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, 2007

OR

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, 2007
common stock, $.01 par value		85,115,680

 

 

CIENA CORPORATION

INDEX

FORM 10-Q

				PAGE
				NUMBER
		PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Condensed Consolidated Statements of Operations for the three months ended January 31, 2006 and January 31, 2007			3
		Condensed Consolidated Balance Sheets at October 31, 2006 and January 31, 2007			4
		Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2006 and January 31, 2007			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			34
Item 4.		Controls and Procedures			35
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			35
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3.		Defaults Upon Senior Securities			46
Item 4.		Submission of Matters to a Vote of Security Holders			46
Item 5.		Other Information			46
Item 6.		Exhibits			47
		Signatures			48

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

		Quarter Ended January 31,
		2006				2007
Revenues:
Products		$	105,941			$	146,282
Services			14,489				18,819
Total revenue			120,430				165,101
Costs:
Products			60,399				74,979
Services			9,576				16,494
Total cost of goods sold			69,975				91,473
Gross profit			50,455				73,628
Operating expenses:
Research and development			29,462				29,853
Selling and marketing			26,572				24,875
General and administrative			9,896				10,301
Amortization of intangible assets			6,295				6,295
Restructuring costs (recoveries)			2,015				(466	)
Long-lived asset impairments			(3	)			—
Recovery of doubtful accounts, net			(2,604	)			(10	)
Gain on lease settlement			(6,020	)			—
Total operating expenses			65,613				70,848
Income (loss) from operations			(15,158	)			2,780
Interest and other income, net			9,262				14,845
Interest expense			(6,053	)			(6,148	)
Loss on equity investments, net			(733	)			—
Gain on extinguishment of debt			6,690				—
Income (loss) before income taxes			(5,992	)			11,477
Provision for income taxes			299				421
Net income (loss)		$	(6,291	)		$	11,056
Basic net income (loss) per common share		$	(0.08	)		$	0.13
Diluted net income (loss) per potential common share		$	(0.08	)		$	0.12
Weighted average basic common shares outstanding			82,967				84,953
Weighted average dilutive potential common shares outstanding			82,967				93,259

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

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

		October 31,				January 31,
		2006				2007
ASSETS
Current assets:
Cash and cash equivalents		$	220,164			$	374,079
Short-term investments			628,393				496,628
Accounts receivable, net			107,172				139,422
Inventories, net			106,085				103,548
Prepaid expenses and other			36,372				46,400
Total current assets			1,098,186				1,160,077
Long-term investments			351,407				314,377
Equipment, furniture and fixtures, net			29,427				32,867
Goodwill			232,015				232,015
Other intangible assets, net			91,274				84,011
Other long-term assets			37,404				38,309
Total assets		$	1,839,713			$	1,861,656
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	39,277			$	37,997
Accrued liabilities			79,282				90,065
Restructuring liabilities			8,914				7,621
Unfavorable lease commitments			8,512				7,614
Income taxes payable			5,981				6,298
Deferred revenue			19,637				20,015
Total current liabilities			161,603				169,610
Long-term deferred revenue			21,039				22,847
Long-term restructuring liabilities			26,720				24,579
Long-term unfavorable lease commitments			32,785				30,691
Other long-term obligations			1,678				1,582
Convertible notes payable			842,262				842,262
Total liabilities			1,086,087				1,091,571
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; 140,000,000 shares authorized; 84,891,656 and 85,054,714 shares issued and outstanding			849				851
Additional paid-in capital			5,505,853				5,511,921
Unrealized gains on investments, net			(496	)			(1,001	)
Translation adjustment			(580	)			(742	)
Accumulated deficit			(4,752,000	)			(4,740,944	)
Total stockholders’ equity			753,626				770,085
Total liabilities and stockholders’ equity		$	1,839,713			$	1,861,656

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

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

		Three Months Ended January 31,
		2006				2007
Cash flows from operating activities:
Net income (loss)		$	(6,291	)		$	11,056
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Early extinguishment of debt			(6,690	)			—
Amortization of premium (discount) on marketable securities			1,176				(1,249	)
Non-cash loss from equity investments			733				—
Depreciation and amortization of equipment, furniture and fixtures			5,312				3,150
Stock compensation			4,183				3,289
Amortization of intangibles			7,263				7,263
Provision for inventory excess and obsolescence			3,000				4,763
Provision for warranty and other contractual obligations			2,470				4,791
Other			608				715
Changes in assets and liabilities:
Accounts receivable			(8,350	)			(32,250	)
Inventories			(18,046	)			(2,226	)
Prepaid expenses and other			10,151				(11,289	)
Accounts payable and accrued liabilities			(30,813	)			(1,810	)
Income taxes payable			61				317
Deferred revenue and other obligations			3,195				2,186
Net cash used in operating activities			(32,038	)			(11,294	)
Cash flows from investing activities:
Additions to equipment, furniture, fixtures and intellectual property			(4,375	)			(6,590	)
Restricted cash			1,102				(521	)
Purchases of available for sale securities			(63,641	)			(88,632	)
Maturities of available for sale securities			136,219				258,171
Net cash provided by investing activities			69,305				162,428
Cash flows from financing activities:
Repayment of convertible notes payable			(98,772	)			—
Proceeds from exercise of stock options			2,117				2,781
Net cash provided by (used in) financing activities			(96,655	)			2,781
Net increase (decrease) in cash and cash equivalents			(59,388	)			153,915
Cash and cash equivalents at beginning of period			358,012				220,164
Cash and cash equivalents at end of period		$	298,624			$	374,079

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

CIENA CORPORATION
NOTES TO CONDENSED 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, 2006.

     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 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 markets 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. 00-2, “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 fiscal September each year. Ciena operates its business and tests it goodwill for impairment as a single reporting unit. Testing is required 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. Impairments of other intangibles assets are determined in accordance SFAS 144.

Unfavorable Lease Commitments

     Ciena has recorded unfavorable lease commitments as a result of several acquisitions. Ciena accounts for unfavorable lease commitments in accordance with SFAS 141 “Business Combinations.” The value of the unfavorable lease commitments was based upon the present value of the assumed lease obligations based upon current rental rates and current interest rates at the time of the acquisitions. These unfavorable lease commitments will be paid over the respective lease terms.

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 Ciena’s supply requirements 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 or 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. Revenue for maintenance services is generally 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. In some cases, 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 for doubtful accounts.

Research and Development

     Ciena charges all research and development costs to expense as incurred. Types of expense incurred in research and development include employee compensation, prototype, consulting, depreciation, facility costs and information technologies.

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 SAB 107 relating to SFAS 123(R). Ciena has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

     SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. Ciena uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by Ciena’s stock price as well as assumptions regarding a number of subjective variables. These subjective 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. 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.

     No tax benefits were attributed to the share-based compensation expense because a full 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.

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, and the statement of operations is translated at a monthly average rate. Resulting translation adjustments are recorded directly to a separate component of stockholders’ equity. Where the U.S. dollar is the functional currency, re-measurement adjustments are recorded in other income. The net gain (loss) on foreign currency re-measurement and exchange rate changes is immaterial for separate financial statement presentation.

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

     Ciena calculates earnings per share (EPS) 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. We report our financial results as a single business segment.

Effects of Recent Accounting Pronouncements

     In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides interpretative guidance on the process of quantifying financial statement misstatements and is effective for fiscal years ending after November 15, 2006. The adoption of this statement in our fiscal 2007 did not have a material impact on Ciena’s financial condition, results of operations or cash flows.

     In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. The adoption of this statement in fiscal 2007 did not have a material impact on Ciena’s financial condition, results of operations or cash flows.

     In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” which supersedes APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 also carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The correction of an error in previously issued financial statements is not a change in accounting principle. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement in fiscal 2007 did not have a material impact on Ciena’s financial condition, results of operations or cash flows.

     In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair

value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

     In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

(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, “Accounting for Costs Associated with Exit or Disposal Activities.” The following table displays the activity and balances of the restructuring reserve account for the three months ending January 31, 2007 (in thousands):

						Consolidation
		Workforce				of excess
		reduction				facilities				Total
Balance at October 31, 2006		$	—			$	35,634			$	35,634
Additional liability recorded			71	(a)			—				71
Adjustment to previous estimates			—				(537	)(b)			(537	)
Cash payments			(71	)			(2,897	)			(2,968	)
Balance at January 31, 2007		$	—			$	32,200			$	32,200
Current restructuring liabilities		$	—			$	7,621			$	7,621
Non-current restructuring liabilities		$	—			$	24,579			$	24,579

     The following table displays the activity and balances of the restructuring reserve account for the three months ending January 31, 2006 (in thousands):

						Consolidation
		Workforce				of excess
		reduction				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

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

		January 31, 2007
						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Fair Value
Corporate bonds		$	503,138			$	137			$	570			$	502,705
Asset backed obligations			214,266				19				397				213,888
US government obligations			94,591				21				200				94,412
		$	811,995			$	177			$	1,167			$	811,005
Short-term investments			497,366				56				794				496,628
Long-term investments			314,629				121				373				314,377
		$	811,995			$	177			$	1,167			$	811,005

		October 31, 2006
						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Fair Value
Corporate bonds		$	468,152			$	437			$	525			$	468,064
Asset backed obligations			195,728				142				305				195,565
Commercial paper			152,768				—				—				152,768
US government obligations			163,643				84				324				163,403
		$	980,291			$	663			$	1,154			$	979,800
Short-term investments			629,269				66				942				628,393
Long-term investments			351,022				597				212				351,407
		$	980,291			$	663			$	1,154			$	979,800

     The gross unrealized losses, related to marketable debt investments, were primarily due to changes in interest rates. Ciena’s management has determined that the gross unrealized losses on its marketable debt investments at January 31, 2007 and October 31, 2006 are temporary in nature because Ciena has the ability and intent to hold these investments until a recovery of fair value, which may be maturity. The gross unrealized losses were as follows at January 31, 2007 and October 31, 2006 (in thousands):

		January 31, 2007
		Unrealized Losses Less								Unrealized Losses 12
		Than 12 Months								Months or Greater								Total
		Gross								Gross								Gross
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
Corporate bonds		$	440			$	355,346			$	130			$	45,319			$	570			$	400,665
Asset backed obligations			224				138,016				172				42,797				396				180,813
US government obligations			85				25,590				116				53,951				201				79,541
		$	749			$	518,952			$	418			$	142,067			$	1,167			$	661,019

		October 31, 2006
		Unrealized Losses Less								Unrealized Losses 12
		Than 12 Months								Months or Greater								Total
		Gross								Gross								Gross
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
Corporate bonds		$	400			$	196,947			$	125			$	26,687			$	525			$	223,634
Asset backed obligations			153				92,869				152				34,828				305				127,697
Commercial paper			—				—				—				—				—				—
US government obligations			112				38,692				212				40,839				324				79,531
		$	665			$	328,508			$	489			$	102,354			$	1,154			$	430,862

     The following table summarizes maturities of investments at January 31, 2007 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	497,366			$	496,628
Due in 1-2 years			314,629				314,377
		$	811,995			$	811,005

(5) ACCOUNTS RECEIVABLE

     As of January 31, 2007, trade accounts receivable, net of allowance for doubtful accounts, included three customers that accounted for 25.3%, 16.5%, and 14.7% of net trade accounts receivable, respectively. As of October 31, 2006, the trade accounts receivable, net of allowance for doubtful accounts, included two customers that accounted for 25.4% and 21.8% of the net trade accounts receivable, respectively.

Ciena’s allowance for doubtful accounts as of October 31, 2006 and January 31, 2007 was $0.1 million.

(6) INVENTORIES

     Inventories are comprised of the following (in thousands):

		October 31,				January 31,
		2006				2007
Raw materials		$	29,627			$	29,622
Work-in-process			9,156				7,795
Finished goods			89,628				89,350
			128,411				126,767
Provision for inventory excess and obsolescence			(22,326	)			(23,219	)
		$	106,085			$	103,548

     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 first three months of fiscal 2007, Ciena recorded a provision for inventory reserves of $4.8 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 first three months of fiscal 2007 (in thousands):

		Inventory Reserve
Reserve balance as of October 31, 2006		$	22,326
Provision for excess inventory, net			4,763
Actual inventory scrapped			(3,870	)
Reserve balance as of January 31, 2007		$	23,219

     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 first three months of fiscal 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

(7) PREPAID EXPENSES AND OTHER

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

		October 31,				January 31,
		2006				2007
Interest receivable		$	8,547			$	9,667
Prepaid VAT and other taxes			9,467				16,746
Prepaid expenses			8,445				11,328
Restricted cash			6,990				6,808
Other non-trade receivables			2,923				1,851
		$	36,372			$	46,400

(8) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				January 31,
		2006				2007
Equipment, furniture and fixtures		$	253,953			$	257,886
Leasehold improvements			36,203				36,525
			290,156				294,411
Accumulated depreciation and amortization			(260,729	)			(261,544	)
		$	29,427			$	32,867

(9) OTHER INTANGIBLE ASSETS

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

		October 31,												January 31,
		2006												2007
		Gross				Accumulated								Gross				Accumulated
		Intangible				Amortization				Net Intangible				Intangible				Amortization				Net Intangible
Developed technology		$	139,983			$	(87,577	)		$	52,406			$	139,983			$	(91,846	)		$	48,137
Patents and licenses			47,370				(25,463	)			21,907				47,370				(27,024	)			20,346
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			45,981				(29,020	)			16,961				45,981				(30,453	)			15,528
		$	233,334							$	91,274			$	233,334							$	84,011

     The aggregate amortization expense of other intangible assets was $7.3 million for the first three months of fiscal 2006 and 2007. The following table represents the expected future amortization of other intangible assets as follows (in thousands):

2007 (remaining nine months)		$	21,787
2008			27,840
2009			19,254
2010			14,500
2011			630
		$	84,011

(10) OTHER BALANCE SHEET DETAILS

     Other long-term assets (in thousands):

		October 31,				January 31,
		2006				2007
Maintenance spares inventory, net		$	14,724			$	15,800
Deferred debt issuance costs			10,306				9,429
Investments in privately held companies			6,489				6,489
Restricted cash			3,227				3,930
Other			2,658				2,661
		$	37,404			$	38,309

     Deferred debt issuance costs are amortized using the straight line method which approximates the effect of the effective interest rate method on the maturity of the related debt. Amortization of debt issuance cost, which is included in interest expense, was $0.6 million and $0.9 million during the first three months of fiscal 2006 and fiscal 2007, respectively. This increase reflects Ciena’s April 10, 2006 issuance of 0.25% Convertible Senior Notes due May 1, 2013.

     Accrued liabilities (in thousands):

		October 31,				Janaury 31,
		2006				2007
Warranty		$	31,751			$	33,607
Accrued compensation, payroll related tax and benefits			24,102				26,340
Accrued interest payable			5,502				10,355
Other			17,927				19,763
		$	79,282			$	90,065

      The provision for warranty during the first quarter of fiscal 2007 reflects a $0.7 million increase resulting from an out of period adjustment. This adjustment was not material to the financial statements for the first quarter of fiscal 2007 or Ciena’s fiscal year ended October 31, 2006. The following table summarizes the activity in Ciena’s accrued warranty for the three months of fiscal 2006 and 2007 (in thousands):

														Balance at
Three months ended January 31,		Beginning Balance				Provisions				Settlements				end of period
2006		$	27,044				2,470				(2,762	)		$	26,752
2007		$	31,751				4,791				(2,935	)		$	33,607

     Deferred revenue (in thousands):

		October 31,				January 31,
		2006				2007
Products		$	4,276			$	3,366
Services			36,400				39,496
			40,676				42,862
Less current portion			(19,637	)			(20,015	)
Long-term deferred revenue		$	21,039			$	22,847

(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 and August 1 of each year. 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 1.3687 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. Prior to maturity, Ciena has the option to redeem all or a portion of the notes that have not been previously converted at 100.536% of the principal amount.

     At January 26, 2007, the fair value of the outstanding $542.3 million in aggregate principal amount of 3.75% convertible notes was $528.7 million. Fair value is based on the quoted market price for the notes.

0.25% Convertible Senior Notes due May 1, 2013

     On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggregate principal amount of $300.0 million. The notes bear interest at the annual rate of 0.25%, payable semi-annually on May 1 and November 1. The notes are senior unsecured obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt.

     At the election of the holder, the notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of $39.5255 per share. The notes may not be redeemed by Ciena prior to May 5, 2009. At any time on or after May 5, 2009, if the closing sale price of Ciena’s common stock for at least 20 trading days in any 30 consecutive trading day period ending on the date one day prior to the date of the notice of redemption exceeds 130% of the conversion price, Ciena may redeem the notes in whole or in part, at a redemption price in cash equal to the principal amount to be redeemed, plus accrued and unpaid interest.

     If Ciena undergoes a “fundamental change” (as that term is defined in the indenture), holders of notes will have the right, subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to convert his or her notes in connection with a specified fundamental change, in certain circumstances, Ciena will be required to increase the applicable conversion rate, depending on the price paid per share for Ciena common stock and the effective date of the fundamental change transaction.

     At January 26, 2007, the fair value of the outstanding $300.0 million in aggregate principal amount of 0.25% convertible senior notes outstanding was $278.8 million, based on the quoted market price for the notes.

(12) INCOME (LOSS) PER SHARE CALCULATION

     The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per dilutive potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of (i) common shares outstanding, (ii) shares issuable upon vesting of restricted stock units, (iii) shares issuable upon exercise of outstanding stock options, employee stock purchase plan options and warrants using the treasury stock method; and (iv) shares underlying the 0.25% convertible senior notes.

Numerator		Quarter Ended January 31,
		2006				2007
Net income (loss)		$	(6,291	)		$	11,056
Add: Interest expense associated with 0.25% convertible senior notes			—				188
Net income (loss) used to calculate Diluted EPS		$	(6,291	)		$	11,244

Denominator		Quarter Ended January 31,
		2006				2007
Basic weighted average shares outstanding			82,967				84,953
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			—				716
Add: Shares underlying 0.25% convertible senior notes			—				7,590
Dilutive weighted average shares outstanding			82,967				93,259

EPS		Quarter Ended January 31,
		2006				2007
Basic EPS		$	(0.08	)		$	0.13
Diluted EPS		$	(0.08	)		$	0.12

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the first quarter of fiscal 2006, approximately 9.1 million shares, representing the weighted average number of shares underlying outstanding stock options, restricted stock units, warrants and Ciena’s 3.75% convertible notes, are considered anti-dilutive because Ciena incurred net losses during these periods.

     For the first quarter of fiscal 2007, approximately 4.8 million shares, representing the weighted average number of shares underlying outstanding stock options, employee stock purchase plan options, restricted stock units, and warrants are considered anti-dilutive because the exercise price of these equity awards is greater than the average per share closing price on the NASDAQ Stock Market during this period. In addition, approximately 0.7 million shares, representing the weighted average number of shares issuable upon conversion of Ciena’s 3.75% convertible notes, are considered anti-dilutive pursuant to SFAS 128 because the related interest expense on a per common share “if converted” basis exceeds Basic EPS for the period.

     The following table (in thousands except per share amounts) summarizes the shares excluded from the calculation of the denominator for Basic and Diluted EPS due to their anti-dilutive effect:

Shares excluded from EPS Denominator due to anti-dilutive effect		Quarter Ended January 31,
		2006				2007
Shares underlying outstanding stock options, employee stock purchase plan options, warrants and restricted stock units			8,289				4,760
Shares underlying 3.75% convertible notes			797				742
Total excluded due to anti-dilutive effect			9,086				5,502

(13) STOCKHOLDERS’ EQUITY

Call Spread Option

     Concurrent with Ciena’s April 10, 2006 issuance of 0.25% Convertible Senior Notes due May 1, 2013, Ciena purchased a call spread option on its common stock from an affiliate of the underwriter. The call spread option is designed to mitigate dilution from the conversion of the notes to the extent that the market price per share of Ciena common stock upon exercise is greater than the conversion price, subject to a cap.

     The call spread option covers approximately 7.6 million shares of Ciena common stock, which is the number of shares issuable upon conversion of the notes in full. The call spread option effectively has a “lower strike price” of $39.5255 and a “higher strike price” of $45.54025 and is exercisable and expires on May 1, 2013, the maturity date of the notes. Ciena can exercise the call spread option on a net cash basis, a net share basis or a full physical settlement. A net cash settlement would result in Ciena receiving an amount ranging from $0, if the market price per share of Ciena common stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million, if the market price per share of Ciena common stock upon exercise is at or above the higher strike price. Settlement of the call spread option on a net share basis would result in Ciena receiving a number of shares ranging from 0, if the market price per share of Ciena common stock upon exercise is equal to or below the lower strike price, up to approximately 1.0 million shares, if the market price per share of Ciena common stock upon exercise is equal to the higher strike price. The value of the consideration of a net share settlement will be equal to the value upon a net cash settlement. If the market price is between the lower strike price and the higher strike price, in lieu of a net share or net cash settlement, Ciena may elect to receive the full number of shares underlying the call spread option upon payment by Ciena of an aggregate option exercise price of $300.0 million. Should there be an early unwind of the call spread option, the amount of cash or net shares to be received by Ciena will be dependent upon the existing overall market conditions, and on Ciena’s stock price, the volatility of Ciena’s stock and the remaining term of the call spread option.

     The number of shares subject to the call spread option and the lower price and higher strike prices are subject to customary adjustments. The $28.5 million cost of the call spread option was recorded as a reduction in additional paid in capital.

(14) 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 Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for equity awards, 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 Ciena shares issued and outstanding on January 1 of each year, unless the Compensation Committee reduces the amount of the increase in any year. By action of the Compensation Committee, no additional shares were added to the Plan on January 1, 2005, 2006 or 2007. 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 issuance under the 2000 Plan. As of January 31, 2007, there were 4.2 million shares authorized and available for issuance under the 2000 Plan.

Stock Options

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

						Weighted Average
		Options Outstanding				Exercise Price
Balance as of October 31, 2006			7,110			$	48.52
Granted			342				27.03
Exercised			(154	)			19.52
Canceled			(249	)			38.23
Balance as of Janaury 31, 2007			7,049			$	48.47

     The total intrinsic value of options exercised during the first three months of fiscal 2007 was $1.3 million.

     The following table summarizes information with respect to stock options outstanding at January 31, 2007, based on Ciena’s closing stock price on January 26, 2007 of $28.78 per share (shares and intrinsic value in thousands):

						Options Outstanding at January 31, 2007																Vested Options at January 31, 2007
										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	—	$	16.52				905				7.94			$	14.33			$	13,086				362				7.16			$	11.87			$	6,119
$16.53	—	$	17.43				837				8.27				17.19				9,701				310				8.02				17.09				3,626
$17.44	—	$	22.96				841				7.52				21.72				5,935				794				7.41				21.76				5,579
$22.97	—	$	31.36				911				8.26				27.51				1,381				485				6.93				27.49				822
$31.37	—	$	31.71				1,026				5.91				31.70				—				1,002				5.83				31.71				—
$31.72	—	$	46.97				708				6.23				40.82				—				647				5.95				41.35				—
$46.98	—	$	83.13				774				5.18				60.45				—				774				5.18				60.45				—
$83.14	—	$	1,046.50				1,047				3.99				155.33				—				1,047				3.99				155.33				—
$  0.01	—	$	1,046.50				7,049				6.61			$	48.47			$	30,103				5,421				5.94			$	56.87			$	16,146

     As of January 31, 2007, total unrecognized compensation expense related to unvested stock options was $14.6 million. This expense is expected to be recognized over a weighted-average period of 1.8 years.

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 based on the fair value of the common stock and recognizes the expense ratably over the requisite period. The following table is a summary of Ciena’s restricted stock unit activity, based on Ciena’s closing stock price as January 26, 2007 of $28.78 per share (shares and fair value in thousands):

						Weighted Average
		Restricted Stock				Grant Date Fair				Aggregate Fair
		Units Outstanding				Value Per Share				Value
Balance as of October 31, 2006			162			$	22.99			$	3,829
Granted			1,149
Converted			(11	)
Canceled or forfeited			(13	)
Balance as of January 31, 2007			1,287			$	27.28			$	37,062

     The total fair value of restricted stock units converted during the first three months of fiscal 2007 was $0.5 million.

     As of January 31, 2007, total unrecognized compensation expense related to restricted stock units was $33.2 million. This expense is expected to be recognized over a weighted-average period of 2.2 years.

2003 Employee Stock Purchase Plan

     In March 2003, Ciena shareholders approved the ESPP, which has a ten-year term and originally authorized the issuance of 2.9 million shares. At the 2005 annual meeting, Ciena shareholders approved an amendment increasing the number of shares available to 3.6 million and adopting an “evergreen” provision that on December 31 of each year provides for an increase in the number of shares available by up to 0.6 million shares, provided that the total number of shares available shall not exceed 3.6 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 3.4 million

     Under the ESPP, eligible employees may enroll in an offer period during certain open enrollment periods. New offer periods begin March 16 and September 16 of each year. Prior to the offer period commencing September 15, 2006, (i) each offer period consisted of four, six-month purchase periods during which employee payroll deductions were accumulated and used to purchase shares of common stock; and (ii) the purchase price of the shares was 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 was lower. In addition, if the fair market value on the purchase date was less than the fair market value on the first day of an offer period, then participants automatically commenced a new offer period.

     On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to shorten the offer period under the ESPP to six months. As a result of this change, the offer period and any purchase period will be the same six-month period. Under the amended ESPP, the applicable purchase price equals 95% of the fair market value of Ciena common stock on the last day of each purchase period. Employees enrolled with offer periods commenced prior to September 15, 2006, will be permitted to complete the remaining purchase periods in their current offer period. These amendments were intended to enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future offering periods.

		ESPP shares available				Intrinisic value at
		for issuance				exercise date
Balance as of October 31, 2006			2,976
Evergreen provision			571
Issued			—				—
Balance as of Janaury 31, 2007			3,547

     As of January 31, 2007, unrecognized compensation expense related to the ESPP was $0.3 million. This expense is expected to be recognized over a weighted-average period of 1.0 years.

Share-Based Compensation under SFAS 123(R) for the first quarter of fiscal 2006 and first quarter of fiscal 2007

     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.

     The following table summarizes share-based compensation expense under SFAS 123(R) for the first quarter of fiscal 2006 and the first quarter of fiscal 2007 which was allocated as follows (in thousands):

		Quarter Ended January 31,
		2006				2007
Product costs		$	135			$	221
Service costs			188				193
Share-based compensation expense included in cost of sales			323				414
Research and development			1,637				743
Sales and marketing			1,046				1,040
General and administrative			821				1,000
Share-based compensation expense included in operating expense			3,504				2,783
Stock-based compensation expense capitalized in inventory, net			356				92
Total share-based compensation		$	4,183			$	3,289

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

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

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

     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:

		Quarter Ended January 31,
		2006				2007
Expected volatility			62.0	%			55.8	%
Risk-free interest rate			4.3% - 4.5	%			4.6% - 5.0	%
Expected life (years)			6.0 - 6.1				6.0 - 6.4
Expected dividend yield			0.0	%			0.0	%

     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; and options are non-transferable and non-hedgeable.

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

     Assumptions for Restricted Stock Unit Awards under SFAS 123(R)

     The fair value of each restricted stock unit award is based on the fair value of the common stock on the date of grant. The weighted average fair value of each restricted stock unit granted under Ciena’s stock option plans for the first three months of fiscal 2006 and the first three months of fiscal 2007 was $18.29 and $27.88, respectively.

     Assumptions for Employee Stock Purchase Plan Awards under SFAS 123(R)

     The amendments to the ESPP for offer periods on or after September 15, 2006 described above were intended to enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future offering periods. Employees enrolled with offer periods that commenced prior to September 15, 2006, however, are permitted to complete the remaining purchase periods in their current offer period. For these continuing offer periods, the fair value is determined as of the grant date, using the graded vesting approach. Under the graded vesting approach, the 24-month ESPP offer period, which consists of four, six-month purchase periods, is treated for valuation purpose as four separate option tranches with individual lives of six, 12, 18 and 24 months, each commencing on the initial grant date. Each tranche is expensed straight-line over its individual life.

(15) COMPREHENSIVE INCOME (LOSS)

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

		Quarter ended January 31,
		2006				2007
Net income (loss)		$	(6,291	)		$	11,056
Change in unrealized loss on available-for-sale securities			1,240				(505	)
Change in accumulated translation adjustments			(10	)			(162	)
Total comprehensive income (loss)		$	(5,061	)		$	10,389

(16) ENTITY WIDE DISCLOSURES

     The following table reflects Ciena’s geographic distribution of revenue from customers, identifying the specific country where revenue attributable to that country during the applicable period is greater than 10% of total revenue. Except as otherwise identified below, revenue attributable to geographic regions outside of the United States is reflected as International revenue. For the periods below, Ciena’s geographic distribution of revenue was as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2006				%*				2007				%*
United States		$	102,670				85.3			$	119,603				72.4
United Kingdom			n/a				—				20,646				12.5
International			17,760				14.7				24,852				15.1
Total		$	120,430				100.0			$	165,101				100.0

n/a    Denotes less than 10% for the period

     The following table reflects Ciena’s geographic distribution of equipment, furniture and fixtures, identifying the specific country where the assets attributable to that country are greater than 10% of total equipment, furniture and fixtures. Except as otherwise identified below, equipment, furniture and fixtures attributable to geographic regions outside of the United States are reflected as International. For the periods below, Ciena’s geographic distribution of equipment, furniture and fixtures was as follows (in thousands, except percentage data):

		October 31,								January 31,
		2006				%*				2007				%*
United States		$	21,934				74.5			$	24,204				73.7
India			n/a				—				3,499				10.6
International			7,493				25.5				5,164				15.7
Total		$	29,427				100.0			$	32,867				100.0

n/a    Denotes less than 10% for the period

     For the periods below, product portfolio distribution of revenue was as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2006				%*				2007				%*
Optical networking products		$	73,404				61.1			$	127,199				77.0
Broadband networking products			24,983				20.7				9,409				5.7
Data networking products			6,057				5.0				4,881				3.0
Network and services management software, and other			1,497				1.2				4,793				2.9
Global network services			14,489				12.0				18,819				11.4
Total		$	120,430				100.0			$	165,101				100.0

     For the periods below, customers accounting for at least 10% of Ciena’s revenue were as follows (in thousands, except percentage data):

		Quarter Ended January 31,
		2006				%*				2007				%*
Company A		$	13,990				11.6				n/a				—
Company B			23,494				19.5				18,846				11.4
Company C			n/a				—				30,992				18.8
Company D			n/a				—				31,956				19.3
Company E			17,073				14.2				n/a				—
Total		$	54,557				45.3			$	81,794				49.5

(17) CONTINGENCIES

Foreign Tax Contingencies

     Ciena has received assessment notices totaling $6.6 million from the Mexican tax authorities asserting deficiencies in payments between 2001 and 2005 related primarily to income taxes and import taxes and duties. In October 2006, Ciena filed administrative petitions disputing these assessments. In February 2007, Ciena received notification that one of its petitions had been denied. Ciena intends to file a judicial petition appealing the assessment. As of January 31, 2007, Ciena had accrued liabilities of $0.8 million related to these contingencies, which are reported as a component of other current accrued liabilities. As of October 31, 2006, Ciena had accrued liabilities of $0.7 million related to these contingencies, which are reported as a component of other current accrued liabilities. As of January 31, 2007, Ciena estimates that it could be exposed to possible losses of up to $5.8 million, for which it has not accrued liabilities, related to this contingency. Ciena has not accrued these liabilities because it does not deem such losses probable. Ciena continues to

evaluate the likelihood of probable and reasonably possible losses, if any, related to these assessments. As a result, future increases or decreases to our accrued liabilities may be necessary and will be recorded in the period when such amounts are probable and estimable.

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 September 11, 2006, the PTO issued a Notice of Intent to Issue a Reexamination Certificate and Statement of Reasons for Patentability/Confirmation, stating its intent to confirm certain claims of the ‘016 Patent. Thereafter, on September 19, 2006, Litton Systems filed a status report in which it requested that the district court lift the stay of the case, which request was denied by the district court on October 13, 2006. 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 our 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, if approved, the plaintiffs’ cases against the issuers would be dismissed, the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to assign or surrender to the plaintiffs certain claims the issuers may have against the underwriters. The settlement agreement does not require Ciena to pay any amount toward the settlement or to make any other payments. In October 2004, the district court certified a class with respect to the Section 10(b) claims in six “focus cases” selected out of all of the consolidated cases, which cases did not include Ciena, and which decision was appealed by the underwriter defendants to the U.S. Court of Appeals for the Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs and issuer defendants 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 revised stipulated settlement agreement, and approving and setting dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006, at which time the court took the matter under advisement. If the court determines that the settlement is fair to the class members, the settlement will be approved. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the district court’s grant of class certification in the six focus cases. Because the settlement agreement involves certification of a settlement class as part of the approval process, the impact of the Second Circuit’s decision on the settlement remains unclear.

     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 its 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 10, 2007, 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 is a supplier of communications networking equipment, software and services that support the delivery and transport of voice, video and data services. Our products are used in communications networks operated by telecommunications service providers, cable operators, governments and enterprises around the globe. We specialize in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling integrated services offerings, our optical, data and broadband access platforms create business and operational value for our customers.

     The first quarter of fiscal 2007 represents our twelfth consecutive quarter of sequential revenue growth and our second consecutive profitable quarter. Our progress over the last three years is a result of improving conditions in the markets for our products and our continued investment in our business to better position ourselves to take advantage of these market improvements. Our strategy has included efforts to broaden our product portfolio and introduce products and product features designed to assist our customers to transition to next-generation network architectures. At the same time we have taken steps to realize cost efficiencies in our engineering and product manufacturing operations. These efforts have resulted in our steady growth in revenues, more stabilized operating expense and improved gross margin in recent periods.

     Revenue was $165.1 million for the first quarter of fiscal 2007, representing a 37.1% increase from $120.4 million in the first quarter of fiscal 2006 and a 3.2% sequential increase from $160.0 million in the fourth quarter of fiscal 2006. International revenue represented 27.6% of revenue in the first quarter of fiscal 2007, an increase from 14.7% in the first quarter of 2006 and a decrease from 31.7% in the fourth quarter of fiscal 2006. While we believe that current market conditions and customer demand will enable us to continue to increase our revenue during fiscal 2007, our results remain susceptible to fluctuation from quarter to quarter. We expect that a sizable portion of our revenue will come from larger network builds. These projects often involve equipment orders that come in large batches and contract terms that may result in recognizing significant amounts of revenue at one time. Together these factors can exacerbate quarterly fluctuations in revenue.

     The telecommunications industry has experienced a period of consolidation, including a number of companies that have been significant customers of ours during prior periods. In December 2006, AT&T completed its acquisition of BellSouth. As a result, AT&T is likely to represent a greater percentage of our revenue in fiscal 2007. For the first quarter of fiscal 2007, three customers accounted for greater than 10% of our revenue and 49.5% in the aggregate. Consolidation of some of our largest customers has presented both opportunities and challenges across our product lines. While we believe that these mergers have provided additional sales opportunities for our optical networking products, revenue from our broadband access products has been negatively affected by these mergers in recent quarters. We expect these mergers will result in further concentration of our revenue and, over the long term, may result in additional risks to our business, including increased pricing pressure and exposure to changes in network strategies or reductions in capital expenditures affecting network investments.

     Gross margin for the first quarter of fiscal 2007 was 44.6%, up from 41.9% in the first quarter of fiscal 2006 and down slightly from 45.5% in the fourth quarter of fiscal 2006. Although our gross margin has been relatively stable in recent quarters, it remains susceptible to fluctuation as a result of sales volume and customer and product mix in any quarter. Price competition and an increasingly competitive landscape may also contribute to pressure on gross margin in fiscal 2007 when compared with the levels achieved during the second and third quarters of fiscal 2006. Gross margin in the near term may

also be affected by our introduction of new products, particularly if we encounter low initial sales volumes and high initial production costs.

     For the first quarter of fiscal 2007, Ciena had net income of $11.1 million, or $0.12 per diluted share. This compares with a net loss of $6.3 million, or $.08 per share for the first quarter of fiscal 2006, and a net income of $13.1 million, or $0.14 per diluted share for the fourth quarter of fiscal 2006.

     Operating expense for the first quarter of fiscal 2007 was $70.8 million, an increase from $65.6 million in the first quarter of fiscal 2006 and $68.9 million in the fourth quarter of fiscal 2006. Operating expense for the first quarter of fiscal 2006 included a gain 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. We expect quarterly operating expense to increase from the first quarter of fiscal 2007 during the remainder of fiscal 2007 as we fund the growth of our business through research and development initiatives, increased hiring and the expansion of our development operations in India.

     We used $11.3 million in cash for operations during the first quarter of fiscal 2007. This was primarily due to an increase in our accounts receivable balance. Our accounts receivable balance at the end of the first quarter of fiscal 2007 was $139.4 million, an increase of $32.3 million from the end of the fourth quarter of fiscal 2006.This increase was due to higher sales volume, shipments made late in the first quarter, contractual acceptance terms for turnkey deployments affecting the timing of invoicing and longer payment terms, primarily associated with our international revenue.

     At the end of the first quarter of fiscal 2007, $542.3 million in aggregate principal amount remained outstanding on our 3.75% convertible notes. This remaining principal balance becomes due and payable on February 1, 2008. See Note 11 to our financial statements for a discussion of our convertible notes and “Liquidity and Capital Resources” below for a discussion of our cash and cash equivalents, short-term investments and long-term investments at January 31, 2007.

     As of January 31, 2007, headcount was 1,588 up from 1,485 at October 31, 2006 and 1,442 at January 31, 2006.

Results of Operations

Three months ended January 31, 2006 compared to three months ended January 31, 2007

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 first quarter of fiscal 2006 to first quarter of fiscal 2007.

		Quarter Ended January 31,																Increase
		2006				%*				2007				%*				(decrease)				%**
Revenue:
Products		$	105,941				88.0			$	146,282				88.6			$	40,341				38.1
Services			14,489				12.0				18,819				11.4				4,330				29.9
Total revenue			120,430				100.0				165,101				100.0				44,671				37.1
Costs:
Products			60,399				50.1				74,979				45.4				14,580				24.1
Services			9,576				8.0				16,494				10.0				6,918				72.2
Total cost of goods sold			69,975				58.1				91,473				55.4				21,498				30.7
Gross profit		$	50,455				41.9			$	73,628				44.6			$	23,173				45.9