UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Ciena Corporation

(Exact name of registrant as specified in its charter)

Delaware		23-2725311
State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1201 Winterson Road, Linthicum, MD		21090
(Address of Principal Executive Offices)		(Zip Code)

(410) 865-8500
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at February 28, 2006
common stock, $.01 par value		582,356,152

 

 

CIENA CORPORATION

INDEX

FORM 10-Q

				PAGE
				NUMBER
PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Consolidated Statements of Operations for the three months ended January 31, 2005 and January 31, 2006			3
		Consolidated Balance Sheets at October 31, 2005 and January 31, 2006			4
		Consolidated Statements of Cash Flows for the three months ended January 31, 2005 and January 31, 2006			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			33
Item 4.		Controls and Procedures			34
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			34
Item 1A.		Risk Factors			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3.		Defaults Upon Senior Securities			45
Item 4.		Submission of Matters to a Vote of Security Holders			45
Item 5.		Other Information			45
Item 6.		Exhibits			45
		Signatures			46

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

		Quarter Ended January 31,
		2005				2006
Revenues:
Products		$	82,300			$	105,941
Services			12,448				14,489
Total revenue			94,748				120,430
Costs:
Products			60,848				60,399
Services			9,669				9,576
Total cost of goods sold			70,517				69,975
Gross profit			24,231				50,455
Operating expenses:
Research and development			34,662				29,462
Selling and marketing			26,840				26,572
General and administrative			7,656				9,896
Amortization of intangible assets			10,411				6,295
Restructuring costs			1,125				2,015
Long-lived asset impairments			184				(3	)
Recovery of doubtful accounts, net			—				(2,604	)
Gain on lease settlement			—				(6,020	)
Total operating expenses			80,878				65,613
Loss from operations			(56,647	)			(15,158	)
Interest and other income, net			7,433				9,262
Interest expense			(7,226	)			(6,053	)
Gain (loss) on equity investments, net			22				(733	)
Gain on extinguishment of debt			—				6,690
Loss before income taxes			(56,418	)			(5,992	)
Provision for income taxes			577				299
Net loss		$	(56,995	)		$	(6,291	)
Basic and diluted net loss per common share and dilutive potential common share		$	(0.10	)		$	(0.01	)
Weighted average basic common and dilutive potential common shares outstanding			571,573				580,771

The accompanying notes are an integral part of these consolidated financial statements.

CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

						(unaudited)
		October 31,				January 31,
		2005				2006
ASSETS
Current assets:
Cash and cash equivalents		$	358,012			$	298,624
Short-term investments			579,531				496,010
Accounts receivable, net			72,786				81,136
Inventories, net			49,333				64,379
Prepaid expenses and other			37,867				34,717
Total current assets			1,097,529				974,866
Long-term investments			155,944				166,951
Equipment, furniture and fixtures, net			28,090				27,131
Goodwill			232,015				232,015
Other intangible assets, net			120,324				113,061
Other long-term assets			41,327				30,867
Total assets		$	1,675,229			$	1,544,891
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	43,868			$	51,995
Accrued liabilities			76,491				64,138
Restructuring liabilities			15,492				12,687
Unfavorable lease commitments			9,011				8,620
Income taxes payable			5,785				5,846
Deferred revenue			27,817				30,986
Total current liabilities			178,464				174,272
Long-term deferred revenue			15,701				15,727
Long-term restructuring liabilities			54,285				35,939
Long-term unfavorable lease commitments			41,364				38,934
Other long-term obligations			1,296				1,151
Convertible notes payable			648,752				542,262
Total liabilities			939,862				808,285
Commitments and contingencies
Stockholders’ equity:
Preferred stock — par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding			—				—
Common stock — par value $0.01; 980,000,000 shares authorized; 580,340,947 and 581,581,317 shares issued and outstanding			5,803				5,816
Additional paid-in capital			5,489,613				5,493,614
Deferred stock compensation			(2,286	)			—
Changes in unrealized gains on investments, net			(4,673	)			(3,433	)
Translation adjustment			(495	)			(505	)
Accumulated deficit			(4,752,595	)			(4,758,886	)
Total stockholders’ equity			735,367				736,606
Total liabilities and stockholders’ equity		$	1,675,229			$	1,544,891

The accompanying notes are an integral part of these consolidated financial statements.

CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Three Months Ended January 31,
		2005				2006
Cash flows from operating activities:
Net loss		$	(56,995	)		$	(6,291	)
Adjustments to reconcile net loss to net cash used in operating activities:
Early extinguishment of debt			—				(6,690	)
Amortization of premium on marketable securities			4,913				1,176
Non-cash loss from equity investments			—				733
Non-cash impairment of long-lived assets			184				—
Depreciation and amortization of leasehold improvements			8,383				5,312
Stock compensation			2,047				4,183
Amortization of intangibles			11,378				7,263
Provision for inventory excess and obsolescence			1,115				3,000
Provision for warranty and other contractual obligations			3,016				2,470
Other			749				608
Changes in assets and liabilities:
Accounts receivable			(6,244	)			(8,350	)
Inventories			242				(18,046	)
Prepaid expenses and other			4,888				10,151
Accounts payable and accrued liabilities			(13,889	)			(30,813	)
Income taxes payable			318				61
Deferred revenue and other obligations			(3,436	)			3,195
Net cash used in operating activities			(43,331	)			(32,038	)
Cash flows from investing activities:
Additions to equipment, furniture, fixtures and intellectual property			(4,201	)			(4,375	)
Proceeds from sale of equipment, furniture and fixtures			177				—
Restricted cash			(621	)			1,102
Purchases of available for sale securities			(161,847	)			(63,641	)
Maturities of available for sale securities			200,731				136,219
Minority equity investments, net			(1,595	)			—
Net cash provided by investing activities			32,644				69,305
Cash flows from financing activities:
Repayment of convertible notes payable			—				(98,772	)
Proceeds from issuance of common stock			347				2,117
Repayment of notes receivable from stockholders			45				—
Net cash provided by (used in) financing activities			392				(96,655	)
Net decrease in cash and cash equivalents			(10,295	)			(59,388	)
Cash and cash equivalents at beginning of period			185,868				358,012
Cash and cash equivalents at end of period		$	175,573			$	298,624

The accompanying notes are an integral part of these consolidated financial statements

CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1) INTERIM FINANCIAL STATEMENTS

     The interim financial statements included herein for Ciena Corporation (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments which Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheet. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Ciena believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2005.

     Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of October in each year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and each fiscal quarter is described as having ended on January 31, April 30 and July 31 of each fiscal year.

(2) SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

     Ciena considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Restricted cash collateralizing letters of credits are included in other current assets and other long-term assets depending upon the duration of the restriction.

Investments

     Ciena’s short-term and long-term investments are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses and declines in value determined to be other than temporary, if any, on available-for-sale securities, are reported in other income or expense as incurred.

     Ciena also has certain other minority equity investments in privately held technology companies. These investments are carried at cost because Ciena owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. These investments are inherently high risk as the market for technologies or products manufactured by these companies are usually early stage at the time of the investment by Ciena and such markets may never be significant. Ciena could lose its entire investment in some or all of these companies. Ciena monitors these investments for impairment and makes appropriate reductions in carrying values when necessary.

Inventories

     Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis. Ciena records a provision for excess and obsolete inventory whenever an impairment has been identified.

Equipment, Furniture and Fixtures

     Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are computed using the straight-line method over useful lives of two years to five years for equipment, furniture and fixtures and nine months to ten years for leasehold improvements. Impairments of equipment, furniture and fixtures are determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

     Internal use software and web site development costs are capitalized in accordance with Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and

Emerging Issues Task Force (EITF) Issue No. 00-02, “Accounting for Web Site Development Costs.” Qualifying costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized over the estimated useful life of the asset.

Goodwill and Other Intangible Assets

     Ciena has recorded goodwill and purchased intangible assets as a result of several acquisitions. Ciena accounts for goodwill in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” which requires Ciena to test each reporting unit’s goodwill for impairment on an annual basis, which Ciena has determined to be the last business day of September each year, and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the economic lives of the respective assets, generally three to seven years. It is Ciena’s policy to assess periodically the carrying amount of its purchased intangible assets to determine if there has been an impairment to their carrying value. Impairments of other intangibles assets are determined in accordance with SFAS 144.

Concentrations

     Substantially all of Ciena’s cash and cash equivalents, short-term and long-term investments, are maintained at two major U.S. financial institutions. The majority of Ciena’s cash equivalents consist of money market funds and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

     Additionally, Ciena’s access to certain raw materials is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of Ciena could affect future results. Ciena relies on a small number of contract manufacturers to perform the majority of the manufacturing operations for its products. If Ciena cannot effectively manage these manufacturers and forecast future demand, or if they fail to deliver products or components on time, Ciena’s business may suffer.

Revenue Recognition

     Ciena recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed and determinable; and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. Services revenue is deferred and recognized ratably over the period during which the services are to be performed.

     Some of Ciena’s communications networking equipment is integrated with software that is essential to the functionality of the equipment. Ciena provides unspecified software upgrades and enhancements related to the equipment through maintenance contracts for these products. For transactions involving the sale of software, revenue is recognized in accordance with SOP 97-2, “Software Revenue Recognition,” including deferral of revenue recognition in instances where vendor specific objective evidence for undelivered elements is not determinable.

     For arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets, except as otherwise covered by SOP 97-2, the determination as to how the arrangement consideration should be measured and allocated to the separate deliverables of the arrangement is determined in accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately.

Revenue Related Accruals

     Ciena provides for the estimated costs to fulfill customer warranty and other contractual obligations upon the recognition of the related revenue. Such reserves are determined based upon actual warranty cost experience, estimates of component failure rates, and management’s industry experience. Ciena’s sales contracts do not permit the right of return of product by the customer after the product has been accepted.

Accounts Receivable Trade, Net

     Ciena’s allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from its customers. In determining the appropriate balance for Ciena’s allowance for doubtful accounts, management considers each individual customer account receivable in order to determine collectibility. In doing so, management considers creditworthiness, payment history, account activity and communication with such customer. If a customer’s financial condition changes, Ciena may be required to take a charge for an allowance on doubtful accounts. During the first quarter of fiscal 2006, Ciena recorded the recovery of a doubtful account in the amount of $2.6 million as a result of the payment of an amount due from a customer from whom payment was previously deemed doubtful due to the customer’s financial condition.

Research and Development

     Ciena charges all research and development costs to expense as incurred.

Advertising Costs

     Ciena expenses all advertising costs as incurred.

Share-Based Compensation Expense

     On November 1, 2005, Ciena adopted SFAS 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards, made to employees and directors, including stock options, restricted stock, restricted stock units and participation in Ciena’s employee stock purchase plan. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107 relating to SFAS 123(R). Ciena has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

      Ciena adopted SFAS 123(R) using the modified prospective application transition method, as of November 1, 2005, the first day of Ciena’s fiscal year 2006. Ciena’s consolidated financial statements as of and for the first quarter of fiscal 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective application transition method, Ciena’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) for the first quarter of fiscal 2006 was $4.2 million, of which $0.4 million was capitalized as part of inventory.

     Prior to the adoption of SFAS 123(R), Ciena accounted for share-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” as interpreted by FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” as allowed under SFAS 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense of $2.0 million for the first quarter of fiscal 2005 was solely related to share-based awards assumed through acquisitions and restricted stock unit awards that Ciena had been recognizing in its consolidated statement of operations in accordance with the provisions set forth above. Because the exercise price of Ciena’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date, under the intrinsic value method, no share-based compensation expense was otherwise recognized in Ciena’s consolidated statement of operations.

     SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in Ciena’s consolidated statement of operations over the requisite service periods. Share-based compensation expense recognized in Ciena’s consolidated statement of operations for the first quarter of fiscal 2006 includes compensation expense for share-based awards granted (i) prior to, but not yet vested as of October 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and (ii) subsequent to October 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), Ciena changed its method of attributing the value of share-based compensation expense from the accelerated multiple-option approach to the straight-line single-option method. Compensation expense for all share-based awards granted on or prior to October 31, 2005 will continue to be recognized using the accelerated multiple-option approach. Compensation expense for all share-based awards subsequent to October 31, 2005 is recognized using the straight-line single-option method. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense has

been reduced to account for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In Ciena’s pro forma information required under SFAS 123 for periods prior to fiscal 2006, Ciena accounted for forfeitures as they occurred.

     To calculate option-based compensation under SFAS 123(R), Ciena used the Black-Scholes option-pricing model, which it had previously used for valuation of option-based awards for its pro forma information required under SFAS 123 for periods prior to fiscal 2006. For additional information see Note 13. Ciena’s determination of fair value of option-based awards on the date of grant using the Black-Scholes model is affected by Ciena’s stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to Ciena’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

     No tax benefits were attributed to the share-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Income Taxes

     Ciena accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” SFAS 109 describes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carry forwards. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than the enactment of changes in tax laws or rates. Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Fair Value of Financial Instruments

     The carrying amounts of Ciena’s financial instruments, which include short-term and long-term investments, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities.

     As of the last day of the first quarter of fiscal 2006, the fair value of the $542.3 million in aggregate principal amount of convertible notes, due February 1, 2008, was $509.0 million, based on the quoted market price for the notes.

Foreign Currency Translation

     Some of Ciena’s foreign branch offices and subsidiaries use the U.S. dollar as their functional currency, because Ciena, as the U.S. parent entity, exclusively funds the operations of these branch offices and subsidiaries with U.S. dollars. For those subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are recorded directly to a separate component of stockholders’ equity. Where the U.S. dollar is the functional currency, translation adjustments are recorded in other income. The net gain (loss) on foreign currency re-measurement and exchange rate changes for the first quarter of fiscal 2005 and the first quarter of fiscal 2006 were immaterial for separate financial statement presentation.

Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income (Loss) per Common and Dilutive Potential Common Share

     Ciena calculates earnings per share in accordance with the SFAS 128, “Earnings per Share.” This statement requires dual presentation of basic and diluted EPS on the face of the income statement for entities with a complex capital structure and requires a reconciliation of the numerator and denominator used for the basic and diluted EPS computations.

Software Development Costs

     SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established and prior to the date the product is generally available for sale. The capitalized cost is then amortized

over the estimated product life. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, Ciena has not capitalized any software development costs.

Segment Reporting

     SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for operating segments of a company. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Ciena organizes its operations into four separate business segments: the Transport and Switching Group (TSG), the Data Networking Group (DNG), the Broadband Access Group (BBG) and Global Network Services (GNS).

     Revenue from sales to customers outside of the United States is reflected as International in Ciena’s geographic segment distribution of revenue.

Reclassification

     Certain prior year amounts have been reclassified to conform to current year consolidated financial statement presentation.

(3) RESTRUCTURING COSTS

     Ciena has previously taken actions to align its workforce, facilities and operating costs with business opportunities. Ciena historically has committed to a restructuring plan and has incurred the associated liability concurrently in accordance with the provisions of SFAS 146. The following table displays the activity and balances of the restructuring reserve account for the three months ending January 31, 2006 (in thousands):

		Workforce				Consolidation of
		reduction				excess facilities				Total
Balance at October 31, 2005		$	270			$	69,507			$	69,777
Additional reserve recorded			1,469	(a)			742	(a)			2,211
Adjustments to previous estimates			—				(196	) (b)			(196	)
Lease settlement			—				(6,020	) (c)			(6,020	)
Cash payments			(1,011	)			(16,135	)			(17,146	)
Balance at January 31, 2006		$	728			$	47,898			$	48,626
Current restructuring liabilities		$	728			$	11,959			$	12,687
Non-current restructuring liabilities		$	—			$	35,939			$	35,939

(4) MARKETABLE DEBT AND EQUITY SECURITIES

     Cash, short-term and long-term investments, exclusive of restricted cash, are comprised of the following (in thousands):

		January 31, 2006
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	258,524			$	—			$	1,463			$	257,061
Asset-backed obligations			170,619				—				651				169,968
U.S. government obligations			237,252				—				1,320				235,932
Money market funds			298,623				1				—				298,624
		$	965,018			$	1			$	3,434			$	961,585
Included in cash and cash equivalents			298,623				1				—				298,624
Included in short-term investments			498,361				—				2,351				496,010
Included in long-term investments			168,034				—				1,083				166,951
		$	965,018			$	1			$	3,434			$	961,585

		October 31, 2005
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	291,044			$	—			$	1,888			$	289,156
Asset backed obligations			195,471				—				844				194,627
Commercial paper			—				—				—				—
U.S. government obligations			253,633				—				1,941				251,692
Money market funds			358,012				—				—				358,012
		$	1,098,160			$	—			$	4,673			$	1,093,487
Included in cash and cash equivalents			358,012				—				—				358,012
Included in short-term investments			582,947				—				3,416				579,531
Included in long-term investments			157,201				—				1,257				155,944
		$	1,098,160			$	—			$	4,673			$	1,093,487

     The following table summarizes maturities of investments at January 31, 2006 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	498,361			$	496,010
Due in 1-2 years			168,034				166,951
Due in 2-5 years			—				—
		$	666,395			$	662,961

(5) ACCOUNTS RECEIVABLE

     As of January 31, 2006, trade accounts receivable, net of allowance for doubtful accounts, included four customers who accounted for 10.0%, 12.4%, 12.8%, and 15.0% of trade accounts receivable, respectively. As of October 31, 2005, trade accounts receivable, net of allowance for doubtful accounts, included three customers who accounted for 12.1%, 13.1% and 13.8% of net trade accounts receivable, respectively.

     Ciena performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from its customers. Ciena maintains an allowance for potential losses associated with accounts that it deems doubtful on a specific identification basis. In determining the appropriate balance for Ciena’s allowance for doubtful accounts, management considers each individual customer account receivable in order to determine collectibility. In doing so, management considers creditworthiness, payment history, account activity and communication with such customer. If a customer’s financial condition changes, Ciena may be required to take a charge for an allowance on doubtful accounts. Ciena’s allowance for doubtful accounts as of October 31, 2005 and January 31, 2006 was $3.3 million and $0.7 million, respectively. During the first quarter of fiscal 2006, Ciena recorded the recovery of a doubtful account in the amount of $2.6 million.

(6) INVENTORIES

     Inventories are comprised of the following (in thousands):

		October 31,				January 31,
		2005				2006
Raw materials		$	21,177			$	24,251
Work-in-process			3,136				3,528
Finished goods			47,615				58,812
			71,928				86,591
Provision for excess and obsolescence			(22,595	)			(22,212	)
		$	49,333			$	64,379

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. During the three months ended January 31, 2006, Ciena recorded a provision for inventory reserves of $3.0 million, primarily related to excess inventory due to a change in forecasted sales for certain products. The following is a summary of the change in the reserve for excess inventory and obsolete inventory during the three months ended January 31, 2006 (in thousands):

		Inventory Reserve
Reserve balance as of October 31, 2005		$	22,595
Provision for excess inventory, net			3,000
Actual inventory scrapped			(3,383	)
Reserve balance as of January 31, 2006		$	22,212

     During the three months ended January 31, 2005, Ciena recorded a provision for excess inventory of $1.1 million, primarily related to excess inventory due to a change in forecasted sales for certain products. The following is a summary of the change in the reserve for excess and obsolete inventory during the three months ended January 31, 2005 (in thousands):

		Inventory Reserve
Reserve balance as of October 31, 2004		$	21,933
Provision for excess inventory, net			1,115
Actual inventory scrapped			(493	)
Reserve balance as of January 31, 2005		$	22,555

(7) PREPAID EXPENSES AND OTHER

     Prepaid expenses and other are comprised of the following (in thousands):

		October 31,				January 31,
		2005				2006
Interest receivable		$	7,743			$	7,133
Prepaid VAT and other taxes			4,848				4,725
Prepaid expenses			9,103				9,032
Restricted cash			10,376				9,863
Other non-trade receivables			5,797				3,964
		$	37,867			$	34,717

(8) EQUIPMENT, FURNITURE AND FIXTURES

     Equipment, furniture and fixtures are comprised of the following (in thousands):

		October 31,				January 31,
		2005				2006
Equipment, furniture and fixtures		$	249,282			$	249,761
Leasehold improvements			32,875				32,925
			282,157				282,686
Accumulated depreciation and amortization			(254,458	)			(256,713	)
Construction-in-progress			391				1,158
		$	28,090			$	27,131

(9) OTHER INTANGIBLE ASSETS

     Other intangible assets are comprised of the following (in thousands):

		October 31, 2005												January 31, 2006
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Developed technology		$	139,983			$	(70,502	)		$	69,481			$	139,983			$	(74,771	)		$	65,212
Patents and licenses			47,370				(19,219	)			28,151				47,370				(20,780	)		$	26,590
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			45,981				(23,289	)			22,692				45,981				(24,722	)		$	21,259
		$	233,334							$	120,324			$	233,334							$	113,061

     The aggregate amortization expense of other intangible assets was $11.4 million and $7.3 million for the quarter ended January 31, 2005 and 2006, respectively. The following table represents the expected future amortization of other intangible assets as follows (in thousands):

2006 (remaining nine months)		$	21,787
2007			29,050
2008			27,840
2009			19,254
2010			14,500
Thereafter			630
		$	113,061

(10) OTHER BALANCE SHEET DETAILS

     Other long-term assets (in thousands):

		October 31,				January 31,
		2005				2006
Maintenance spares inventory, net		$	12,513			$	12,606
Deferred debt issuance costs			6,406				4,759
Investments in privately held companies			7,223				6,489
Restricted cash			4,393				3,804
Other			10,792				3,209
		$	41,327			$	30,867

     Accrued liabilities (in thousands):

		October 31,				January 31,
		2005				2006
Warranty		$	27,044			$	26,752
Accrued compensation, payroll related tax and benefits			26,164				22,252
Accrued interest payable			6,082				—
Other			17,201				15,134
		$	76,491			$	64,138

     The following table summarizes the activity in Ciena’s accrued warranty for the three months ended January 31, 2005 and 2006 (in thousands):

Three months ended				Beginning												Balance at end
January 31,				Balance				Provisions				Settlements				of period
2005				$	30,189				3,016				(4,268	)		$	28,937
2006				$	27,044				2,470				(2,762	)		$	26,752

     Deferred revenue (in thousands):

		October 31,				January 31,
		2005				2006
Products		$	14,534			$	18,023
Services			28,984				28,690
Total deferred revenue			43,518				46,713
Less current portion			(27,817	)			(30,986	)
Long-term deferred revenue		$	15,701			$	15,727

(11) CONVERTIBLE NOTES PAYABLE

Ciena 3.75% Convertible Notes, due February 1, 2008

     On February 9, 2001, Ciena completed a public offering of 3.75% convertible notes, due February 1, 2008, in an aggregate principal amount of $690.0 million. Interest is payable on February 1^st and August 1^st of each year. At the election of the holder, the notes may be converted into shares of Ciena’s common stock at any time before their maturity or their prior redemption or repurchase by Ciena. The conversion rate is 9.5808 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. Ciena has the option to redeem all or a portion of the notes that have not been previously converted at the following redemption prices (expressed as percentage of principal amount):

		Redemption
Period		Price
Beginning on February 1, 2006 and ending on January 31, 2007			101.071	%
Beginning on February 1, 2007 and ending on January 31, 2008			100.536	%

     During the first quarter of fiscal 2006, Ciena repurchased $106.5 million of the outstanding 3.75% convertible notes for $98.8 million in open market transactions. Ciena recorded a gain on the extinguishment of debt in the amount of $6.7 million, which consists of the $7.7 million gain from the repurchase of the notes, less $1.0 million of associated debt issuance costs.

     As of the last day of the first quarter of fiscal 2006, the fair value of the $542.3 million in aggregate principal amount of convertible notes outstanding was $509.0 million, based on the quoted market price for the notes.

(12) LOSS PER SHARE CALCULATION

     Basic and diluted EPS are computed using the weighted average number of common shares outstanding (excluding restricted stock subject to repurchase). Because of the anti-dilutive effect, diluted EPS and the weighted average number of common shares do not include shares underlying: stock options, warrants, restricted stock, restricted stock units, and Ciena’s 3.75% convertible notes. Shares underlying these securities totaled approximately

62.5 million and 63.6 million for the first quarter of fiscal 2005 and the first quarter of fiscal 2006, respectively.

(13) SHARE-BASED COMPENSATION EXPENSE

     During fiscal 2005, the Board of Directors determined that all future grants of stock options, restricted stock units, or other forms of equity-based compensation will solely be issued under the Ciena Corporation 2000 Equity Incentive Plan (the “2000 Plan”) and the 2003 Employee Stock Purchase Plan (the “ESPP”).

Ciena Corporation 2000 Equity Incentive Plan

     The 2000 Plan, which is a shareholder approved plan, was assumed by Ciena as a result of its merger with ONI. It authorizes the issuance of stock options, restricted stock, restricted stock units and stock bonuses to employees, officers, directors, consultants, independent contractors and advisors. The Board of Directors or its Compensation Committee has broad discretion to establish the terms and conditions for grants, including number of shares, vesting and required service or other performance criteria. The maximum term of any award under the 2000 Plan is ten years. The exercise price of options may not be less than 85% of the fair market value of the stock at the date of grant, or 100% of the fair market value for qualified options.

     Under the terms of the 2000 Plan, the number of shares authorized for issuance will increase by 5.0% of the number of issued and outstanding shares of Ciena each January 1^st, unless the Compensation Committee reduces the amount of the increase in any year. By action of the Compensation Committee, the plan increased by (i) zero shares on January 1, 2006, (ii) zero shares on January 1, 2005, and (iii) 9.5 million shares, or 2.0% of the then issued and outstanding shares of Ciena, on January 1, 2004. In addition, any shares subject to outstanding options or other awards under the ONI 1997 Stock Plan, ONI 1998 Equity Incentive Plan, or ONI 1999 Equity Incentive Plan that are forfeited upon cancellation of the award are available for grant and issuance under the 2000 Plan. As of January 31, 2006, there were 38.9 million shares authorized and available to grant under the 2000 Plan.

     Stock Options

     The following table is a summary of Ciena’s stock option activity (shares in thousands):

						Weighted
						Average
		Options				Exercise
		Outstanding				Price
Balance as of October 31, 2005			60,591			$	6.40
Granted			2,570				2.42
Exercised			(1,136	)			2.08
Canceled			(1,341	)			5.68
Balance as of January 31, 2006			60,684			$	4.79

     The total intrinsic value of options exercised in the first quarter of fiscal 2006 was $1.5 million.

     The following table summarizes information with respect to stock options outstanding at January 31, 2006 (shares and intrinsic value in thousands):

												Options Outstanding at January 31, 2006																Vested Options at January 31, 2006
																Weighted																Weighted
																Average																Average
																Remaining				Weighted												Remaining				Weighted
Range of																Contractual				Average				Aggregate								Contractual				Average				Aggregate
Exercise																Life				Exercise				Intrinsic								Life				Exercise				Intrinsic
Price												Number				(Years)				Price				Value				Number				(Years)				Price				Value
$	0.01				—			$	2.36				10,120				7.19			$	1.83			$	21,987				3,336				2.71			$	1.00			$	10,016
$	2.37				—			$	2.49				8,781				8.97				2.45				13,644				2,187				7.85				2.41				3,480
$	2.50				—			$	3.29				10,058				8.49				3.07				9,394				8,619				8.41				3.10				7,738
$	3.30				—			$	4.48				5,350				8.01				3.93				959				5,294				7.99				3.94				927
$	4.49				—			$	4.53				7,377				6.81				4.53				—				7,377				6.81				4.53				—
$	4.54				—			$	6.71				5,125				6.93				5.91				—				5,125				6.93				5.91				—
$	6.72				—			$	11.88				6,028				6.26				8.50				—				6,028				6.26				8.50				—
$	11.89				—			$	149.50				7,845				4.98				10.66				—				7,845				4.98				10.66				—
$	0.01				—			$	149.50				60,684				7.29			$	4.79			$	45,984				45,811				6.63			$	5.56			$	22,161

     As of January 31, 2006, total unrecognized compensation expense related to unvested stock options was $17.7 million. This expense is expected to be recognized over a weighted-average period of 1.6 years.

     On October 26, 2005, Ciena’s Board of Directors accelerated the vesting of approximately 14.1 million unvested, “out-of-the-money” stock options previously awarded to employees, officers and directors under Ciena’s stock option plans. Certain performance-based options held by executives were not subject to this acceleration. For purposes of the acceleration, options with an exercise price greater than $2.49 per share were deemed “out-of-the-money.” The accelerated options, which were considered fully vested as of October 26, 2005, had exercise prices ranging from $2.50 to $46.99 per share and a weighted average exercise price of $4.39 per share. Ciena did not accelerate the vesting of options that had an exercise price per share of $2.49 or less. The primary purpose of the accelerated vesting was to enable Ciena to avoid recognizing future compensation expense associated with these out-of-the-money stock options upon adoption of SFAS 123(R) for fiscal 2006.

     Restricted Stock Units

     A restricted stock unit is a right to receive a share of Ciena common stock when the unit vests. Ciena calculates the fair value of each restricted stock unit using the intrinsic value method and recognizes the expense straight-line over the requisite period. The following table is a summary of Ciena’s restricted stock unit activity (shares and intrinsic value in thousands):

						Weighted				Intrinsic
		Restricted				Average				Value at
		Stock Units				Grant Date				Jan. 31,
		Outstanding				Fair Value				2006
Balance as of October 31, 2005			127			$	6.76
Granted			1,457				2.37
Converted			(43	)			6.76
Canceled			—				—
Balance as of January 31, 2006			1,541			$	2.61			$	6,164

     The total intrinsic value of restricted stock units converted into shares in the first quarter of fiscal 2006 was $0.1 million.

     As of January 31, 2006, total unrecognized compensation expense related to restricted stock units was $4.0 million. This expense is expected to be recognized over a weighted-average period of 1.5 years.

2003 Employee Stock Purchase Plan

     In March 2003, Ciena shareholders approved the ESPP which authorized the issuance of 20.0 million shares. Under the ESPP, eligible employees may enroll in a 24-month offer period during certain open enrollment periods.

New offer periods begin March 16 and September 16 of each year. Each offer period consists of four, six-month purchase periods during which employee payroll deductions are accumulated. These deduction amounts, which are subject to certain limitations, are accumulated, and, at the end of each purchase period, are used to purchase shares of common stock. The purchase price of the shares is 15% less than the fair market value on either the first day of an offer period or the last day of a purchase period, whichever is lower. If the fair market value on the purchase date is less than the fair market value on the first day of an offer period, then participants automatically commence a new 24-month offer period. The ESPP has a ten-year term.

     At the 2005 annual meeting, Ciena shareholders approved an amendment to the ESPP pursuant to which 11.8 million shares were added to the ESPP on March 16, 2005, increasing the number of shares available under the ESPP to 25.0 million. The amendment to the ESPP also provided for an “evergreen” provision, pursuant to which, beginning on December 31, 2005, the number of shares available for issuance under the ESPP annually increases by up to four million shares, provided that the total number of shares available for issuance at any time under the ESPP shall not exceed 25.0 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 28.0 million. On December 31, 2005, the evergreen provision automatically added an additional 2.1 million shares to the ESPP, increasing the total number of shares available to 25.0 million.

     As of January 31, 2006, unrecognized compensation expense related to the ESPP was $0.8 million. This expense is expected to be recognized over a weighted-average period of 1.2 years.

Share-Based Compensation under SFAS 123(R) for Fiscal 2006 and APB 25 for Fiscal 2005

     On November 1, 2005, Ciena adopted SFAS 123(R), which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based payments awards made to Ciena’s employees and directors including stock options, restricted stock, restricted stock unit awards and stock purchased under Ciena’s ESPP.

     Prior to the adoption of SFAS 123(R), Ciena accounted for share-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as interpreted by FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” as allowed under SFAS 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense of $2.0 million for the first quarter of fiscal 2005 was solely related to share-based awards assumed through acquisitions and restricted stock unit awards that Ciena had been recognizing in its consolidated statement of operations in accordance with the provisions set forth above. Because the exercise price of Ciena’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the grant date, under the intrinsic value method, no share-based compensation expense was otherwise recognized in Ciena’s consolidated statement of operations.

     The following table summarizes share-based compensation expense under SFAS 123(R) for the three months ended January 31, 2006 and under APB 25, as interpreted by FIN 44, for the three months ended January 31, 2005, which was allocated as follows (in thousands):

		Quarter Ended January 31,
		2005				2006
Product costs		$	—			$	135
Service costs			—				188
Stock-based compensation expense included in cost of sales			—				323
Research and development			1,011				1,637
Sales and marketing			876				1,046
General and administrative			160				821
Stock-based compensation expense included in operating expense			2,047				3,504
Stock-based compensation expense capitalized in inventory			—				356
Total stock-based compensation		$	2,047			$	4,183

Pro Forma Share-Based Compensation under SFAS 123 for Fiscal 2005

     Had (i) compensation expense for Ciena’s stock option plans and employee stock purchase plan been determined based on the Black-Scholes valuation method; and (ii) the fair value at the grant date for awards in the first quarter of fiscal 2005 been determined consistent with the provisions of SFAS 123, “Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” Ciena’s net loss and net loss per share for the first quarter of fiscal 2005 would have changed by the pro forma amounts indicated below (in thousands, except per share data):

		Quarter Ended
		January 31, 2005
Net loss applicable to common stockholders — as reported		$	(56,995	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			11,799
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			2,047
Net loss applicable to common stockholders — pro forma		$	(66,747	)
Basic and diluted net loss per share — as reported		$	(0.10	)
Basic and diluted net loss per share — pro forma		$	(0.12	)

Fair Value and Assumptions Used to Calculate Fair Value under SFAS 123(R) and SFAS 123

     The weighted average fair value of each restricted stock unit granted under Ciena’s stock option plans for the first quarter of fiscal 2006 was $2.37, and there were no restricted stock units issued in the first quarter of fiscal 2005. The fair value of each restricted stock unit award is estimated on the date of grant using the intrinsic value method. The weighted average fair value of each option granted for the first quarter of fiscal 2005 and the first quarter of fiscal 2006 was $1.62 and $1.47, respectively.

     The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model, with the following weighted average assumptions for the first quarter of fiscal 2005 and the first quarter of fiscal 2006:

		Quarter Ended January 31,
		2005				2006
Expected volatility			66	%			62	%
Risk-free interest rate			3.65	%			4.3% - 4.5	%
Expected life (years)			4.5				6.0 - 6.1
Expected dividend yield			0.0	%			0.0	%

     Assumptions for Option-Based Awards under SFAS 123(R)

     Consistent with SFAS 123(R) and SAB 107, 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 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. Because Ciena considers its options to be “plain vanilla,” it calculated the expected term using the simplified method as prescribed in SAB 107. Under SAB 107, options are considered to be “plain vanilla” if they have the following basic characteristics: granted “at-the-money”; exerciseability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termination of service; options are non-transferable and non-hedgeable.

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

     As share-based compensation expense recognized in the consolidated statement of operations for the first quarter of fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based on Ciena’s historical experience.

     Assumptions for option-based awards under SFAS 123

     Prior to the first quarter of fiscal 2006, Ciena considered the implied volatility and historical volatility of its stock price in determining its expected volatility. The risk-free interest rate was based upon assumption of interest rates appropriate for the term of Ciena’s employee stock options. The dividend yield assumption was based on Ciena’s history and expectation of dividend payouts. Forfeitures prior to the first quarter of fiscal 2006 were accounted for as they occurred.

(14) COMPREHENSIVE LOSS

     The components of comprehensive loss were as follows (in thousands):

		Quarter ended January 31,
		2005				2006
Net loss		$	(56,995	)		$	(6,291	)
Change in unrealized loss on available-for-sale securities, net of tax			(2,444	)			1,240
Change in accumulated translation adjustments			(8	)			(10	)
Total comprehensive loss		$	(59,447	)		$	(5,061	)

(15) SEGMENT REPORTING

     Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. Ciena’s geographic distribution of revenue for the first quarter of fiscal 2005 and fiscal 2006 was as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2005				%*				2006				%*
United States		$	78,686				83.0			$	102,670				85.3
International			16,062				17.0				17,760				14.7
Total		$	94,748				100.0			$	120,430				100.0

     During the first quarter of fiscal 2005 and fiscal 2006, customers who each accounted for at least 10% of Ciena’s revenue during the respective periods were as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2005				%*				2006				%*
Company A			n/a				—			$	13,990				11.6
Company B			17,643				18.6				23,494				19.5
Company C			12,420				13.1				n/a				—
Company D			n/a				—				17,073				14.2
Total		$	30,063				31.7			$	54,556				45.3

     The table below (in thousands, except percentage data) sets forth Ciena’s operating segment revenues for the first quarter of fiscal 2005 and fiscal 2006.

		Quarter Ended January 31,
		2005				%*				2006				%*
Revenues:
TSG		$	50,440				53.3			$	74,901				62.3
DNG			16,579				17.5				6,057				5.0
BBG			15,281				16.1				24,983				20.7
GNS			12,448				13.1				14,489				12.0
Consolidated revenue		$	94,748				100.0			$	120,430				100.0

     Segment profit (loss) is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each operating segment in a given period. In connection with that assessment, the Chief Executive Officer excludes the following non-performance items: corporate selling and marketing, corporate general and administrative costs, amortization of intangibles, in-process research and development, restructuring costs, long-lived asset impairment, recovery of sale, export and use taxes, provisions or recovery of doubtful accounts, accelerated amortization of leaseholds, interest income, interest expense, equity investment gains or losses, gains or losses on extinguishment of debt, and provisions for income taxes.

     The table below sets forth Ciena’s operating segment profit (loss) and the reconciliation to consolidated net loss for the first quarter of fiscal 2005 and the first quarter of fiscal 2006.

		Quarter Ended January 31,
		2005				2006
Segment profit (loss):
TSG		$	(16,902	)		$	9,937
DNG			4,857				(1,408	)
BBG			(3,442	)			5,298
GNS			2,238				4,775
Total segment profit (loss)		$	(13,249	)		$	18,602
Non-performance items:
Corporate selling and marketing			(22,135	)			(24,181	)
Corporate general and administrative			(7,496	)			(9,896	)
Stock compensation costs:
Research and development			(1,011	)			—
Selling and marketing			(876	)			—
General and administrative			(160	)			—
Amortization of intangible assets			(10,411	)			(6,295	)
Restructuring costs			(1,125	)			(2,015	)
Long-lived asset impairments			(184	)			3
Recovery of doubtful accounts, net			—				2,604
Gain on lease settlement			—				6,020
Interest and other financial charges, net			229				9,166
Provision for income taxes			(577	)			(299	)
Consolidated net loss		$	(56,995	)		$	(6,291	)

(16) CONTINGENCIES

Litigation

     On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United States District Court for the Central District of California against Ciena and several other defendants, alleging that optical fiber amplifiers incorporated into certain of those parties’ products infringe U.S. Patent No. 4,859,016 (the “‘016 Patent”). The complaint seeks injunctive relief, royalties and damages. On October 10, 2003, the court stayed the case pending final resolution of matters before the U.S. Patent and Trademark Office (the “PTO”), including a request for and disposition of a reexamination of the ‘016 Patent. On October 16, 2003 and November 2, 2004, the PTO granted reexaminations of the ‘016 Patent, resulting in a continuation of the stay of the case. On July 11, 2005, the PTO

issued a Notice of Intent to Issue a Reexamination Certificate and a Statement of Reasons for Patentability/Confirmation, stating its intent to confirm all claims of ‘016 Patent. As a result, on October 10, 2005, Litton Systems filed a motion with the district court for an order lifting the stay of the case, and defendant Pirelli S.p.A. filed with the PTO a new request for ex parte reexamination of the ‘016 Patent. On December 15, 2005, the PTO denied Pirelli’s request for reexamination. On December 19, 2005, the district court denied Litton Systems’ motion to lift the stay. The PTO has not yet issued a Reexamination Certificate. Ciena believes that it has valid defenses to the lawsuit and intends to defend it vigorously in the event the stay of the case is lifted.

     As a result of its merger with ONI Systems Corp. in June 2002, Ciena became a defendant in a securities class action lawsuit. Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York. These complaints name ONI, Hugh C. Martin, ONI’s former chairman, president and chief executive officer; Chris A. Davis, ONI’s former executive vice president, chief financial officer and administrative officer; and certain underwriters of ONI’s initial public offering as defendants. The complaints were consolidated into a single action, and a consolidated amended complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the underwriter defendants violated the securities laws by failing to disclose alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the initial public offering’s registration statement and by engaging in manipulative practices to artificially inflate the price of ONI’s common stock after the initial public offering. The amended complaint also alleges that ONI and the named former officers violated the securities laws on the basis of an alleged failure to disclose the underwriters’ alleged compensation arrangements and manipulative practices. No specific amount of damages has been claimed. Similar complaints have been filed against more than 300 other issuers that have had initial public offerings since 1998, and all of these actions have been included in a single coordinated proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without prejudice pursuant to a tolling agreement. In July 2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including Ciena), and their insurers entered into a settlement agreement, whereby the plaintiffs’ cases against the issuers are to be dismissed. The plaintiffs and issuer defendants subsequently moved the court for preliminary approval of the settlement agreement, which motion was opposed by the underwriter defendants. On February 15, 2005, the district court granted the motion for preliminary approval of the settlement agreement, subject to certain modifications to the proposed bar order, and directed the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005, the district court issued a preliminary order approving the stipulated settlement agreement, approving and setting dates for notice of the settlement to all class members, and scheduling the fairness hearing for April 2006. After the fairness hearing, if the court determines that the settlement is fair to the class members, the settlement will be approved. The settlement agreement does not require Ciena to pay any amount toward the settlement or to make any other payments.

     On January 18, 2005, Ciena filed a complaint in the United States District Court, Eastern District of Texas, Marshall Division against Nortel Networks, Inc., Nortel Networks Corporation and Nortel Networks Limited (collectively, “Nortel”), which complaint was subsequently amended. Ciena’s amended complaint charges Nortel with infringement of nine patents related to Ciena’s communications networking systems and technology. Ciena seeks to enjoin Nortel’s infringing activities and recover damages caused by such infringement. On March 14, 2005, Nortel filed an answer to Ciena’s complaint and a counterclaim against Ciena, each of which have subsequently been amended. Nortel’s amended counterclaim charges Ciena with infringement of 13 patents related to Nortel’s communications networking systems and technology, including certain of Nortel’s SONET, ATM and VLAN systems and technology. Nortel’s counterclaim seeks injunctive relief and damages. Trial on 13 of the 22 total patents in suit (six for Ciena and seven for Nortel) is currently scheduled for June 2006.

     In addition to the matters described above, Ciena is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, Ciena does not expect that the ultimate costs to resolve these matters will have a material effect on the company’s results of operations, financial position or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Some of the statements contained, or incorporated by reference, in this quarterly report discuss future events or expectations, contain projections of results of operations or financial condition, changes in the markets for our products and services, or state other “forward-looking” information. Ciena’s “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. You should be aware that these statements only reflect our current predictions and beliefs. These

statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially. Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report, particularly under the heading “Risk Factors” in Item 1A of Part II of this report below. You should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on January 12, 2006, for a more complete understanding of the risks associated with an investment in Ciena’s securities. Ciena undertakes no obligation to revise or update any forward-looking statements.

Overview

     Ciena Corporation supplies communications networking equipment, software and services to telecommunications service providers, cable operators, governments and enterprises. Our product and service offerings enable customers to converge, transition and connect communications networks that deliver voice, video and data services. We are a network specialist, focused on optimizing access and edge networks for broadband communication, enhancing enterprise data services and evolving network infrastructures to support new, high-bandwidth applications and network convergence. Our equipment, software and services enable customers to gain a competitive advantage by increasing the functionality of their networks and reducing their costs of transporting voice, video and data.

     Our revenue increased to $120.4 million in the first quarter of fiscal 2006, representing a 27.1% increase from $94.7 million in the first quarter of fiscal 2005 and a 1.9% increase from $118.2 million in the fourth quarter of fiscal 2005. We have started to witness indications of increased demand for our equipment, software and services as customers appear to be investing in their core and metro network infrastructures to satisfy increasing capacity needs. We are also seeing increased investment at the edge of the network as a result of increased sales of broadband services by communications service providers. Finally, some large carriers are considering, or have taken steps towards developing, next-generation, converged networks in order to increase the efficiency of their networks and expand their service offerings. One example is BT’s 21^st Century Network, or 21CN, for which we were selected as a preferred supplier for the optical transmission portion. Our revenues for the first quarter do not include any revenue from the 21CN project.

     We expect further revenue growth and improvement in our financial results during fiscal 2006. Some of this expected revenue growth will come from orders related to larger network builds, which occur in phases. The timing and size of these orders, our ability to deliver products against them, and the timing of satisfaction of acceptance criteria will all contribute to fluctuations in our revenues from quarter to quarter. We also expect the cash required to finance inventory and accounts receivable to fluctuate, but generally to increase during fiscal 2006.

     Our revenues, margins, and cash requirements are significantly dependent upon, among other things, the availability of component supplies and manufacturing capacity sufficient to meet demand, particularly as it relates to larger network builds. Recently, we have experienced component supply shortages affecting our operations. Supply shortages can be exacerbated by difficulties in forecasting and aligning our supply needs with customer demand, which is often difficult to predict. If shortages persist or worsen, they could constrain our future growth and revenue opportunities and adversely affect our financial performance.

     Gross margin increased to 41.9% in the first quarter of 2006, up from 25.6% in the first quarter of fiscal 2005 and 39.9% for the fourth quarter of fiscal 2005. Gross margin improvement reflects both changes in product mix and significant gains resulting from our focus on cost reductions. To continue to drive cost improvements we are employing a global approach to sourcing components and manufacturing our products, and are increasingly utilizing overseas suppliers in lower cost regions, particularly in Asia. We believe that these steps will be important to maintain and build upon our gross margin improvement in recent quarters.

     Operating expense decreased to $65.6 million in the first quarter of fiscal 2006, from $80.9 million in the first quarter of fiscal 2005. This decrease was due in large part to reducing headcount and closing facilities in the United States and Canada in prior periods. In the first quarter of 2006, we also recognized gains of $6.0 million from the buy-out of the lease on our former Fremont, CA facility, and $2.6 million due to the recovery of a doubtful account.

     In early November 2005, we effected a headcount reduction of 62 employees and closed one of our facilities in Kanata, Ontario. This resulted in a restructuring charge of $2.2 million in the first quarter of fiscal 2006. We expect to take additional steps to reduce our operating expense and will incur additional restructuring costs during future periods. As of January 31, 2006, headcount was 1,442, down from 1,497 at the end of fiscal 2005.

     The first quarter of fiscal 2006 represents our first fiscal period following adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” which requires that we recognize compensation expense on our consolidated statement of operations for all share-based awards made to employees and directors based on estimated fair values. We have adopted SFAS 123(R) using the modified prospective application transition method, and accordingly have not restated financial statements for prior periods to include the impact of SFAS 123(R). To determine the valuation of share-based awards under SFAS 123(R), we continue to use the Black-Scholes option pricing model that we utilized to determine our pro forma share-based compensation in prior periods. Share-based compensation was $4.2 million during the first quarter of fiscal 2006, of which $0.4 million was capitalized as part of inventory. Additional information regarding our adoption of SFAS 123(R) during the first quarter of fiscal 2006 is set forth in the notes to the financial statements above and in “Critical Accounting Policies and Estimates” below.

     During the first quarter of fiscal 2006, we repurchased an additional $106.5 million in principal amount of our outstanding 3.75% convertible notes, due February 1, 2008, in open market transactions. These additional repurchases used approximately $98.8 million in cash and resulted in a gain on the extinguishment of debt in the amount of $6.7 million, which consists of the $7.7 million gain from the repurchase of the notes less $1.0 million of associated debt issuance costs. At January 31, 2006, the remaining principal balance on our outstanding convertible notes was $542.3 million. We intend to continue to evaluate and pursue opportunities to achieve cost savings relating to the repayment of our outstanding convertible notes when it is prudent to do so.

Results of Operations

Three months ended January 31, 2005 compared to three months ended January 31, 2006

Revenue, cost of goods sold and gross profit

     Cost of goods sold consists of component costs, direct compensation costs, warranty and other contractual obligations, royalties, license fees, direct technical support costs, cost of excess and obsolete inventory and overhead related to manufacturing, technical support and engineering, furnishing and installation (“EF&I”) operations.

     The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold and gross profit from the first quarter of fiscal 2005 to the first quarter of fiscal 2006.

		Quarter Ended January 31,																Increase
		2005				%*				2006				%*				(decrease)				%**
Revenue:
Products		$	82,300				86.9			$	105,941				88.0			$	23,641				28.7
Services			12,448				13.1				14,489				12.0				2,041				16.4
Total revenue			94,748				100.0				120,430				100.0				25,682				27.1
Costs:
Products			60,848				64.2				60,399				50.1				(449	)			(0.7	)
Services			9,669				10.2				9,576				8.0				(93	)			(1.0	)
Total cost of goods sold			70,517				74.4				69,975				58.1				(542	)			(0.8	)
Gross profit		$	24,231				25.6			$	50,455				41.9			$	26,224				108.2

     The table below (in thousands, except percentage data) sets forth the changes in product revenue, product cost of goods sold and product gross profit from the first quarter of fiscal 2005 to the first quarter of fiscal 2006.

		Quarter Ended January 31,																Increase
		2005				%*				2006				%*				(decrease)				%**
Product revenue		$	82,300				100.0			$	105,941				100.0			$	23,641				28.7
Product cost of goods sold			60,848				73.9				60,399				57.0				(449	)			(0.7	)
Product gross profit		$	21,452				26.1			$	45,542				43.0			$	24,090				112.3

     The table below (in thousands, except percentage data) sets forth the changes in service revenue, service cost of goods sold and service gross profit (loss) from the first quarter of fiscal 2005 to the first quarter of fiscal 2006.

		Quarter Ended January 31,																Increase
		2005				%*				2006				%*				(decrease)				%**
Service revenue		$	12,448				100.0			$	14,489				100.0			$	2,041				16.4
Service cost of goods sold			9,669				77.7				9,576				66.1				(93	)			(1.0	)
Service gross profit		$	2,779				22.3			$	4,913				33.9			$	2,134				76.8

     Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenues from the first quarter of fiscal 2005 to the first quarter of fiscal 2006.

		Quarter Ended January 31,																Increase
		2005				%*				2006				%*				(decrease)				%**
United States		$	78,686				83.0			$	102,670				85.3			$	23,984				30.5
International			16,062				17.0				17,760				14.7				1,698				10.6
Total		$	94,748				100.0			$	120,430				100.0			$	25,682				27.1

     During the first quarter of fiscal 2005 and first quarter of fiscal 2006, certain customers each accounted for at least 10% of our revenues during the respective periods as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2005				%*				2006				%*
Company A			n/a				—			$	13,990				11.6
Company B			17,643				18.6				23,494				19.5
Company C			12,420				13.1				n/a				—
Company D			n/a				—				17,073				14.2
Total		$	30,063				31.7			$	54,556				45.3