SHARE-BASED COMPENSATION EXPENSE

Ciena grants equity awards under its 2008 Omnibus Incentive Plan and 2003 Employee Stock Purchase Plan (“ESPP”). In connection with its acquisition of the MEN Business, Ciena also adopted the 2010 Inducement Equity Award Plan, pursuant to which it has made awards to eligible persons as described below.

2008 Plan

The 2008 Omnibus Incentive Plan (the “2008 Plan”) was approved by Ciena’s Board of Directors on December 12, 2007 and became effective upon the approval of Ciena’s stockholders on March 26, 2008. The 2008 Plan has a ten year term. The 2008 Plan reserves eight million shares of common stock for issuance, subject to increase from time to time by the number of shares: (i) subject to outstanding awards granted under Ciena’s prior equity compensation plans that terminate without delivery of any stock (to the extent such shares would have been available for issuance under such prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition of another company.

The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder approval. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction.

Pursuant to Board and stockholder approval, effective April 14, 2010, Ciena amended its 2008 Plan to (i) increase the number of shares available for issuance by five million shares; and (ii) reduce from 1.6 to 1.31 the fungible share ratio used for counting full value awards, such as restricted stock units, against the shares remaining available under the 2008 Plan. As of October 31, 2011, there were approximately 4.0 million shares authorized and remaining available for issuance under the 2008 Plan.

2010 Inducement Equity Award Plan

On December 8, 2009, the Compensation Committee of the Board of Directors approved the 2010 Inducement Equity Award Plan (the “2010 Plan”). The 2010 Plan is intended to enhance Ciena's ability to attract and retain certain key employees transferred to Ciena in connection with its acquisition of the MEN Business. The 2010 Plan authorizes the issuance of restricted stock or restricted stock units representing up to 2.25 million shares of Ciena common stock. Upon the March 19, 2011 termination of the 2010 Plan, any shares then remaining available ceased to be available for issuance under the 2010 Plan or any other existing Ciena equity incentive plan.

Stock Options

Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. The following table is a summary of Ciena's stock option activity for the periods indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balance as of October 31, 2008	6,399		$	48.84
Granted	234		8.63
Exercised	(107	)	2.33
Canceled	(988	)	61.40
Balance as of October 31, 2009	5,538		45.80
Granted	86		12.42
Exercised	(103	)	5.21
Canceled	(519	)	95.00
Balance as of October 31, 2010	5,002		40.96
Granted	—		—
Exercised	(411	)	14.88
Canceled	(901	)	97.64
Balance as of October 31, 2011	3,690		$	30.01

The total intrinsic value of options exercised during fiscal 2009, fiscal 2010 and fiscal 2011 was $0.7 million, $0.9 million and $3.4 million, respectively. The weighted average fair value of each stock option granted by Ciena during fiscal 2009 and fiscal 2010 was $4.94 and $6.94, respectively. There were no stock options granted by Ciena during fiscal 2011.

The following table summarizes information with respect to stock options outstanding at October 31, 2011, based on Ciena’s closing stock price on the last trading day of Ciena’s fiscal 2011 (shares and intrinsic value in thousands):



					Options Outstanding at						Vested Options at
					October 31, 2011						October 31, 2011
					Number	Weighted Average Remaining	Weighted				Number	Weighted Average Remaining	Weighted
Range of					of	Contractual	Average		Aggregate		of	Contractual	Average		Aggregate
Exercise					Underlying	Life	Exercise		Intrinsic		Underlying	Life	Exercise		Intrinsic
Price					Shares	(Years)	Price		Value		Shares	(Years)	Price		Value
$	0.94	—	$	16.31	380	6.03	$	8.20	$	2,161	277	5.43	$	7.48	$	1,780
$	16.52	—	$	17.29	404	3.76	16.69		—		393	3.67	16.67		—
$	17.43	—	$	24.50	555	3.63	20.49		—		545	3.57	20.49		—
$	24.69	—	$	28.28	422	5.01	26.98		—		414	4.99	26.98		—
$	28.61	—	$	31.43	284	3.85	29.78		—		276	3.77	29.76		—
$	31.71	—	$	32.55	524	1.34	31.72		—		521	1.31	31.72		—
$	33.00	—	$	37.10	350	5.54	35.17		—		337	5.51	35.19		—
$	37.31	—	$	47.32	511	2.95	44.72		—		508	2.93	44.72		—
$	47.53	—	$	167.09	257	0.57	66.85		—		257	0.57	66.85		—
$	267.52	—	$	267.52	3	0.75	267.52		—		3	0.75	267.52		—
$	0.94	—	$	267.52	3,690	3.61	$	30.01	$	2,161	3,531	3.45	$	30.64	$	1,780

Assumptions for Option-Based Awards

Ciena recognizes the fair value of service-based options as share-based compensation expense on a straight-line basis over the requisite service period. During fiscal 2009 and fiscal 2010, Ciena estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model, with the weighted average assumptions in the table below. Ciena did not grant any option-based awards during fiscal 2011.



	Year Ended October 31,
	2009	2010
Expected volatility	65.0%	61.9%
Risk-free interest rate	1.7%-3.1%	2.0%-3.0%
Expected term (years)	5.2-5.3	5.3-5.5
Expected dividend yield	0.0%	0.0%

Ciena considered the implied volatility and historical volatility of its stock price in determining its expected volatility, and, finding both to be equally reliable, determined that a combination of both would result in the best estimate of expected volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of Ciena's employee stock options.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. Ciena uses historical information about specific exercise behavior of its grantees to determine the expected term.

The dividend yield assumption is based on Ciena's history and expectation of dividend payouts.

Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. Ciena relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.

Restricted Stock Units

A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena's outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards subject to service-based conditions typically vest in increments over a three or four-year period. Awards with performance-based vesting conditions require the achievement of certain operational, financial or other performance criteria or targets as a condition of vesting, or the acceleration of vesting, of such awards. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena's determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets.

The following table is a summary of Ciena's restricted stock unit activity for the period indicated, with the aggregate fair value of the balance outstanding at the end of each period, based on Ciena's closing stock price on the last trading day of the relevant period (shares and aggregate fair value in thousands):



	Restricted Stock Units Outstanding		Weighted Average Grant Date Fair Value Per Share		Aggregate Fair Value
Balance as of October 31, 2008	1,849		$	30.85	$	17,773
Granted	3,364
Vested	(1,358	)
Canceled or forfeited	(139	)
Balance as of October 31, 2009	3,716		14.67		43,591
Granted	3,643
Vested	(1,846	)
Canceled or forfeited	(322	)
Balance as of October 31, 2010	5,191		13.81		71,681
Granted	2,064
Vested	(2,466	)
Canceled or forfeited	(491	)
Balance as of October 31, 2011	4,298		$	16.28	$	59,399

The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2009, fiscal 2010 and fiscal 2011 was $14.7 million, $25.7 million and $45.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during fiscal 2009, fiscal 2010 and fiscal 2011 was $7.02, $13.43 and $19.73, respectively.

Assumptions for Restricted Stock Unit Awards

The fair value of each restricted stock unit award is based on the closing price on the date of grant. Share-based expense for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably over the performance period based upon Ciena's determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal and, to the extent previously recognized, compensation cost is reversed.

2003 Employee Stock Purchase Plan

In March 2003, Ciena stockholders approved the 2003 Employee Stock Purchase Plan (the “ESPP”), which has a ten-year term. Ciena stockholders subsequently approved an amendment increasing the number of shares available to 3.6 million and adopting an “evergreen” provision. On December 31 of each year, the number of shares available under the ESPP will increase by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 3.6 million. Pursuant to the evergreen provision, the maximum number of shares that may be added to the ESPP during the remainder of its ten-year term is 2.2 million.

Under the ESPP, eligible employees may enroll in a six-month offer period during certain open enrollment periods. Prior to October 1, 2010, new offer periods began March 16 and September 16 of each year and the purchase price reflected a 5% discount off of the lower of the fair market value of Ciena common stock on the day preceding the offer period or the last day of the offer period. Prior to October 1, 2010, the ESPP was non-compensatory for purposes of share-based compensation expense.

Beginning on October 1, 2010, the six-month offer periods begin on December 21 and June 21 of each year with an initial stub period running from October 1, 2010 through December 20, 2010. The purchase price reflects a 15% discount off of the lower of the fair market value of Ciena common stock on the day preceding the offer period or the last day of the offer period. The current ESPP is considered compensatory for purposes of share-based compensation expense.

During fiscal 2009, fiscal 2010 and fiscal 2011, Ciena issued 0.1 million, 0.1 million and 0.5 million shares under the ESPP, respectively. At October 31, 2009, 2010 and 2011, 3.5 million, 3.5 million and 3.2 million shares remained available for issuance under the ESPP, respectively.

Share-Based Compensation Expense for Periods Reported

The following table summarizes share-based compensation expense for the periods indicated (in thousands):



	Year Ended October 31,
	2009			2010		2011
Product costs	$	2,116		$	2,140	$	2,269
Service costs	1,599			1,717		1,881
Share-based compensation expense included in cost of goods sold	3,715			3,857		4,150
Research and development	10,006			9,310		10,149
Sales and marketing	10,861			10,950		12,182
General and administrative	10,380			9,959		11,140
Acquisition and integration costs	—			1,342		308
Share-based compensation expense included in operating expense	31,247			31,561		33,779
Share-based compensation expense capitalized in inventory, net	(524		)	142		1
Total share-based compensation	$	34,438		$	35,560	$	37,930

As of October 31, 2011, total unrecognized compensation expense was $59.4 million: (i) $1.0 million, which relates to unvested stock options and is expected to be recognized over a weighted-average period of 0.6 year; and (ii) $58.4 million, which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.6 years.