Employee Benefit Plans (including Share-based Compensation)

As of June 30, 2014, the Company has the following share-based compensation plans:

2013 Equity Incentive Plan

The 2013 Equity Incentive Plan (the “2013 Plan”) was approved by stockholders on November 20, 2013. The 2013 Plan replaces the 2005 Equity Incentive Plan (the "2005 Plan").

Under the 2013 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 2013 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 2013 Plan authorizes the issuance of up to 9,000,000 shares of the Company’s common stock. In addition, up to 9,500,000 shares subject to stock options and awards outstanding under the 2005 Plan that expired and 6,900,000 shares subject to stock options outstanding and awards outstanding under the Enterasys Networks Inc. 2013 Stock Plan have been added to the number of shares available for future grant under the 2013 Plan. As of June 30, 2014, total options and awards to acquire 2,149,398 shares were outstanding under the 2013 Plan and 6,350,048 shares are available for grant under the 2013 Plan. Options granted under this plan have a contractual term of seven years.

Enterasys Inc. 2013 Stock Plan

Enterasys Networks Inc. 2013 Stock Plan (the "Enterasys Plan") was assumed by the Company on October 31, 2013 pursuant to the Stock Purchase Agreement, dated September 12, 2013, by and between the Company and Enterprise Networks Holdings, Inc. As of June 30, 2014, total options and awards to acquire 5,700,360 shares were outstanding under the Enterasys Plan. Options granted under this plan have a contractual term of seven years.

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 replaced 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”). Effective November 20, 2013, the 2005 Plan was terminated, and, as of June 30, 2014, options to acquire 9,183,034 shares were outstanding under the 2005 Plan.

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, 2014, options to acquire 303,763 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, 2014, options to acquire 5,000 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, 2014, there were no shares 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 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
Granted	6,347		$	5.15
Exercised	(1,792	)	$	3.59
Canceled	(1,968	)	$	5.01
Options outstanding at June 30, 2014	11,732		$	4.26	5.13	6,846
Exercisable at June 30, 2014	4,846		$	3.88	3.77	3,825
Vested and expected to vest at June 30, 2014	10,563		$	4.21	5.01	6,397

Included in the options granted above for the year ended June 30, 2014 are 4.2 million options, assumed in connection with the acquisition of Enterasys on October 31, 2013, with an exercise price of $5.30.

The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2014:



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	784	3.62	$	2.42	756	$	2.40
$3.17 – $3.17	1,954	5.80	$	3.17	597	$	3.17
$3.25 – $3.53	1,313	4.25	$	3.37	834	$	3.38
$3.54 – $3.87	1,224	4.91	$	3.63	629	$	3.69
$4.03 – $4.25	1,588	4.59	$	4.20	776	$	4.22
$4.26 – $5.26	242	1.36	$	4.70	242	$	4.70
$5.30 – $5.30	3,466	5.73	$	5.30	897	$	5.30
$5.36 – $6.44	1,061	6.49	$	5.75	15	$	6.02
$6.48 – $6.48	10	0.35	$	6.48	10	$	6.48
$6.96 – $6.96	90	0.42	$	6.96	90	$	6.96
$1.69 – $6.96	11,732	5.13	$	4.26	4,846	$	3.88

The total intrinsic value of options exercised in fiscal 2014, fiscal 2013 and fiscal 2012 was $4.1 million, $1.1 million, and $0.5 million, respectively. The fair value of options vested in fiscal 2014, fiscal 2013 and fiscal 2012 was $2.9 million, $1.5 million, and $2.3 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 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
Granted	5,193		$	5.50
Vested	(1,062	)	$	3.77
Cancelled	(817	)	$	3.65
Non-vested stock outstanding at June 30, 2014	6,000		$	4.98

Included in the restricted stock units granted above for the year ended June 30, 2014 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.

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 2013 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, 2014, 10,795,209 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, 2014		June 30, 2013		June 30, 2012
Cost of product revenue	$	836	$	428	$	463
Cost of service revenue	895		292		257
Research and development	4,111		2,461		1,363
Sales and marketing	6,430		1,032		1,765
General and administrative	3,650		3,140		2,341
Total share-based compensation expense	$	15,922	$	7,353	$	6,189

The amount of stock based compensation expense capitalized in inventory has been immaterial for each of the periods presented. As of June 30, 2014, there was $12.6 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 2.8 years. As of June 30, 2014, there were approximately $20.4 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 2014, fiscal 2013, and fiscal 2012 was $2.36, $1.74, and $1.67, respectively. The weighted-average estimated per share fair value of shares purchased under the ESPP in fiscal 2014, fiscal 2013, and fiscal 2012 was $1.64, $0.88, 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 2014 based on the Company’s historical forfeiture experience is approximately 12% for non-executives and 14% 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, 2014		June 30, 2013		June 30, 2012		June 30, 2014		June 30, 2013		June 30, 2012
Expected life	4.40 years		4.58 years		5.06 years		0.25 years		0.25 years		0.25 years
Risk-free interest rate	1.24	%	0.74	%	1.05	%	0.08	%	0.07	%	0.07	%
Volatility	56	%	64	%	60	%	58	%	49	%	61	%
Dividend yield	0	%	0	%	0	%	0	%	0	%	0	%

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 2014. 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. During the year ended June 30, 2014, eligible employees from Enterasys were also added to the Plan as of the acquisition date. The program is 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 $0.8 million, $0.5 million, and $0.5 million, for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. No discretionary contributions were made in fiscal 2014, fiscal 2013 and fiscal 2012.