SHARE-BASED COMPENSATION EXPENSE

Ciena grants equity awards under its 2008 Omnibus Incentive Plan and the Amended and Restated Employee Stock Purchase Plan (“ESPP”).

2008 Plan

The 2008 Omnibus Incentive Plan (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.

The 2008 Plan reserves 18.5 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 includes a fungible share feature that counts each share of common stock underlying full value awards, such as restricted stock units, as 1.31 shares for purposes of calculating the shares remaining available under the 2008 Plan. As of October 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 periods indicated (shares in thousands):



	Shares Underlying Options Outstanding		Weighted Average Exercise Price
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
Granted	—		—
Exercised	(56	)	6.72
Canceled	(427	)	51.28
Balance as of October 31, 2012	3,207		$	27.58

The total intrinsic value of options exercised during fiscal 2010, fiscal 2011 and fiscal 2012 was $0.9 million, $3.4 million and $0.5 million, respectively. The weighted average fair value of each stock option granted by Ciena during fiscal 2010 was $6.94. There were no stock options granted by Ciena during fiscal 2011 or fiscal 2012.

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



					Options Outstanding at						Vested Options at
					October 31, 2012						October 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	318	5.03	$	8.44	$	1,445	286	4.84	$	8.16	$	1,387
$	16.52	—	$	17.29	389	2.68	16.68		—		389	2.68	16.68		—
$	17.43	—	$	24.50	529	2.48	20.46		—		529	2.48	20.46		—
$	24.69	—	$	28.28	406	3.67	27.00		—		406	3.67	27.00		—
$	28.61	—	$	31.43	195	3.20	29.80		—		195	3.20	29.80		—
$	31.71	—	$	32.55	506	0.31	31.72		—		506	0.31	31.72		—
$	33.00	—	$	37.10	345	3.89	35.19		—		345	3.89	35.19		—
$	37.31	—	$	47.32	487	1.93	44.83		—		487	1.93	44.83		—
$	47.53	—	$	55.79	32	0.80	49.35		—		32	0.80	49.35		—
$	0.94	—	$	55.79	3,207	2.66	$	27.58	$	1,445	3,175	2.62	$	27.75	$	1,387

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 2010, Ciena estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. Ciena did not grant any option-based awards during fiscal 2011 or fiscal 2012. The following table lists the assumptions used in valuing option-based awards granted in fiscal 2010:



	Year Ended
	October 31, 2010
Expected volatility	61.9%
Risk-free interest rate	2.0%-3.0%
Expected term (years)	5.3-5.5
Expected dividend yield	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, 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
Granted	2,433
Vested	(1,912	)
Canceled or forfeited	(416	)
Balance as of October 31, 2012	4,403		$	14.16	$	56,267

The total fair value of restricted stock units that vested and were converted into common stock during fiscal 2010, fiscal 2011 and fiscal 2012 was $25.7 million, $45.3 million and $27.0 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during fiscal 2010, fiscal 2011 and fiscal 2012 was $13.43, $19.73 and $11.28, 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

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. 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.

During fiscal 2010, fiscal 2011 and fiscal 2012, Ciena issued 0.1 million, 0.5 million and 1.2 million shares under the ESPP, respectively. At October 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):



	Year Ended October 31,
	2010		2011		2012
Product costs	$	2,140	$	2,269	$	2,156
Service costs	1,717		1,881		1,462
Share-based compensation expense included in cost of goods sold	3,857		4,150		3,618
Research and development	9,310		10,149		8,567
Sales and marketing	10,950		12,182		11,558
General and administrative	9,959		11,140		8,691
Acquisition and integration costs	1,342		308		7
Share-based compensation expense included in operating expense	31,561		33,779		28,823
Share-based compensation expense capitalized in inventory, net	142		1		(47		)
Total share-based compensation	$	35,560	$	37,930	$	32,394

As of October 31, 2012, total unrecognized compensation expense was $49.4 million: (i) $0.2 million, which relates to unvested stock options and is expected to be recognized over a weighted-average period of 0.5 years; and (ii) $49.2 million, which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.3 years.