Share-based Compensation

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



	Three Months Ended				Nine Months Ended
	March 31, 2014		March 31, 2013		March 31, 2014		March 31, 2013
Cost of product revenue	$	268	$	118	$	568	$	413
Cost of service revenue	420		61		623		304
Research and development	1,419		268		2,559		988
Sales and marketing	1,765		756		3,614		2,051
General and administrative	970		638		2,510		1,869
Total share-based compensation expense	$	4,842	$	1,841	$	9,874	$	5,625

During the three and nine months ended March 31, 2014 and 2013, the Company did not capitalize any stock-based compensation expense in inventory, as the amounts were immaterial. The income tax benefit for share-based compensation expense was immaterial in the three and nine months ended March 31, 2014 and 2013.

The weighted-average grant-date per share fair value of options granted during the three months ended March 31, 2014 and 2013 was $2.71 and $1.72, respectively. The weighted-average estimated per share fair value of shares purchased under the Company’s 1999 Employee Stock Purchase Plan (“ESPP”) during the three months ended March 31, 2014 and 2013 was $1.62 and $0.86, respectively.

The weighted-average grant-date per share fair value of options granted during the nine months ended March 31, 2014 and 2013 was $2.39 and $2.71, respectively. The weighted-average estimated per share fair value of shares purchased under the ESPP during the nine months ended March 31, 2014 and 2013 was $1.44 and $0.88, respectively.

The following table summarizes stock option activity under all plans for the nine months ended March 31, 2014:



	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 30, 2013	9,145		$	3.66
Granted	6,097		$	5.22
Exercised	(1,676	)	$	3.60		$	1,036
Cancelled	(1,323	)	$	4.92
Options outstanding at March 31, 2014	12,243		$	4.31	5.50	$	18,367
Exercisable at March 31, 2014	3,926		$	3.78	3.80	$	8,040
Vested and expected to vest at March 31, 2014	11,247		$	4.28	5.42	$	17,301

Included in the options granted above are 4.2 million options, assumed in connection with the acquisition of Enterasys on October 31, 2013, with an exercise price of $5.30.

Stock Awards

Stock awards may be granted under the 2013 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 for the nine months ended March 31, 2014:



	Number of Shares (000’s)	Weighted- Average Grant- Date Fair Value		Aggregate Fair Market Value ($000's)
Non-vested stock outstanding at June 30, 2013	2,686	$	3.09
Granted	5,037	$	5.56
Vested	852	$	3.51	$	4,982
Cancelled	515	$	2.62
Non-vested stock outstanding at March 31, 2014	9,090	$	4.47

Included in the restricted stock units granted above are 2.7 million restricted stock units assumed in connection with the acquisition of Enterasys on October 31, 2013, with an acquisition-date fair value of $5.30.

Excluding the options assumed as part of the Enterasys acquisition, 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				Stock Option Plan				Employee Stock Purchase Plan
	Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
	March 31, 2014		March 31, 2013		March 31, 2014		March 31, 2013		March 31, 2014		March 31, 2013		March 31, 2014		March 31, 2013
Expected life	5 years		4 years		0.25 years		0.25 years		4 years		5 years		0.25 years		0.25 years
Risk-free interest rate	1.41	%	0.72	%	0.09	%	0.10	%	1.23	%	0.71	%	0.10	%	0.07	%
Volatility	57	%	62	%	57	%	42	%	56	%	60	%	51	%	53	%
Dividend yield	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%

The Company is required to estimate the expected forfeiture rate and only recognize expense on a straight-line method for those shares expected to vest.