SHARE-BASED COMPENSATION EXPENSE

Ciena grants equity awards under its 2008 Omnibus Incentive Plan (the "2008 Plan") and the Amended and Restated Employee Stock Purchase Plan (the “ESPP”). These plans were approved by stockholders and are described in Ciena’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013.

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. Pursuant to Board and stockholder approval, effective April 10, 2014, Ciena amended its 2008 Plan to increase the number of shares available for issuance by 6.6 million shares. The total number of shares authorized for issuance under the 2008 Plan is 25.1 million shares. As of April 30, 2014, approximately 9.2 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. As of April 30, 2014, all outstanding options have completed their service-based vesting conditions and are fully vested. 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, 2013	2,102		$	27.46
Exercised	(108	)	17.82
Canceled	(379	)	42.39
Balance at April 30, 2014	1,615		$	24.60

The total intrinsic value of options exercised during the first six months of fiscal 2013 and fiscal 2014 was $0.3 million and $0.7 million, respectively. Ciena did not grant any stock options during the first six months of fiscal 2013 or fiscal 2014.

The following table summarizes information with respect to stock options outstanding at April 30, 2014, based on Ciena’s closing stock price on the last trading day of Ciena’s second fiscal quarter of 2014 (shares and intrinsic value in thousands):



					Options Outstanding and Vested at
					April 30, 2014
					Number	Weighted Average Remaining	Weighted
Range of					of	Contractual	Average		Aggregate
Exercise					Underlying	Life	Exercise		Intrinsic
Price					Shares	(Years)	Price		Value
$	0.94	—	$	16.31	174	3.66	$	8.25	$	1,929
$	16.52	—	$	17.29	264	1.17	16.64		710
$	17.43	—	$	24.50	353	1.02	20.45		242
$	24.69	—	$	28.28	335	2.50	27.01		—
$	28.61	—	$	31.43	103	3.30	29.80		—
$	31.71	—	$	32.55	21	3.22	31.92		—
$	33.00	—	$	37.10	249	3.55	35.23		—
$	37.45	—	$	46.44	116	3.28	44.30		—
$	0.94	—	$	46.44	1,615	2.36	$	24.60	$	2,881

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.

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 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, 2013	4,419		$	15.33	$	102,745
Granted	1,745
Vested	(1,252	)
Canceled or forfeited	(99	)
Balance at April 30, 2014	4,813		$	17.67	$	93,052

The total fair value of restricted stock units that vested and were converted into common stock during the first six months of fiscal 2013 and fiscal 2014 was $15.9 million and $29.1 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first six months of fiscal 2013 and fiscal 2014 was $15.75 and $21.95 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.

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.

Amended and Restated Employee Stock Purchase Plan (ESPP)

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 Ciena common 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. 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. Unless earlier terminated, the ESPP will terminate on January 24, 2023.

During the first six months of fiscal 2014, Ciena issued 0.5 million shares under the ESPP. At April 30, 2014, 7.3 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 April 30,					Six Months Ended April 30,
	2013			2014		2013			2014
Product costs	$	686		$	741	$	1,247		$	1,247
Service costs	435			568		862			1,148
Share-based compensation expense included in cost of sales	1,121			1,309		2,109			2,395
Research and development	2,204			2,782		4,237			5,354
Sales and marketing	3,382			4,246		6,125			8,309
General and administrative	3,144			3,661		5,700			7,167
Share-based compensation expense included in operating expense	8,730			10,689		16,062			20,830
Share-based compensation expense capitalized in inventory, net	(24		)	53		(24		)	218
Total share-based compensation	$	9,827		$	12,051	$	18,147		$	23,443

As of April 30, 2014, total unrecognized share-based compensation expense related to unvested restricted stock units,was $72.4 million, and this expense is expected to be recognized over a weighted-average period of 1.5 years.