Employee Benefit Plans (including Share-based Compensation)

As of June 30, 2013, the Company has the following share-based compensation plans:

2005 Equity Incentive Plan

The 2005 Equity Incentive Plan (the “2005 Plan”) was adopted by the Company’s Board of Directors on October 20, 2005, and approved by stockholders on December 2, 2005. The 2005 Plan replaces the 1996 Stock Option Plan (the “1996 Plan”), 2000 Non-statutory Stock Option Plan (the “2000 Plan”) and 2001 Non-statutory Stock Option Plan (the “2001 Plan”).

Under the 2005 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other share-based or cash-based awards to employees and consultants. The 2005 Plan also authorizes the grant of awards of stock options, stock appreciation rights, restricted stock and restricted stock units to non-employee members of the Board of Directors and deferred compensation awards to officers, directors and certain management or highly compensated employees. The 2005 Plan authorizes the issuance of up to 12,000,000 shares of the Company’s common stock and on December 23, 2009, the Company’s stockholders approved to increase the number of shares authorized by another 4,000,000 shares. In addition, up to 11,000,000 shares subject to awards outstanding under the 1996 Plan, the 2000 Plan, and the 2001 Plan that expired have been added to the number of shares available for future grant under the 2005 Plan. As of June 30, 2013, total options and awards to acquire 10,548,505 shares were outstanding under the 2005 Plan and 3,615,342 shares are available for grant under the 2005 Plan. Options granted under this plan have a contractual term of seven years.

Amended 1996 Stock Option Plan

The 1996 Plan was originally adopted in September 1996, and provided for the grant of options for common stock to eligible participants. A total of 56,382,867 shares were reserved under the 1996 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the 1996 Plan was terminated, and, as of June 30, 2013, options to acquire 805,071 shares were outstanding under the 1996 Plan.

2000 Plan

In March 2000, the Board of Directors adopted the 2000 Plan which provided for the grant of options for common stock to eligible participants. A total of 4,000,000 shares were reserved under the 2000 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the 2000 Plan was terminated, and, as of June 30, 2013, options to acquire 64,027 shares were outstanding under the 2000 Plan.

2001 Plan

In May 2001, the Board of Directors adopted the 2001 Plan which provided for the grant of options for common stock to eligible participants. A total of 4,000,000 shares were reserved under the 2001 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the 2001 Plan was terminated, and, as of June 30, 2013, options to acquire 21,750 shares were outstanding under the 2001 Plan.

The following table summarizes stock option activity under all plans:



	Number of Shares (000’s)		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value ($ 000’s)
Options outstanding at June 27, 2010	9,586		$	4.24
Granted	2,748		$	3.28
Exercised	(606	)	$	2.52
Canceled	(2,596	)	$	4.40
Options outstanding at July 3, 2011	9,132		$	4.01
Granted	2,593		$	3.30
Exercised	(437	)	$	2.24
Canceled	(2,282	)	$	4.85
Options outstanding at June 30, 2012	9,006		$	3.68
Granted	4,163		$	3.35
Exercised	(2,045	)	$	3.00
Canceled	(1,979	)	$	3.77
Options outstanding at June 30, 2013	9,145		$	3.66	4.89	1,737
Exercisable at June 30, 2013	4,855		$	3.96	3.64	1,073
Vested and expected to vest at June 30, 2013	8,279		$	3.71	4.71	1,562

The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2013:



Options Outstanding					Options Exercisable
Range of Exercise Prices	Number Outstanding (000’s)	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable (000’s)	Weighted- Average Exercise Price
		(In years)
$1.69 – $3.03	1,039	4.64	$	2.45	949	$	2.39
$3.17 – $3.17	1,996	6.76	$	3.17	31	$	3.17
$3.25 – $3.38	1,486	5.35	$	3.33	546	$	3.30
$3.43 – $3.54	1,105	5.11	$	3.53	395	$	3.52
$3.58 – $3.68	938	5.24	$	3.64	394	$	3.68
$3.74 – $4.18	942	4.07	$	3.85	901	$	3.85
$4.22 – $4.74	986	3.54	$	4.36	986	$	4.36
$4.78 – $8.05	586	0.89	$	6.50	586	$	6.50
$8.36 – $8.36	7	0.33	$	8.36	7	$	8.36
$9.80 – $9.80	60	0.43	$	9.80	60	$	9.80
$1.69 – $9.80	9,145	4.89	$	3.66	4,855	$	3.96

The total intrinsic value of options exercised in fiscal 2013, fiscal 2012 and fiscal 2011 were $1.1 million, $0.5 million, and $0.5 million, respectively. The fair value of options vested in fiscal 2013, fiscal 2012 and fiscal 2011 were $1.5 million, $2.3 million, and $1.0 million, respectively.

Stock Awards

Stock awards may be granted under the 2005 Plan on terms approved by the Board of Directors. Stock awards generally provide for the issuance of restricted stock which vests over a fixed period.

The following table summarizes stock award activity:



	Number of Shares (000’s)		Weighted- Average Grant- Date Fair Value
Non-vested stock outstanding at June 27, 2010	2,880		$	2.92
Granted	818		$	3.18
Vested	(1,376	)	$	3.21
Cancelled	(452	)	$	3.03
Non-vested stock outstanding at July 3, 2011	1,870		$	2.79
Granted	739		$	3.11
Vested	(1,233	)	$	3.28
Cancelled	(298	)	$	3.17
Non-vested stock outstanding at June 30, 2012	1,078		$	2.35
Granted	3,220		$	3.49
Vested	(939	)	$	3.38
Cancelled	(673	)	$	3.44
Non-vested stock outstanding at June 30, 2013	2,686		$	3.09

The non-vested shares were placed in an escrow account and will be released to the recipients as the shares vest over periods of up to twenty-four months. If a participant terminates employment prior to the vesting dates, the non-vested shares will be canceled and returned to the 2005 Plan. The Company recognizes compensation expense on the awards over the vesting period based on an intrinsic value as of the date of grant.

1999 Employee Stock Purchase Plan

In January 1999, the Board of Directors approved the adoption of Extreme Network’s 1999 Employee Stock Purchase Plan (the “ESPP”). On December 2, 2005, the stockholders approved an amendment to the ESPP to increase the maximum number of shares of common stock that may be issued under the plan by 5,000,000 to a total of 12,000,000 shares. The ESPP permits eligible employees to acquire shares of the Company’s common stock through periodic payroll deductions of up to 15% of total compensation. No more than 625 shares may be purchased on any purchase date per employee. Each offering period has a maximum duration of 3 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable offering period or on the last day of the respective purchase period. On January 26, 2010, the Board of Directors approved an amendment to the ESPP to increase the maximum number of shares that may be purchased on any purchase date per employee from 625 shares to 1,000 shares. Through June 30, 2013, 10,033,395 shares had been purchased under the ESPP.

Share Based Compensation

Share-based compensation expense recognized in the financial statements by line item caption is as follows (dollars in thousands):



	Year Ended
	June 30, 2013		June 30, 2012		July 3, 2011
Cost of product revenue	$	428	$	463	$	435
Cost of service revenue	292		257		232
Research and development	2,461		1,363		1,113
Sales and marketing	1,032		1,765		1,948
General and administrative	3,140		2,341		1,520
Total share-based compensation expense	$	7,353	$	6,189	$	5,248

The amount of stock based compensation expense capitalized in inventory has been immaterial for each of the periods presented. As of June 30, 2013, there was $5.5 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 3.0 years. As of June 30, 2013, there were approximately $4.2 million in unrecognized compensation costs related to non-vested stock awards. This cost is expected to be recognized over a weighted-average period of approximately 1.9 years.

The weighted-average grant-date per share fair value of options granted in fiscal 2013, fiscal 2012, and fiscal 2011 were $1.74, $1.67, and $1.57, respectively. The weighted-average estimated per share fair value of shares purchased under the ESPP in fiscal 2013, fiscal 2012, and fiscal 2011 were $0.88, $0.98, and $0.98, respectively. The average fair-value and the average derived service period on the grant-date for the performance-based option awards with market conditions, granted in fiscal 2013, was $1.53 and 2.5 years respectively.

The Company uses the straight-line method for expense attribution, and the Company estimates forfeitures and only recognizes expense for those shares expected to vest. The Company’s estimated forfeiture rate in fiscal 2013 based on the Company’s historical forfeiture experience is approximately 9% for non-executives and 3% for executives.

The fair value of each option award and share purchase option under the Company's ESPP is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the following table. The Company uses the Monte-Carlo simulation model to determine the fair value and the derived service period of performance-based option awards, with market conditions, on the date of the grant. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The expected term of ESPP represents the contractual life of the ESPP purchase period. The risk-free rate based upon the estimated life of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on both the implied volatilities from traded options on the Company’s stock and historical volatility on the Company’s stock.



	Stock Option Plan						Employee Stock Purchase Plan
	Year Ended						Year Ended
	June 30, 2013		June 30, 2012		July 3, 2011		June 30, 2013		June 30, 2012		July 3, 2011
Expected life	4.58 yrs		5.06 yrs		4.43 yrs		0.25 yrs		0.25 yrs		0.24 yrs
Risk-free interest rate	0.74	%	1.05	%	1.47	%	0.07	%	0.07	%	0.17	%
Volatility	64	%	60	%	62	%	49	%	61	%	55	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

Employee Stock Option Exchange Program

On December 23, 2009, the Company’s stockholders approved a voluntary program (“Exchange Program”) that permitted eligible employees to exchange certain outstanding stock options that were “underwater” for a lesser number of shares of restricted stock units to be granted under the 2005 Plan and to exchange certain other stock options that are more substantially underwater for a cash payment. The Exchange Program was open to all of the Company’s United States employees, except for members of its Board of Directors and its executive officers. The Exchange Program commenced on February 4, 2010 and ended March 4, 2010. On March 5, 2010, the Company canceled a total of 3,058,761 tendered stock options, issued a total of 569,189 replacement restricted stock units under the 2005 Plan, and incurred a cash outlay of $8,769 which was paid out at the end of March 2010.

401(k) Plan

The Company provides a tax-qualified employee savings and retirement plan, commonly known as a 401(k) plan (the “Plan”), which covers the Company’s eligible employees. Pursuant to the Plan, employees may elect to reduce their current compensation up to the IRS annual contribution limit of $17,500 for calendar year 2013. Effective January 1, 2005, employees age 50 or over may elect to contribute an additional $5,500. The amount contributed to the Plan is on a pre-tax basis.

The Company provides for discretionary matching contributions as determined by the Board of Directors for each calendar year. All matching contributions vest immediately. In addition, the Plan provides for discretionary contributions as determined by the Board of Directors each year. The program was to match $0.50 for every dollar contributed by the employee up to the first 2.5% of pay. The Company’s matching contributions to the Plan totaled $0.5 million, $0.5 million, and $0.6 million, for fiscal 2013, fiscal 2012 and fiscal 2011, respectively. No discretionary contributions were made in fiscal 2013, fiscal 2012 and fiscal 2011.