SHARE-BASED COMPENSATION EXPENSE

Ciena maintains two active equity compensation plans, the 2008 Omnibus Incentive Plan (“2008 Plan”) and the Amended and Restated Employee Stock Purchase Plan (“ESPP”). These plans were approved by stockholders and are described in Ciena’s annual report on Form 10-K. In March 2012, Ciena stockholders approved the addition of 5.5 million additional shares of common stock for issuance under the 2008 Plan. As a result, the total number of shares authorized for issuance under the 2008 Plan is 18.5 million shares. As of July 31, 2012, approximately 7.0 million shares remained available for issuance under the 2008 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 period indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balance at October 31, 2011	3,690		$	30.01
Granted	—		—
Exercised	(40	)	5.78
Canceled	(329	)	56.67
Balance at July 31, 2012	3,321		$	27.66

The total intrinsic value of options exercised during the first nine months of fiscal 2011 and fiscal 2012 was $3.3 million and $0.3 million, respectively. There were no stock options granted by Ciena during the first nine months of fiscal 2011 and fiscal 2012.

The following table summarizes information with respect to stock options outstanding at July 31, 2012, based on Ciena’s closing stock price on the last trading day of Ciena’s third fiscal quarter of 2012 (shares and intrinsic value in thousands):



					Options Outstanding at						Vested Options at
					July 31, 2012						July 31, 2012
					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	334	5.36	$	8.45	$	2,519	283	5.07	$	8.06	$	2,246
$	16.52	—	$	17.29	393	2.95	16.68		—		391	2.94	16.68		—
$	17.43	—	$	24.50	534	2.79	20.47		—		533	2.79	20.47		—
$	24.69	—	$	28.28	409	4.24	26.99		—		409	4.24	26.99		—
$	28.61	—	$	31.43	269	2.84	29.75		—		269	2.84	29.75		—
$	31.71	—	$	32.55	512	0.57	31.72		—		512	0.57	31.72		—
$	33.00	—	$	37.10	347	4.75	35.17		—		347	4.75	35.17		—
$	37.31	—	$	47.32	489	2.20	44.83		—		489	2.2	44.83		—
$	47.53	—	$	55.79	32	1.07	49.35		—		32	1.07	49.35		—
$	267.52	—	$	267.52	2	0.15	267.52		—		2	0.15	267.52		—
$	0.94	—	$	267.52	3,321	3.01	$	27.66	$	2,519	3,267	2.95	$	27.93	$	2,246

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. Ciena did not grant any option-based awards during the first nine months of fiscal 2011 and fiscal 2012.

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 at October 31, 2011	4,298		$	16.28	$	59,399
Granted	2,250
Vested	(1,518	)
Canceled or forfeited	(254	)
Balance at July 31, 2012	4,776		$	14.21	$	76,365

The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2011 and fiscal 2012 was $38.3 million and $21.4 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first nine months of fiscal 2011 and fiscal 2012 was $20.16 and $11.00 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 2012, Ciena stockholders approved an amendment and restatement of the ESPP, extending the term to January 24, 2023 and increasing by 5.0 million the number of shares authorized for issuance thereunder. Pursuant to the ESPP's “evergreen” provision, on December 31 of each year, the number of shares available under the ESPP increases by up to 0.6 million shares, provided that the total number of shares available at that time shall not exceed 8.2 million. Under the ESPP, eligible employees may enroll in a twelve-month offer period that begins in December and June of each year. Each offer period includes two six-month purchase periods. Employees may purchase a limited number of shares of the Company stock at 85% of the fair market value on either the day immediately preceding the offer date or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of share-based compensation expense. During the first nine months of fiscal 2012, Ciena issued 1.2 million shares under the ESPP. At July 31, 2012, 7.6 million shares remained available for issuance under the ESPP.

Share-Based Compensation Expense for Periods Reported

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



	Quarter Ended July 31,						Nine Months Ended July 31,
	2011			2012			2011			2012
Product costs	$	579		$	564		$	1,658		$	1,509
Service costs	511			332			1,516			1,136
Share-based compensation expense included in cost of sales	1,090			896			3,174			2,645
Research and development	2,423			1,841			7,591			6,067
Sales and marketing	2,736			2,589			8,871			8,510
General and administrative	2,882			1,547			8,023			6,485
Acquisition and integration costs	54			—			288			7
Share-based compensation expense included in operating expense	8,095			5,977			24,773			21,069
Share-based compensation expense capitalized in inventory, net	(152		)	(48		)	(28		)	(58		)
Total share-based compensation	$	9,033		$	6,825		$	27,919		$	23,656

As of July 31, 2012, total unrecognized share-based compensation expense was $56.3 million: (i) $0.3 million related to unvested stock options and expected to be recognized over a weighted-average period of 0.5 year, and (ii) $56.0 million related to unvested restricted stock units and expected to be recognized over a weighted-average period of 1.4 years.