January 31, 2010 was 9,956,582 and had an exercise price of $2.75. The number of options vested and expected to vest as of January 31, 2011 was 10,903,283 and had a weighted average exercise price of $2.78. The number of options vested and expected to vest as of January 31, 2012 is 5,581,226 and has a weighted average exercise price of $2.64.

Information regarding the stock options outstanding at January 31, 2012 is summarized as follows:


Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$1.25		1,389,456		1.41 years	$	1.25		1,389,456	$	1.25
$3.00		5,110,555		7.73 years	$	3.00		2,291,838	$	3.00
$3.08		780,000		8.22 years	$	3.08		209,644	$	3.08
$3.19		500,000		8.67 years	$	3.19		169,021	$	3.19
$3.54		512,500		9.54 years	$	3.54		2,915	$	3.54
$3.58		290,000		9.07 years	$	3.58		61,104	$	3.58

		8,582,511		6.96 years	$	2.79		4,123,978	$	2.43

(1)	The table shows options without consideration of expected forfeitures. The Company estimates its forfeiture rate to be approximately 2%.

(2)

Total stock options outstanding at January 31, 2012 consist of 3,944,055 time-based options, 3,249,000 performance-based options and 1,389,456 roll over options. The Company presently does not record compensation expense associated with performance-based options because management believes their vesting is not probable.

The aggregate intrinsic value for options outstanding and options exercisable as of January 31, 2012 was $8.0 million and $5.3 million, respectively.

Restricted Stock Awards

In connection with the consummation of the merger (the "Merger") of Spyglass Merger Corp. with and into the Company on March 10, 2006, the Company entered into a restricted stock agreement, dated as of March 10, 2006 with Robert Pender, the Company's Chief Financial Officer. Pursuant to this agreement, Mr. Pender was issued 307,200 shares of the Company's common stock. The restricted stock award vested in full on June 16, 2010 pursuant to the terms of the restricted stock agreement. Mr. Pender transferred 112,681 shares of the Company's common stock to the Company for purposes of paying applicable income tax withholdings resulting from the vesting of the restricted stock award pursuant to the terms of the restricted stock agreement.

The following table sets forth the summary of restricted stock award activity under our restricted stock agreement for the fiscal years ended January 31, 2010, 2011 and 2012:


	Non-Vested Shares			Weighted Average Grant Date Fair Value
Balances as of January 31, 2009		307,200		$	5.00
Granted		—		$	—
Cancelled		—		$	—

Balances as of January 31, 2010		307,200		$	5.00
Granted		—		$	—
Restricted stock awards released upon vesting		(307,200	)	$	5.00
Cancelled		—		$	—

Balances as of January 31, 2011 and 2012		—		$	—

Restricted Stock Units

The Company has entered into restricted stock unit agreements with certain of its employees. These units are unvested and subject to each employee's continued employment with the Company for a period of three years from the date of issuance. In addition, if the Company is subject to a "change in control" or an "initial public offering" (as defined in these agreements) while the employee remains an employee of the Company, his or her remaining unvested restricted stock units will immediately vest in part or in full depending on the price per share at the time of such event.

The following table sets forth the summary of restricted stock units' activity under our restricted stock purchase agreements for the fiscal years ended January 31, 2010, 2011 and 2012:


	Non-Vested Shares			Weighted Average Grant Date Fair Value
Balances as of January 31, 2009		—		$	—
Granted		2,300,000		$	3.00
Cancelled		(480,000	)	$	3.00

Balances as of January 31, 2010		1,820,000		$	3.00
Granted		300,000		$	3.10
Cancelled		(100,000	)	$	3.00

Balances as of January 31, 2011		2,020,000		$	3.01
Granted		45,000		$	3.54
Cancelled		(750,000	)	$	3.01

Balances as of January 31, 2012		1,315,000		$	3.04

The aggregate intrinsic value for restricted stock units outstanding as of January 31, 2012 was $4.9 million. There were no restricted stock units debted as of January 31, 2012.

As of January 31, 2012, total unrecognized compensation costs related to unvested stock options and restricted stock and units was $4.2 million. Costs related to unvested stock options are expected to be recognized over a period of 3 to 3.5 years and costs related to the restricted stock and units are expected to be recognized over a period of 3 to 4 years from grant date.

Stock-based compensation expense for the fiscal years ended January 31, 2010, 2011 and 2012 is categorized as follows (in thousands):


	Fiscal Years Ended January 31,
	2010			2011			2012
Cost of maintenance	$	86		$	94		$	63
Cost of professional services		52			63			66

Stock-based compensation expense in cost of revenue		138			157			129

Sales and marketing		554			541			557
Research and development		769			796			(110	)
General and administrative		1,393			2,091			819

Stock-based compensation expense in operating expense		2,716			3,428			1,266

Total stock-based compensation expense		2,854			3,585			1,395
Income tax benefit		(1,108	)		(1,393	)		(541	)

Total stock-based compensation expense, net of tax	$	1,746		$	2,192		$	854