14.

Employee Stock Plans

(a) Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of April 30, 2011, the Company had five stock incentive plans: the 2005 Stock Incentive Plan (the "2005 Plan"); the 1996 Stock Incentive Plan (the "1996 Plan"); the 1997 Supplemental Stock Incentive Plan (the "Supplemental Plan"); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the "SA Acquisition Plan"); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the "WebEx Acquisition Plan"). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted share-based awards to a significant percentage of its employees, and the majority has been granted to employees below the vice president level. The Company's primary stock incentive plans are summarized as follows:

2005 Plan As amended on November 15, 2007, the maximum number of shares issuable under the 2005 Plan over its term is 559 million shares plus the amount of any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, then the shares underlying the awards will again be available under the 2005 Plan.

Prior to November 12, 2009, the number of shares available for issuance under the 2005 Plan was reduced by 2.5 shares for each share awarded as a stock grant or stock unit. Pursuant to an amendment approved by the Company's shareholders on November 12, 2009, following that amendment the number of shares available for issuance under the 2005 Plan is reduced by 1.5 shares for each share awarded as a stock grant or a stock unit, and any shares underlying awards outstanding under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms become available for reissuance under the 2005 Plan. The 2005 Plan permits the granting of stock options, stock, stock units, and stock appreciation rights to employees (including employee directors and officers), consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options and stock appreciation rights granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and prior to November 12, 2009 have an expiration date no later than nine years from the grant date. The expiration date for stock options and stock appreciation rights granted subsequent to the amendment approved on November 12, 2009 shall be no later than ten years from the grant date. The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Stock grants and stock units will generally vest with respect to 20% or 25% of the shares covered by the grant on each of the first through fifth or fourth anniversaries of the date of the grant, respectively. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants, and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.

1996 Plan The 1996 Plan expired on December 31, 2006, and the Company can no longer make equity awards under the 1996 Plan. The maximum number of shares issuable over the term of the 1996 Plan was 2.5 billion shares. Stock options granted under the 1996 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain other grants have utilized a 60-month ratable vesting schedule. In addition, the Board of Directors, or other committees administering the plan, has the discretion to use a different vesting schedule and has done so from time to time.

Supplemental Plan The Supplemental Plan expired on December 31, 2007, and the Company can no longer make equity awards under the Supplemental Plan. Officers and members of the Company's Board of Directors were not eligible to participate in the Supplemental Plan. Nine million shares were reserved for issuance under the Supplemental Plan.

Acquisition Plans In connection with the Company's acquisitions of Scientific-Atlanta, Inc. ("Scientific-Atlanta") and WebEx Communications, Inc. ("WebEx"), the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renaming of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.

(b) Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan, which includes its subplan, the International Employee Stock Purchase Plan (together, the "Purchase Plan"), under which 471.4 million shares of the Company's common stock have been reserved for issuance as of April 30, 2011. Effective July 1, 2009, eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited number of shares of the Company's stock at a discount of up to 15% of the lesser of the market value at the beginning of the offering period or the end of each 6-month purchase period. Prior to July 1, 2009 the offering period was six months. The Purchase Plan is scheduled to terminate on January 3, 2020. The Company issued 17 million and 14 million shares under the Purchase Plan during the nine months ended April 30, 2011 and May 1, 2010, respectively. As of April 30, 2011, 139 million shares were available for issuance under the Purchase Plan. The Company estimates the value of employee stock purchase rights on the date of grant using the Black-Scholes model.

(c) Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees and share-based awards assumed from acquisitions or investments. The following table summarizes share-based compensation expense (in millions):


	Three Months Ended				Nine Months Ended
	April 30, 2011		May 1, 2010		April 30, 2011		May 1, 2010
Cost of sales – product	$	16	$	16	$	47	$	43
Cost of sales – service		44		47		135		121

Share-based compensation expense in cost of sales		60		63		182		164

Research and development		120		129		373		336
Sales and marketing		160		171		491		444
General and administrative		60		71		191		182

Share-based compensation expense in operating expenses		340		371		1,055		962

Total share-based compensation expense	$	400	$	434	$	1,237	$	1,126

As of April 30, 2011, there was approximately $2.9 billion of total unrecognized compensation cost related to unvested share-based awards. This compensation cost is expected to be recognized over a weighted-average life of approximately 2.4 years. The income tax benefit for share-based compensation expense was $107 million and $335 million for the three and nine months ended April 30, 2011, respectively, and $118 million and $304 million for the three and nine months ended May 1, 2010, respectively.

The Company estimates the fair value of employee stock options on the date of grant using a lattice-binomial model. The lattice-binomial model is more capable than the Black-Scholes model of incorporating the features of the Company's employee stock options, such as the vesting provisions and various restrictions, including restrictions on transfer and hedging, among others, and the fact that options are often exercised prior to their contractual maturity. The use of the lattice-binomial model also requires extensive actual employee exercise behavior data for the relative probability estimation purpose and a number of complex assumptions, including expected volatility, risk-free interest rate, expected dividends, kurtosis, and skewness.

The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company's determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company's expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company's employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management's opinion, the existing valuation models may not provide an accurate measure of the fair value or be indicative of the fair value that would be observed in a willing buyer/willing seller market for the Company's employee stock options.

(d) Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows (in millions):


	Share- Based Awards Available for Grant
BALANCE AT JULY 25, 2009		253
Options granted and assumed		(15	)
Restricted stock, stock units, and other share-based awards granted and assumed		(81	)
Share-based awards canceled/forfeited/expired		123
Additional shares reserved		15

BALANCE AT JULY 31, 2010		295
Restricted stock, stock units, and other share-based awards granted and assumed		(72	)
Share-based awards canceled/forfeited/expired		26
Additional shares reserved		2

BALANCE AT APRIL 30, 2011		251

As reflected in the preceding table, for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 Plan beginning November 15, 2007 and prior to November 12, 2009, an equivalent of 2.5 shares was deducted from the available share-based award balance. Effective as of November 12, 2009, the equivalent number of shares was revised to 1.5 shares for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 Plan beginning on such date.

(e) Restricted Stock and Stock Unit Awards

A summary of the restricted stock and stock unit activity is as follows (in millions, except per-share amounts):


	Restricted Stock/Stock Units			Weighted- Average Grant Date Fair Value per Share		Aggregated Fair Market Value
BALANCE AT JULY 25, 2009		62		$	21.25
Granted and assumed		54			23.40
Vested		(16	)		21.56	$	378
Canceled/forfeited		(3	)		22.40

BALANCE AT JULY 31, 2010		97		$	22.35
Granted and assumed		48			21.68
Vested		(22	)		23.02	$	437
Canceled/forfeited		(5	)		22.17

BALANCE AT APRIL 30, 2011		118		$	21.96

Certain of the restricted stock units awarded in fiscal 2011 are contingent on the future achievement of financial performance metrics. The performance measures for these performance-based restricted stock units are revenue and earnings per share with pre-established adjustments.

On March 17, 2011, the Company's Board of Directors approved the initiation of quarterly cash dividends to the Company's shareholders. For share-based awards that were issued subsequent to the declaration of a quarterly cash dividend, fair value was measured based on the fair value at the grant date, less the present value of the expected dividend, which dividend is not paid on such awards during the vesting period. For restricted stock units that were granted prior to the Company's dividend declaration on March 17, 2011, the fair value was measured based on an expected dividend yield of 0%.

(f) Stock Option Awards

A summary of the stock option activity is as follows (in millions, except per-share amounts):


	STOCK OPTIONS OUTSTANDING
	Number Outstanding			Weighted- Average Exercise Price per Share
BALANCE AT JULY 25, 2009		1,004		$	24.29
Granted and assumed		15			13.23
Exercised		(158	)		17.88
Canceled/forfeited/expired		(129	)		47.31

BALANCE AT JULY 31, 2010		732			21.39
Exercised		(73	)		17.04
Canceled/forfeited/expired		(22	)		26.03

BALANCE AT APRIL 30, 2011		637		$	21.73

The following table summarizes significant ranges of outstanding and exercisable stock options as of April 30, 2011 (in millions, except years and share prices):


	STOCK OPTIONS OUTSTANDING								STOCK OPTIONS EXERCISABLE
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life (in Years)		Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value		Number Exercisable		Weighted- Average Exercise Price per Share		Aggregate Intrinsic Value
$ 0.01 – 15.00		62		1.81	$	10.64	$	429		59	$	10.79	$	395
15.01 – 18.00		100		3.23		17.69		11		99		17.70		11
18.01 – 20.00		169		2.16		19.29		—		167		19.29		—
20.01 – 25.00		155		4.12		22.75		—		139		22.75		—
25.01 – 35.00		151		5.31		30.63		—		111		30.58		—

Total		637		3.51	$	21.73	$	440		575	$	21.18	$	406

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of $17.52 as of April 29, 2011, which would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of April 30, 2011 was 69 million. As of July 31, 2010, 606 million outstanding stock options were exercisable and the weighted-average exercise price was $20.51.