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 July 31, 2007

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 August 24, 2007
common stock, $.01 par value		85,964,108

 

 

CIENA CORPORATION

INDEX

FORM 10-Q

				PAGE NUMBER
		PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Condensed Consolidated Statements of Operations for the quarters and nine months ended July 31, 2006 and July 31, 2007 (Unaudited)			3
		Condensed Consolidated Balance Sheets at October 31, 2006 and July 31, 2007 (Unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2006 and July 31, 2007 (Unaudited)			5
		Notes to Condensed Consolidated Financial Statements (Unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			40
Item 4.		Controls and Procedures			40
		PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			41
Item 1A.		Risk Factors			42
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3.		Defaults Upon Senior Securities			51
Item 4.		Submission of Matters to a Vote of Security Holders			51
Item 5.		Other Information			51
Item 6.		Exhibits			55
		Signatures			56

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

		Quarter Ended July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Revenues:
Products		$	137,809			$	182,143			$	360,958			$	501,637
Services			14,690				22,808				43,146				61,942
Total revenue			152,499				204,951				404,104				563,579
Costs:
Products			70,356				84,383				189,712				250,681
Services			10,479				22,903				29,367				59,775
Total cost of goods sold			80,835				107,286				219,079				310,456
Gross profit			71,664				97,665				185,025				253,123
Operating expenses:
Research and development			26,190				31,671				84,508				93,166
Selling and marketing			24,903				30,303				78,132				85,360
General and administrative			16,217				14,564				37,359				36,572
Amortization of intangible assets			6,295				6,295				18,885				18,885
Restructuring costs (recoveries)			11,008				(1,196	)			16,037				(2,396	)
Long-lived asset impairments			—				—				(6	)			—
Recovery of doubtful accounts, net			(139	)			—				(2,990	)			(10	)
Gain on lease settlement			—				—				(11,648	)			—
Total operating expenses			84,474				81,637				220,277				231,577
Income (loss) from operations			(12,810	)			16,028				(35,252	)			21,546
Interest and other income, net			14,045				19,464				34,504				51,206
Interest expense			(6,148	)			(6,931	)			(18,016	)			(19,227	)
Gain on equity investments, net			948				592				215				592
Gain on extinguishment of debt			—				—				7,052				—
Income (loss) before income taxes			(3,965	)			29,153				(11,497	)			54,117
Provision for income taxes			320				841				989				1,739
Net income (loss)		$	(4,285	)		$	28,312			$	(12,486	)		$	52,378
Basic net income (loss) per common share		$	(0.05	)		$	0.33			$	(0.15	)		$	0.61
Diluted net income (loss) per potential common share		$	(0.05	)		$	0.29			$	(0.15	)		$	0.57
Weighted average basic common shares outstanding			84,197				85,651				83,568				85,268
Weighted average dilutive potential common shares outstanding			84,197				101,568				83,568				96,189

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,				July 31,
		2006				2007
ASSETS
Current assets:
Cash and cash equivalents		$	220,164			$	724,271
Investments in marketable debt securities			628,393				1,004,492
Accounts receivable, net			107,172				117,806
Inventories, net			106,085				105,141
Prepaid expenses and other			36,372				43,382
Total current assets			1,098,186				1,995,092
Investments in marketable debt securities			351,407				8,354
Equipment, furniture and fixtures, net			29,427				41,462
Goodwill			232,015				232,015
Other intangible assets, net			91,274				69,486
Other assets			37,404				67,270
Total assets		$	1,839,713			$	2,413,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	39,277			$	51,798
Accrued liabilities			79,282				92,862
Restructuring liabilities			8,914				7,164
Unfavorable lease commitments			8,512				8,406
Income taxes payable			5,981				6,676
Deferred revenue			19,637				33,146
Convertible notes payable			—				542,262
Total current liabilities			161,603				742,314
Deferred revenue			21,039				26,978
Restructuring liabilities			26,720				21,188
Unfavorable lease commitments			32,785				26,473
Other obligations			1,678				1,503
Convertible notes payable			842,262				800,000
Total liabilities			1,086,087				1,618,456
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 85,948,654 shares issued and outstanding			849				859
Additional paid-in capital			5,505,853				5,495,915
Unrealized loss on investments, net			(496	)			(279	)
Translation adjustment			(580	)			(1,650	)
Accumulated deficit			(4,752,000	)			(4,699,622	)
Total stockholders’ equity			753,626				795,223
Total liabilities and stockholders’ equity		$	1,839,713			$	2,413,679

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

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

		Nine Months Ended July 31,
		2006				2007
Cash flows from operating activities:
Net income (loss)		$	(12,486	)		$	52,378
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Early extinguishment of debt			(7,052	)			—
Amortization of premium (discount) on marketable securities			2,058				(8,093	)
Non-cash loss from equity investments			733				—
Depreciation of equipment, furniture and fixtures; and amortization of leasehold improvements			13,173				9,407
Stock compensation			10,953				14,258
Amortization of intangible assets			21,788				21,788
Provision for inventory excess and obsolescence			6,158				8,860
Provision for warranty			10,885				8,910
Other			1,236				1,754
Changes in assets and liabilities:
Accounts receivable			(16,852	)			(10,634	)
Inventories			(52,646	)			(7,916	)
Prepaid expenses and other			1,282				(16,776	)
Accounts payable, accrued liabilities and other obligations			(42,744	)			3,316
Income taxes payable			70				695
Deferred revenue			(917	)			19,448
Net cash provided by (used in) operating activities			(64,361	)			97,395
Cash flows from investing activities:
Additions to equipment, furniture and fixtures			(13,332	)			(21,442	)
Restricted cash			1,347				(11,904	)
Purchases of available for sale marketable debt securities			(403,664	)			(564,399	)
Maturities of available for sale marketable debt securities			485,916				539,663
Minority equity investments, net			948				411
Net cash provided by (used in) investing activities			71,215				(57,671	)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes			300,000				500,000
Repurchase of 3.75% convertible notes			(98,410	)			—
Debt issuance costs			(7,990	)			(11,431	)
Purchase of call spread option			(28,457	)			(42,500	)
Proceeds from exercise of stock options			22,225				18,314
Net cash provided by financing activities			187,368				464,383
Net increase in cash and cash equivalents			194,222				504,107
Cash and cash equivalents at beginning of period			358,012				220,164
Cash and cash equivalents at end of period		$	552,234			$	724,271

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 that 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. Fiscal 2007 consists of 53 weeks.

     During the first nine months of fiscal 2007, Ciena identified certain immaterial adjustments and recorded expenses of $0.7 million related to its provision for warranty and $0.3 million related to service costs, each of which related to fiscal 2006. Ciena’s revenue for the first nine months of fiscal 2007 is understated by $0.8 million due to an equivalent overstatement of revenue during fiscal 2006. Ciena has determined that these out of period adjustments were not material to the current period or any prior period in fiscal 2006 or 2007, and Ciena does not believe that these adjustments will be material to its results for fiscal 2007.

(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 investments represent investments in marketable debt securities that 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.

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 its 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.

Minority Equity Investments

     Ciena has certain minority equity investments in privately held technology companies that are classified as other assets. 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.

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 are based upon the present value of the assumed lease obligations based upon rental rates and interest rates at the time of the acquisitions. Subject to early termination or settlement, Ciena expects to pay these unfavorable lease commitments over the respective lease terms. See Note 18 below.

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.

     A large percentage of Ciena’s revenue is derived from sales to a small number of telecommunications service providers. Recent consolidation among Ciena’s customers has magnified these concentrations. Consequently, Ciena’s accounts receivable is concentrated among these customers. See Notes 5 and 16 below.

     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 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. 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.

Warranty Accruals

     Ciena provides for the estimated costs to fulfill customer warranty upon the recognition of the related revenue. The warranty liability is 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 receivable 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 receivable, 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 receivable.

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), as interpreted by SAB 107, which requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values. SFAS 123(R) requires companies to estimate the fair value of share-based awards on the date of grant.

     Ciena estimates the fair value of option-based awards on the date of grant using the Black-Scholes option-pricing model. Fair value is affected by Ciena’s stock price as well as assumptions regarding a number of subjective variables, including expected stock price volatility over the term of the award and projected employee stock option exercise behavior.

     Ciena estimates the fair value of each restricted stock unit award based on the fair value of the underlying common stock at the time of grant.

     In each case, the fair value is recognized as share-based compensation expense over the relevant vesting or performance period. Ciena only recognizes expense to its consolidated statement of operations for those options or shares that ultimately are expected to vest and, as a result, compensation expense reflects a reduction for estimated forfeitures of share-based awards.

     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. Ciena reports its 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 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.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits an entity to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. 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 nine months ending July 31, 2007 (in thousands):

		Workforce				Consolidation of
		reduction				excess facilities				Total
Balance at October 31, 2006		$	—			$	35,634			$	35,634
Additional liability recorded			72	(a)			—				72
Adjustment to previous estimates			—				(2,468	)(b)			(2,468	)
Cash payments			(72	)			(4,814	)			(4,886	)
Balance at July 31, 2007		$	—			$	28,352			$	28,352
Current restructuring liabilities		$	—			$	7,164			$	7,164
Non-current restructuring liabilities		$	—			$	21,188			$	21,188

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

		Workforce				Consolidation of
		reduction				excess facilities				Total
Balance at October 31, 2005		$	270			$	69,507			$	69,777
Additional reserve recorded			4,523	(a)			1,782	(a)			6,305
Adjustments to previous estimates			—				9,732	(b)			9,732
Lease settlement			—				(11,648	)(c)			(11,648	)
Cash payments			(4,581	)			(31,954	)			(36,535	)
Balance at July 31, 2006		$	212			$	37,419			$	37,631
Current restructuring liabilities		$	212			$	9,201			$	9,413
Non-current restructuring liabilities		$	—			$	28,218			$	28,218

(4) MARKETABLE DEBT SECURITIES

     Marketable debt securities are comprised of the following (in thousands):

		July 31, 2007
						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Fair Value
Corporate bonds		$	334,964			$	87			$	202			$	334,849
Asset backed obligations			155,029				41				130				154,940
Commercial paper			455,440				—				4				455,436
US government obligations			42,643				16				38				42,621
Certificate of deposit			25,000				—				—				25,000
		$	1,013,076			$	144			$	374			$	1,012,846
Short-term			1,004,712				144				364				1,004,492
Long-term			8,364				—				10				8,354
		$	1,013,076			$	144			$	374			$	1,012,846

		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			629,269				66				942				628,393
Long-term			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 July 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 following table displays gross unrealized losses at July 31, 2007 and October 31, 2006 (in thousands):

		July 31, 2007
		Unrealized Losses								Unrealized Losses
		Less Than 12 Months								12 Months or Greater								Total
		Gross								Gross								Gross
		Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value
Corporate bonds		$	154			$	198,909			$	48			$	29,396			$	202			$	228,305
Asset backed obligations			96				86,142				34				25,981				130				112,123
Commercial paper			4				11,291				—				—				4				11,291
US government obligations			4				11,207				34				16,483				38				27,690
		$	258			$	307,549			$	116			$	71,860			$	374			$	379,409

		October 31, 2006
		Unrealized Losses								Unrealized Losses
		Less Than 12 Months								12 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
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 July 31, 2007 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	1,004,712			$	1,004,492
Due in 1-2 years			8,364				8,354
		$	1,013,076			$	1,012,846

(5) ACCOUNTS RECEIVABLE

     As of July 31, 2007, trade accounts receivable, net of allowance for doubtful accounts receivable, included five customers that accounted for 23.7%, 14.7%, 11.2%, 11.1% and 11.1% of net trade accounts receivable, respectively. As of October 31, 2006, the trade accounts receivable, net of allowance for doubtful accounts receivable, included two customers that accounted for 25.4% and 21.8% of the net trade accounts receivable, respectively.

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

(6) INVENTORIES

     Inventories are comprised of the following (in thousands):

		October 31,				July 31,
		2006				2007
Raw materials		$	29,627			$	31,231
Work-in-process			9,156				6,586
Finished goods			89,628				91,455
			128,411				129,272
Provision for inventory excess and obsolescence			(22,326	)			(24,131	)
		$	106,085			$	105,141

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first nine months of fiscal 2007, Ciena recorded a provision for inventory reserves of $8.9 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 allowance for excess inventory and obsolete inventory during the first nine months of fiscal 2007 (in thousands):

		Inventory Allowance
Balance as of October 31, 2006		$	22,326
Provision for excess inventory, net			8,860
Actual inventory scrapped			(7,055	)
Balance as of July 31, 2007		$	24,131

     During the first nine months of fiscal 2006, Ciena recorded a provision for inventory reserves of $6.2 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 nine months of fiscal 2006 (in thousands):

		Inventory Allowance
Reserve balance as of October 31, 2005		$	22,595
Provision for excess inventory, net			6,158
Actual inventory scrapped			(8,210	)
Reserve balance as of July 31, 2006		$	20,543

(7) PREPAID EXPENSES AND OTHER

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

		October 31,				July 31,
		2006				2007
Interest receivable		$	8,547			$	7,212
Prepaid VAT and other taxes			9,467				14,064
Deferred deployment expenses			1,948				5,361
Prepaid expenses			6,497				9,102
Restricted cash			6,990				2,977
Other non-trade receivables			2,923				4,666
		$	36,372			$	43,382

(8) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				July 31,
		2006				2007
Equipment, furniture and fixtures		$	253,953			$	270,056
Leasehold improvements			36,203				36,833
			290,156				306,889
Accumulated depreciation and amortization			(260,729	)			(265,427	)
		$	29,427			$	41,462

(9) OTHER INTANGIBLE ASSETS

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

		October 31,												July 31,
		2006												2007
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Developed technology		$	139,983			$	(87,577	)		$	52,406			$	139,983			$	(100,384	)		$	39,599
Patents and licenses			47,370				(25,463	)			21,907				47,370				(30,146	)			17,224
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			45,981				(29,020	)			16,961				45,981				(33,318	)			12,663
		$	233,334							$	91,274			$	233,334							$	69,486

     The aggregate amortization expense of other intangible assets was $21.8 million for the first nine months of fiscal 2006 and 2007. The following table represents the expected future amortization of other intangible assets as follows (in thousands):

2007 (remaining three months)		$	7,262
2008			27,840
2009			19,254
2010			14,500
2011			630
		$	69,486

(10) OTHER BALANCE SHEET DETAILS

     Other long-term assets (in thousands):

		October 31,				July 31,
		2006				2007
Maintenance spares inventory, net		$	14,724			$	19,283
Deferred debt issuance costs			10,306				19,104
Investments in privately held companies			6,489				6,671
Restricted cash			3,227				19,144
Other			2,658				3,068
		$	37,404			$	67,270

     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 $2.2 million and $2.8 million during the first nine months of fiscal 2006 and fiscal 2007, respectively.

Accrued liabilities (in thousands):

		October 31,				July 31,
		2006				2007
Warranty		$	31,751			$	32,535
Accrued compensation, payroll related tax and benefits			24,102				31,225
Accrued interest payable			5,502				10,944
Other			17,927				18,158
		$	79,282			$	92,862

     The following table summarizes the activity in Ciena’s accrued warranty for the first nine months of fiscal 2006 and 2007 (in thousands):

Nine months ended		Beginning												Balance at
July 31,		Balance				Provisions				Settlements				end of period
2006		$	27,044				10,885				(7,819	)		$	30,110
2007		$	31,751				8,910				(8,126	)		$	32,535

Deferred revenue (in thousands):

		October 31,				July 31,
		2006				2007
Products		$	4,276			$	14,231
Services			36,400				45,893
			40,676				60,124
Less current portion			(19,637	)			(33,146	)
Long-term deferred revenue		$	21,039			$	26,978

(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. The $542.3 million in aggregate principal amount remaining outstanding on the 3.75% convertible notes is classified as a current liability on Ciena’s balance sheet at July 31, 2007.

     At July 27, 2007, the fair value of the outstanding $542.3 million in aggregate principal amount of 3.75% convertible notes was $535.1 million, 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. Interest is payable on May 1 and November 1 of each year. 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, 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 July 27, 2007, the fair value of the outstanding $300.0 million in aggregate principal amount of 0.25% convertible senior notes was $314.3 million, based on the quoted market price for the notes.

0.875% Convertible Senior Notes due June 15, 2017

     On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and December 15 of each year, beginning on December 15, 2007. 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, notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not redeemable by Ciena prior to maturity.

     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.

     Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call spread option on its common stock that is intended to limit exposure to potential dilution from conversion of the notes. At July 27, 2007, the fair value of the outstanding $500.0 million in aggregate principal amount of 0.875% convertible senior notes was $529.7 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% and 0.875% convertible senior notes. Because they were issued on June 11, 2007, Diluted EPS reflects only a portion of the shares underlying the 0.875% convertible notes for the third quarter and nine months ended July 31, 2007.

Numerator

		Quarter Ended July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Net income (loss)		$	(4,285	)		$	28,312			$	(12,486	)		$	52,378
Add: Interest expense associated with 0.25% convertible senior notes			—				469				—				1,408
Add: Interest expense associated with 0.875% convertible senior notes			—				783				—				783
Net income (loss) used to calculate Diluted EPS		$	(4,285	)		$	29,564			$	(12,486	)		$	54,569

Denominator

		Quarter Ended July 31,								Nine Months Ended July 31,
			2006				2007				2006				2007
Basic weighted average shares outstanding			84,197				85,651				83,568				85,268
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			—				1,482				—				1,066
Add: Shares underlying 0.25% convertible senior notes			—				7,590				—				7,590
Add: Shares underlying 0.875% convertible senior notes			—				6,845				—				2,265
Dilutive weighted average shares outstanding			84,197				101,568				83,568				96,189

EPS

		Quarter Ended July 31,								Nine Months Ended July 31,
			2006				2007				2006				2007
Basic EPS		$	(0.05	)		$	0.33			$	(0.15	)		$	0.61
Diluted EPS		$	(0.05	)		$	0.29			$	(0.15	)		$	0.57

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the quarter and nine months ended July 31, 2006, approximately 13.6 million and 9.1 million shares, respectively, representing the weighted average number of shares underlying outstanding stock options, restricted stock units, warrants and convertible notes, are considered anti-dilutive because Ciena incurred net losses during these periods.

     For the quarter and nine months ended July 31, 2007, approximately 3.1 million shares and 4.2 million shares, respectively, 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, for each of the quarter and nine months ended July 31, 2007, 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 periods.

     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 July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Shares underlying outstanding stock options, employee stock purchase plan options, warrants and restricted stock units			5,298				3,087				5,309				4,114
Shares underlying 3.75% convertible notes			742				742				760				742
Shares underlying 0.25% convertible senior notes			7,590				—				3,069				—
Total excluded due to anti-dilutive effect			13,630				3,829				9,138				4,856

(13) STOCKHOLDERS’ EQUITY

Call Spread Option

     Ciena holds two call spread options on its common stock relating to the shares issuable upon conversion of two issues of its convertible notes. These call spread options are designed to mitigate exposure to potential dilution from the conversion of the notes. Ciena purchased a call spread option relating to the 0.25% Convertible Senior Notes due May 1, 2013 for $28.5 million during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the 0.875% Convertible Senior Notes due June 15, 2017 for $42.5 million during the third quarter of fiscal 2007. In each case, the call spread options were purchased at the time of the notes offering from an affiliate of the underwriter. The cost of each call spread option was recorded as a reduction in additional paid in capital.

     Each call spread option is exercisable, upon maturity of the relevant issue of convertible notes, for such number of shares of Ciena common stock issuable upon conversion of that series of notes in full. Each call spread option has a “lower strike price” equal to the conversion price for the notes and a “higher strike price” that serves to cap the amount of dilution protection provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net share basis. The value of the consideration of a net share settlement will be equal to the value upon a net cash settlement and can range 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 (in the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or above the higher strike price. If the market price on the date of exercise is between the lower strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive the full number of shares underlying the call spread option by paying the aggregate option exercise price, which is equal to the original principal outstanding on that series of notes. Should there be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena will depend 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 options and the lower and higher strike prices are subject to customary adjustments.

(14) SHARE-BASED COMPENSATION EXPENSE

     On November 1, 2005, Ciena adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values. Ciena currently grants share-based awards under its 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 is a shareholder approved plan that 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 conditions and any 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. No additional shares were added to the Plan as a result of this provision in 2005, 2006 or 2007. In addition to the evergreen provision, any shares subject to awards under the ONI 1997 Stock Plan, ONI 1998 Equity Incentive Plan, or ONI 1999 Equity Incentive Plan that are forfeited or cancelled are available for issuance under the 2000 Plan. As of July 31, 2007, there were 4.1 million shares authorized and available for issuance under the 2000 Plan.

     Stock Options

     Outstanding stock option awards to employees are generally subject to time-based vesting restrictions and vest incrementally over a four-year period, with awards subject to 12 months of accelerated vesting upon a change in control. The fair value of each option is recognized as stock-based compensation expense on a straight-line basis over the requisite service period. 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 July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Expected volatility			61.5%				55.8%				61.5%				55.8%
Risk-free interest rate			5.0% - 5.1%				4.8% - 5.1%				4.3% - 5.1%				4.4% - 5.1%
Expected life (years)			6.0 - 6.1				6.0 - 6.1				5.5 - 6.1				6.0 - 6.1
Expected dividend yield			0.0%				0.0%				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 for U.S. Treasury bonds 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 calculates the expected life using the simplified method 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.

     A dividend yield assumption of 0% is used based on Ciena’s lack of dividend history and because Ciena does not have expect to make dividend payments in the foreseeable future.

     The following table is a summary of Ciena’s stock option activity during fiscal 2007 (shares in thousands):

						Weighted
						Average
		Options				Exercise
		Outstanding				Price
Balance as of October 31, 2006			7,110			$	48.52
Granted			515				28.21
Exercised			(796	)			21.52
Canceled			(362	)			39.18
Balance as of July 31, 2007			6,467			$	50.75

     The total intrinsic value of options exercised during the first nine months of fiscal 2007 was $9.1 million.

     The following table summarizes information with respect to stock options outstanding at July 31, 2007, based on Ciena’s closing stock price on July 27, 2007 of $36.21 per share (shares and intrinsic value in thousands):

								Options Outstanding at July 31, 2007																Vested Options at July 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				758				7.55			$	14.65			$	16,345				340				6.99			$	12.73			$	7,971
$16.53		—		$	17.43				714				7.81				17.20				13,565				313				7.62				17.12				5,977
$17.44		—		$	22.96				658				7.03				21.77				9,504				617				6.91				21.80				8,899
$22.97		—		$	31.36				937				8.11				27.72				7,959				442				6.68				27.53				3,834
$31.37		—		$	31.71				880				5.43				31.70				3,969				860				5.35				31.71				3,870
$31.72		—		$	46.97				717				6.05				40.53				197				648				5.69				41.09				106
$46.98		—		$	83.13				768				4.68				60.51				—				768				4.68				60.51				—
$83.14		—		$	1,046.50				1,035				3.50				155.63				—				1,035				3.50				155.63				—
$  0.01		—		$	1,046.50				6,467				6.16			$	50.75			$	51,539				5,023				5.47			$	59.08			$	30,657

     As of July 31, 2007, total unrecognized compensation expense related to unvested stock options was $12.9 million. This expense is expected to be recognized over a weighted-average period of 1.7 years.

     Restricted Stock Units

     A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena’s outstanding restricted stock unit awards are subject to time-based vesting conditions or performance-based vesting conditions.

     Awards subject to time-based conditions typically vest in increments over a four-year period. Ciena calculates the fair value of these awards based on the fair value of the underlying common stock at the time of grant and recognizes the expense, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

     Awards with performance-based vesting conditions require the achievement of certain company-based, financial or other performance criteria or targets as a condition to the vesting, or acceleration of vesting, of such awards. Ciena determines the fair value of these awards based on the fair value of the underlying common stock at the time of grant. The fair value, net of estimated forfeitures, is recognized as share-based expense over the performance period, using graded vesting and based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassess the probability of achieving the performance targets and the performance period required to meet those targets. Determining whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized and, to the extent previously recognized, compensation cost is reversed.

     The following table is a summary of Ciena’s restricted stock unit activity during fiscal 2007, based on Ciena’s closing stock price on July 27, 2007 of $36.21 per share (shares and fair value in thousands):

						Weighted
						Average
		Restricted				Grant Date
		Stock Units				Fair Value				Aggregate
		Outstanding				Per Share				Fair Value
Balance as of October 31, 2006			162			$	22.99			$	3,829
Granted			1,184
Converted			(129	)
Canceled or forfeited			(52	)
Balance as of July 31, 2007			1,165			$	27.36			$	42,201

     The weighted average fair value for restricted stock units granted during the three months and nine months ended July 31, 2006 was $30.66 and $19.25, respectively. The weighted average fair value for restricted stock unit award granted during the three months and nine months ended July 31, 2007 was $35.69 and $27.86, respectively. The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2007 was $4.5 million.

     As of July 31, 2007, total unrecognized compensation expense related to restricted stock units was $26.4 million. This expense is expected to be recognized over a weighted-average period of 1.9 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.

     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. For offer periods that commenced prior to September 15, 2006, however, 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.

     The following table is a summary of ESPP activity during fiscal 2007 (shares and fair value in thousands):

		ESPP shares available for				Intrinisic value at
		issuance				exercise date
Balance as of October 31, 2006			2,976
Evergreen provision			571
Issued			(119	)		$	1,137
Balance as of July 31, 2007			3,428

     As of July 31, 2007, unrecognized compensation expense related to the ESPP was $0.1 million. This expense is expected to be recognized over a weighted-average period of 0.6 years.

Share-Based Compensation Recognized under SFAS 123(R)

     The following table summarizes share-based compensation expense under SFAS 123(R) for the quarters and nine months ended July 31, 2006 and July 31, 2007, which was allocated as follows (in thousands):

		Quarter Ended July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Product costs		$	361			$	131			$	871			$	714
Service costs			211				225				604				703
Share-based compensation expense included in cost of sales			572				356				1,475				1,417
Research and development			1,061				985				4,119				2,813
Sales and marketing			715				1,898				2,709				4,804
General and administrative			594				1,724				2,422				4,616
Share-based compensation expense included in operating expense			2,370				4,607				9,250				12,233
Stock-based compensation expense capitalized in inventory, net			(107	)			358				228				608
Total share-based compensation		$	2,835			$	5,321			$	10,953			$	14,258

     Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, these amounts reflect a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. Ciena relies upon historical experience in establishing forfeiture rates. If actual forfeitures differ from current estimates, total unrecognized share-based compensation expense will be adjusted for future changes in estimated forfeitures.

(15) COMPREHENSIVE INCOME (LOSS)

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

		Quarter Ended July 31,								Nine Months Ended July 31,
		2006				2007				2006				2007
Net income (loss)		$	(4,285	)		$	28,312			$	(12,486	)		$	52,378
Change in unrealized loss on available-for-sale securities, net			464				(47	)			2,271				217
Change in accumulated translation adjustments			27				(188	)			—				(1,070	)
Total comprehensive income (loss)		$	(3,794	)		$	28,077			$	(10,215	)		$	51,525