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 April 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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 May 30, 2008
common stock, $.01 par value		90,154,787

 

 

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 six months ended April 30, 2007 and April 30, 2008			3
		Condensed Consolidated Balance Sheets at October 31, 2007 and April 30, 2008			4
		Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 2007 and April 30, 2008			5
		Notes to Condensed Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			46
Item 4.		Controls and Procedures			46
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			46
Item 1A.		Risk Factors			47
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3.		Defaults Upon Senior Securities			57
Item 4.		Submission of Matters to a Vote of Security Holders			58
Item 5.		Other Information			58
Item 6.		Exhibits			59
		Signatures			60

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Revenues:
Products		$	173,212			$	216,181			$	319,494			$	417,971
Services			20,315				26,018				39,134				51,644
Total revenue			193,527				242,199				358,628				469,615
Costs:
Products			91,319				96,041				166,298				187,428
Services			20,378				18,562				36,872				38,022
Total cost of goods sold			111,697				114,603				203,170				225,450
Gross profit			81,830				127,596				155,458				244,165
Operating expense:
Research and development			31,642				44,628				61,495				80,072
Selling and marketing			30,182				38,591				55,057				72,199
General and administrative			11,707				16,650				21,998				39,278
Amortization of intangible assets			6,295				8,760				12,590				15,230
Restructuring recoveries			(734	)			—				(1,200	)			—
Total operating expense			79,092				108,629				149,940				206,779
Income from operations			2,738				18,967				5,518				37,386
Interest and other income, net			16,897				8,487				31,742				27,569
Interest expense			(6,148	)			(1,861	)			(12,296	)			(9,219	)
Income before income taxes			13,487				25,593				24,964				55,736
Provision for income taxes			477				1,833				898				3,169
Net income		$	13,010			$	23,760			$	24,066			$	52,567
Basic net income per common share		$	0.15			$	0.27			$	0.28			$	0.60
Diluted net income per potential common share		$	0.14			$	0.23			$	0.27			$	0.51
Weighted average basic common shares outstanding			85,198				89,102				85,076				88,155
Weighted average dilutive potential common shares outstanding			93,737				110,770				93,491				110,046

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

CIENA CORPORATION

		October 31,				April 30,
		2007				2008
ASSETS
Current assets:
Cash and cash equivalents		$	892,061			$	963,852
Short-term investments			822,185				69,768
Accounts receivable, net			104,078				132,065
Inventories			102,618				125,406
Prepaid expenses and other			47,817				42,291
Total current assets			1,968,759				1,333,382
Long-term investments			33,946				25,641
Equipment, furniture and fixtures, net			46,671				55,593
Goodwill			232,015				455,138
Other intangible assets, net			67,144				113,383
Other long-term assets			67,738				72,634
Total assets		$	2,416,273			$	2,055,771
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	55,389			$	69,953
Accrued liabilities			90,922				94,489
Restructuring liabilities			1,026				761
Income taxes payable			7,768				1,999
Deferred revenue			33,025				43,535
Convertible notes payable			542,262				—
Total current liabilities			730,392				210,737
Long-term deferred revenue			30,615				36,478
Long-term restructuring liabilities			3,662				3,467
Other long-term obligations			1,450				7,827
Convertible notes payable			800,000				800,000
Total liabilities			1,566,119				1,058,509
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 and 290,000,000 shares authorized; 86,752,069 and 90,129,543 shares issued and outstanding			868				901
Additional paid-in capital			5,519,741				5,612,310
Changes in unrealized gains on investments, net			350				146
Translation adjustment			(1,593	)			410
Accumulated deficit			(4,669,212	)			(4,616,505	)
Total stockholders’ equity			850,154				997,262
Total liabilities and stockholders’ equity		$	2,416,273			$	2,055,771

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

CIENA CORPORATION

		Six Months Ended April 30,
		2007				2008
Cash flows from operating activities:
Net income		$	24,066			$	52,567
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discount on marketable securities			(3,052	)			(1,632	)
Depreciation and amortization of leasehold improvements			6,298				8,567
Share-based compensation			8,937				15,752
Amortization of intangibles			14,525				17,165
Deferred tax provision			—				1,296
Provision for doubtful accounts receivable			—				55
Provision for inventory excess and obsolescence			6,385				10,540
Provision for warranty			7,111				7,083
Other			872				2,373
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable			(38,323	)			(25,990	)
Inventories			(19,090	)			(20,456	)
Prepaid expenses and other			(12,173	)			5,816
Accounts payable and accruals			17,741				7,883
Income taxes payable			498				(5,656	)
Deferred revenue and other obligations			19,492				13,202
Net cash provided by operating activities			33,287				88,565
Cash flows from investing activities:
Payments for equipment, furniture, fixtures and intellectual property			(14,438	)			(14,172	)
Restricted cash			(5,549	)			(4,929	)
Purchase of available for sale securities			(213,219	)			—
Proceeds from maturities of available for sale securities			444,126				762,150
Minority equity investments, net			(181	)			—
Acquisition of business, net of cash acquired			—				(209,965	)
Net cash provided by investing activities			210,739				533,084
Cash flows from financing activities:
Repayment of 3.75% convertible notes payable at maturity			—				(542,262	)
Repayment of indebtedness of acquired business			—				(12,363	)
Proceeds from issuance of common stock			6,116				4,578
Net cash provided by (used in) financing activities			6,116				(550,047	)
Effect of exchange rate changes on cash and cash equivalents			—				189
Net increase in cash and cash equivalents			250,142				71,602
Cash and cash equivalents at beginning of period			220,164				892,061
Cash and cash equivalents at end of period		$	470,306			$	963,852
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	—			$	1,923
Value of common stock issued in acquisition		$	—			$	62,359
Fair value of vested options assumed in acquisition		$	—			$	9,912

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

CIENA CORPORATION

(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 sheets. 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. The October 31, 2007 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2007.

     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

Use of Estimates

     The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for bad debts, valuation of inventories and investments, recoverability of intangible assets and goodwill, income taxes, warranty obligations, restructuring liabilities and contingencies and litigation. Ciena bases its estimates on historical experience and assumptions that it believes are reasonable. Actual results may differ materially from management’s estimates.

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 on available-for-sale securities determined to be other-than-temporary are reported in other income or expense as incurred.

Inventories

     Inventories are stated at the lower of cost or market, with cost computed using standard cost, which approximates actual cost on a first-in, first-out basis. Ciena records a provision for excess and obsolete inventory when 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 the shorter of useful life or lease term 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 straight-line 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 its 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 finite-lived 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, which approximates the use of intangible assets. Impairments of 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 are inherently high risk investments as the markets for technologies or products manufactured by these companies are usually early stage at the time of investment 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.

Concentrations

     Substantially all of Ciena’s cash and cash equivalents and short-term and long-term investments in marketable debt securities 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, management believes that they bear minimal risk.

     Historically, a large percentage of Ciena’s revenue has been the result of sales to a small number of communications service providers. Consolidation among Ciena’s customers has increased this concentration. Consequently, Ciena’s accounts receivable are concentrated among these customers. See Notes 6 and 17 below.

     Additionally, Ciena’s access to certain raw materials is dependent upon sole or limited 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 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. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. 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. Accordingly, Ciena accounts for revenue in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” (SOP 97-2) and all related interpretations. SOP 97-2 incorporates additional guidance unique to software arrangements incorporated with general revenue recognition criteria, such as, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met.

     Arrangements with customers may include multiple deliverables, including any combination of equipment, services and software. If multiple element arrangements include software or software-related elements, Ciena applies the provisions of SOP 97-2 to determine the amount of the arrangement fee to be allocated to those separate units of accounting. Multiple element arrangements that include software are separated into more than one unit of accounting if the functionality of the delivered element(s) is not dependent on the undelivered element(s), there is vendor-specific objective evidence of the fair value of the undelivered element(s), and general revenue recognition criteria related to the delivered element(s) have been met. The amount of product and services revenue recognized is affected by Ciena’s judgments as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists. Changes to the elements in an arrangement and Ciena’s ability to establish vendor-specific objective evidence for those elements could affect the timing of revenue recognition. For all other deliverables, Ciena applies the provisions of Emerging Issues Task Force (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 allows for separation of elements into more than one unit of accounting if the delivered element(s) have value to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for the undelivered element(s), and delivery of the undelivered element(s) is probable and substantially in Ciena’s control. Revenue is allocated to each unit of accounting based on the relative fair value of each accounting unit or using the residual method if objective evidence of fair value does not exist for the delivered element(s). The revenue recognition criteria described above are applied to each separate unit of accounting. If these criteria are not met, revenue is deferred until the criteria are met or the last element has been delivered.

Warranty Accruals

     Ciena provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. Estimated warranty costs include material costs, technical support labor costs and associated overhead. The warranty liability is included in cost of goods sold and 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, 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.

Legal Costs

     Ciena expenses legal costs associated with litigation defense as incurred.

Share-Based Compensation Expense

     Ciena accounts for share-based compensation expense in accordance with SFAS 123(R), as interpreted by SAB 107. SFAS 123(R) requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values on the date of grant. Ciena estimates the fair value of each option-based award on the date of grant using the Black-Scholes option-pricing model. This model is affected by Ciena’s stock price as well as estimates regarding a number of variables including expected stock price volatility over the term of the award and projected employee stock option exercise behaviors. Ciena estimates the fair value of each share-based award on the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest. Ciena uses two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting method, which considers each performance period or tranche separately, for all other 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 adopted the provisions of 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,” after the end of fiscal 2007. The adoption of FIN 48 resulted in Ciena’s recognition of a cumulative effect adjustment that was accounted for as an increase of $0.1 million to retained earnings, a decrease of $0.1 million to income taxes payable and the reclassification of $6.0 million from current income taxes payable to other long-term liabilities as of November 4, 2007. The total amount of unrecognized tax benefits as of the beginning of fiscal 2008 was $6.0 million, which includes $1.0 million of interest and some minor penalties. All of the unrecognized tax benefits, if recognized, would decrease the effective income tax rate. During the six months ended April 30, 2008, there has been no significant change in the unrecognized tax benefits. Ciena has reviewed its uncertain income tax positions in accordance with FIN 48 and currently estimates no material changes in the unrecognized income tax benefits in the next twelve months.

     Ciena historically classified interest and penalties related to unrecognized income tax benefits as a component of income tax expense. With the adoption of FIN 48, Ciena is maintaining its historical method of accruing interest and penalties associated with unrecognized tax benefits as a component of tax expense.

     In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax authorities periodically audit Ciena’s income tax returns. These audits examine significant tax filing positions, including the timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena’s major tax jurisdictions include the United States and the United Kingdom, with open tax years beginning with fiscal year 2004 and 2002 respectively.

Loss Contingencies

     Ciena is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. Ciena considers the likelihood of loss or the incurrence of a liability, as well as Ciena’s ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Ciena regularly evaluates current information available to it to determine whether any accruals should be adjusted and whether new accruals are required.

Fair Value of Financial Instruments

     The carrying amounts of Ciena’s financial instruments, which include short-term and long-term investments in marketable debt securities, 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 per Common Share and Diluted Net Income 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 straight-line 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 and requires certain 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.

Newly Issued Accounting Standards

     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 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 February 2008, the FASB issued FASB Staff Position 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” This staff position amends SFAS 157 to remove certain leasing transactions from its scope. Also in February 2008 the FASB issued FASB Staff Position 157-2 “Effective Date of FASB Statement No. 157.” This staff position delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. Ciena is currently evaluating the impact the adoption of these staff positions could have on its financial condition, results of operations and cash flows.

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS 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 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.

     In June 2007, the FASB ratified EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” EITF 07-3 requires nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities to be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-3 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

     In December 2007, the FASB issued SFAS 141(R), a revised version of SFAS 141, “Business Combinations.” The revision is intended to simplify existing guidance and converge rulemaking under U.S. generally accepted accounting principles (GAAP) with international accounting rules. This statement applies prospectively to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows. Its effect will depend on the nature and significance of any acquisitions subject to this statement.

     In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

     In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the accounting principles to be used. Any effect of applying the provisions of this statement will be reported as a change in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.” Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

     In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion.” APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. Ciena is currently evaluating the impact of the adoption of this position could have on its financial condition, results of operations and cash flows.

(3) BUSINESS COMBINATIONS

     On March 3, 2008, Ciena completed its acquisition of World Wide Packets, Inc. (“World Wide Packets” or “WWP”) pursuant to the terms of an Agreement and Plan of Merger dated January 22, 2008 (the “Merger Agreement”) by and among Ciena, World Wide Packets, Wolverine Acquisition Subsidiary, Inc., a wholly owned subsidiary of Ciena (“Merger Sub”), and Daniel Reiner, as shareholders’ representative. Pursuant to the Merger Agreement, on March 3, 2008, Merger Sub was merged with and into World Wide Packets, with World Wide Packets continuing as the surviving corporation and a wholly owned subsidiary of Ciena. World Wide Packets is a supplier of communications network equipment that enables the cost-effective delivery of a wide variety of carrier Ethernet-based services. Prior to the acquisition, World Wide Packets was a privately held company. Ciena’s results of operations for the quarter and six months ended April 30, 2008 in this report include the operations of World Wide Packets beginning on March 3, 2008, the effective date of the acquisition.

     Upon the closing of the acquisition, all of the outstanding shares of World Wide Packets common stock and preferred stock were exchanged for approximately 2.5 million shares of Ciena common stock and approximately $196.7 million in cash. Of this amount, $20.0 million in cash and 340,000 shares of Ciena common stock were placed into escrow for a period of one year as security for the indemnification obligations of World Wide Packets’ shareholders under the Merger Agreement. Upon the closing, Ciena also assumed all then outstanding World Wide Packets options and exchanged them for options to acquire approximately 0.9 million shares of Ciena common stock. Under the Merger Agreement, Ciena also agreed to indemnify certain officers and directors of World Wide Packets against third-party claims arising out of their employment relationship. Ciena has determined the fair value of this indemnification obligation to be insignificant.

     The following table summarizes the purchase price for the acquisition (in thousands):

		Amount
Cash		$	196,668
Acquisition-related costs			14,133
Value of common stock issued			62,359
Fair value of vested options assumed			9,912
Total purchase price		$	283,072

     The value of Ciena common stock issued in the acquisition was based on the average closing price of Ciena’s common stock for the two trading days prior to, the date of, and the two trading days after the announcement of the acquisition. The fair value of the vested options assumed was determined using the Black-Scholes option-pricing model.

     The acquisition has been accounted for under the purchase method of accounting which requires the total purchase price to be allocated to the acquired assets and assumed liabilities based on their estimated fair values. The purchase price in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities is recognized as goodwill. Amounts allocated to goodwill are not tax deductible. As set forth below, Ciena recorded acquired, finite-lived intangible assets related to developed technology, customer relationships, customer contracts and customer order backlog. The following table summarizes the allocation of the acquisition purchase price based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):

		Amount
Cash		$	836
Accounts receivable			2,052
Inventory			12,872
Equipment, furniture and fixtures			3,269
Other tangible assets			2,003
Developed technology			42,400
Covenants not to compete			3,200
Customer relationships, outstanding purchase orders and contracts			19,100
Goodwill			223,123
Accounts payable and accrued liabilities			(13,420	)
Promissory notes and loans payable			(12,363	)
Total purchase price allocation		$	283,072

     Under purchase accounting rules, Ciena revalued the acquired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal, and (b) a reasonable profit allowance for Ciena’s selling effort. This revaluation resulted in an increase in inventory carrying value of approximately $5.3 million for marketable inventory slightly offset by a decrease of $0.7 million for unmarketable inventory.

     Developed technology represents purchased technology which has reached technological feasibility and for which World Wide Packets had substantially completed development as of the date of acquisition. Fair value is determined using future discounted cash flows related to the projected income stream of the developed technology for a discrete projection period. Cash flows are discounted to their present value. Developed technology will be amortized on a straight line basis over its estimated useful life of 4 years to 6 years.

     Covenants not to compete represent agreements entered into with key employees of World Wide Packets. Covenants not to compete will be amortized on a straight line basis over estimated useful lives of 3.5 years.

     Customer relationships, outstanding purchase orders and contracts represent agreements with existing World Wide Packets’ customers are expected to have estimated useful lives of 4 months to 6 years.

     The following unaudited pro forma financial information summarizes the results of operations for the periods indicated as if Ciena’s acquisition of World Wide Packets had been completed as of the beginning of each of the periods presented. These pro forma amounts (in thousands, except per share data) do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the periods presented or that may be obtained in the future.

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Pro forma revenue		$	198,825			$	242,768			$	367,083			$	476,265
Pro forma net income		$	1,201			$	18,244			$	1,586			$	34,469
Pro forma basic net income per common share		$	0.01			$	0.20			$	0.02			$	0.38
Pro forma diluted net income per potential common share		$	0.01			$	0.18			$	0.02			$	0.34

(4) RESTRUCTURING COSTS

     Ciena has previously taken actions to align its workforce, facilities and operating costs with perceived market and 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 sets forth the activity and balances of the restructuring liability accounts for the six months ended April 30, 2008 (in thousands):

		Consolidation
		of excess
		facilities
Balance at October 31, 2007		$	4,688
Cash payments			(460	)
Balance at April 30, 2008		$	4,228
Current restructuring liabilities		$	761
Non-current restructuring liabilities		$	3,467

     The following table sets forth the activity and balances of the restructuring liability accounts for the six months ended April 30, 2007 (in thousands):

						Consolidation
		Workforce				of excess
		reduction				facilities				Total
Balance at October 31, 2006		$	—			$	35,634			$	35,634
Additional liability recorded			72	(a)			—				72
Adjustment to previous estimates			—				(1,272	) (b)			(1,272	)
Cash payments			(72	)			(4,603	)			(4,675	)
Balance at April 30, 2007		$	—			$	29,759			$	29,759
Current restructuring liabilities		$	—			$	7,065			$	7,065
Non-current restructuring liabilities		$	—			$	22,694			$	22,694

(5) MARKETABLE DEBT SECURITIES

     As of the dates indicated, short-term and long-term investments in marketable debt securities are comprised of the following (in thousands):

		April 30, 2008
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	33,926			$	98			$	—			$	34,024
Asset backed obligations			32,696				92				46				32,742
Commercial paper			25,641				—				—				25,641
US government obligations			3,000				2				—				3,002
		$	95,263			$	192			$	46			$	95,409
Included in short-term investments			69,622				192				46				69,768
Included in long-term investments			25,641				—				—				25,641
		$	95,263			$	192			$	46			$	95,409

		October 31, 2007
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	258,904			$	252			$	42			$	259,114
Asset backed obligations			121,274				136				44				121,366
Commercial paper			198,407				—				—				198,407
US government obligations			31,186				55				—				31,241
Certificate of deposits			246,003				—				—				246,003
		$	855,774			$	443			$	86			$	856,131
Included in short-term investments			821,828				443				86				822,185
Included in long-term investments			33,946				—				—				33,946
		$	855,774			$	443			$	86			$	856,131

     Estimated fair value of commercial paper at October 31, 2007 and April 30, 2008 includes investments in SIV Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007 and failed to make payment at maturity. Due to the mortgage-related assets that they hold, these entities have been exposed to adverse market conditions that have affected their collateral and their ability to access short-term funding. Based on Ciena’s assessment of fair value, as of October 31, 2007, Ciena recognized losses of $13.0 million related to these investments during the fourth quarter of fiscal 2007. Giving effect to these losses, Ciena’s investment portfolio at October 31, 2007 included an estimated fair value of $33.9 million in commercial paper issued by these entities. At April 30, 2008, commercial paper issued by these entities had a carrying value of $25.6 million, with the $8.3 million reduction reflecting the aggregate cash proceeds received from these SIVs during the six-month period. There were no other changes relating to these investments or other events during the six months ended April 30, 2008 that resulted in a change in the carrying value of these investments. Information and the markets relating to these investments remain dynamic, and there may be further declines in the value of these investments, the value of the collateral held by these entities and the liquidity of these investments. To the extent Ciena determines that a further decline in fair value is other-than-temporary, Ciena may recognize additional losses in future periods up to the aggregate amount of these investments.

     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 at April 30, 2008 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. As of the dates indicated, gross unrealized losses were as follows (in thousands):

		April 30, 2008
		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
Asset backed obligations		$	—			$	1,674			$	46			$	2,720			$	46			$	4,394
		$	—			$	1,674			$	46			$	2,720			$	46			$	4,394

		October 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		$	41			$	50,152			$	1			$	2,999			$	42			$	53,151
Asset backed obligations			7				6,140				37				22,923				44				29,063
		$	48			$	56,292			$	38			$	25,922			$	86			$	82,214

The following table summarizes final legal maturities of debt investments at April 30, 2008 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	69,622			$	69,768
Due in 1-2 years			25,641				25,641
Due in 2-5 years			—				—
		$	95,263			$	95,409

(6) ACCOUNTS RECEIVABLE

     As of April 30, 2008, three customers accounted for 27.5%, 14.9% and 10.3% of net accounts receivable, respectively. As of October 31, 2007, one customer accounted for 40.1% of net accounts receivable.

     Ciena’s allowance for doubtful accounts as of October 31, 2007 and April 30, 2008 was $0.1 million and $0.2 million, respectively.

(7) INVENTORIES

     As of the dates indicated, inventories are comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Raw materials		$	28,611			$	21,294
Work-in-process			4,123				4,354
Finished goods			96,054				126,100
			128,788				151,748
Provision for excess and obsolescence			(26,170	)			(26,342	)
		$	102,618			$	125,406

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. During the first six months of fiscal 2008, Ciena recorded a provision for excess and obsolete inventory of $10.5 million, primarily related to changes in forecasted sales for certain products. Deductions from the provision for excess and obsolete inventory generally relate to disposal activities. The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the period indicated (in thousands):

		Inventory Reserve
Reserve for balance as of October 31, 2007		$	26,170
Provision for excess inventory			10,540
Inventory disposed			(10,368	)
Reserve balance as of April 30, 2008		$	26,342

     During the first six months of fiscal 2007, Ciena recorded a provision for excess and obsolete inventory of $6.4 million, primarily related to changes in forecasted sales for certain products. Deductions from the provision for excess and obsolete inventory generally relate to disposal activities. The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the period indicated (in thousands):

		Inventory Reserve
Reserve for balance as of October 31, 2006		$	22,326
Provision for excess inventory			6,385
Inventory disposed			(4,878	)
Reserve balance as of April 30, 2007		$	23,833

(8) PREPAID EXPENSES AND OTHER

     As of the dates indicated, prepaid expenses and other are comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Interest receivable		$	4,981			$	694
Prepaid VAT and other taxes			18,092				14,508
Deferred deployment expense			6,237				5,921
Prepaid expenses			10,724				10,934
Restricted cash			3,994				7,667
Other non-trade receivables			3,789				2,567
		$	47,817			$	42,291

(9) EQUIPMENT, FURNITURE AND FIXTURES

     As of the dates indicated, equipment, furniture and fixtures are comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Equipment, furniture and fixtures		$	269,534			$	284,329
Leasehold improvements			37,249				40,647
			306,783				324,976
Accumulated depreciation and amortization			(260,112	)			(269,383	)
		$	46,671			$	55,593

(10) OTHER INTANGIBLE ASSETS

     As of the dates indicated, other intangible assets are comprised of the following (in thousands):

		October 31, 2007												April 30, 2008
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Developed technology		$	145,073			$	(104,822	)		$	40,251			$	187,473			$	(116,577	)		$	70,896
Patents and licenses			47,370				(31,708	)			15,662				47,370				(34,830	)			12,540
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			45,981				(34,750	)			11,231				68,281				(38,334	)			29,947
		$	238,424							$	67,144			$	303,124							$	113,383

     The aggregate amortization expense of other intangible assets was $7.2 million and $9.8 million for the quarters ended April 30, 2007 and 2008, respectively. The aggregate amortization expense of other intangible assets was $14.5 million and $17.2 million for the first six months of fiscal 2007 and 2008, respectively. During fiscal 2008, developed technology increased by $42.4 million and customer relationships, covenants not to compete, outstanding purchase order and contracts increased by $22.3 million due to Ciena’s acquisition of World Wide Packets. See Note 3 above. Accumulated amortization at April 30, 2008 reflects a $1.3 million decrease due to the recognition of deferred tax assets from prior acquisitions. Expected future amortization of other intangible assets for the fiscal years indicated is as follows (in thousands):

Period ended October 31,
2008 (remaining six months)		$	20,791
2009			32,233
2010			27,412
2011			13,852
2012			9,473
Thereafter			9,622
		$	113,383

(11) OTHER BALANCE SHEET DETAILS

     As of the dates indicated, other long-term assets are comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Maintenance spares inventory, net		$	20,816			$	25,087
Deferred debt issuance costs			18,059				16,313
Investments in privately held companies			6,671				6,671
Restricted cash			19,499				20,755
Other			2,693				3,808
		$	67,738			$	72,634

     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 $1.8 million and $1.7 million during the first six months of fiscal 2007 and fiscal 2008, respectively.

     As of the dates indicated, accrued liabilities are comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Warranty		$	33,580			$	35,834
Accrued compensation, payroll related tax and benefits			32,053				36,062
Accrued interest payable			6,998				1,689
Other			18,291				20,904
		$	90,922			$	94,489

     The following table summarizes the activity in Ciena’s accrued warranty for the fiscal years indicated (in thousands):

Six months ended		Beginning												Balance at
April 30,		Balance				Provisions				Settlements				end of period
2007		$	31,751				7,111				(5,394	)		$	33,468
2008		$	33,580				7,083				(4,829	)		$	35,834

     As of the dates indicated, deferred revenue is comprised of the following (in thousands):

		October 31,				April 30,
		2007				2008
Products		$	13,208			$	19,111
Services			50,432				60,902
			63,640				80,013
Less current portion			(33,025	)			(43,535	)
Long-term deferred revenue		$	30,615			$	36,478

(12) CONVERTIBLE NOTES PAYABLE

Ciena 3.75% Convertible Notes, due February 1, 2008

     During the first quarter of fiscal 2008, Ciena paid at maturity the remaining $542.3 million in aggregate principal amount on its 3.75% convertible notes. All of the notes were retired without conversion into common stock.

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 governing the notes to include certain change in control transactions), 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 $28.5 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 the conversion of the notes. See Note 14 below for a description of this call spread option.

     The fair value of the outstanding $300.0 million in aggregate principal amount of 0.25% convertible senior notes was $304.5 million, based on the quoted market price for the notes on the last trading day of Ciena’s second quarter of fiscal 2008.

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. 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 governing the notes to include certain change in control transactions), 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. See Note 14 below for a description of this call spread option.

     The fair value of the outstanding $500.0 million in aggregate principal amount of 0.875% convertible senior notes was $525.0 million, based on the quoted market price for the notes on the last trading day of Ciena’s second quarter of fiscal 2008.

(13) INCOME 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 per common share (“Basic EPS”) and the diluted net income 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.

Numerator

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Net income		$	13,010			$	23,760			$	24,066			$	52,567
Add: Interest expense for 0.25% convertible senior notes			469				470				939				941
Add: Interest expense for 0.875% convertible senior notes			—				1,388				—				2,735
Net income used to calculate Diluted EPS		$	13,479			$	25,618			$	25,005			$	56,243

Denominator

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Basic weighted average shares outstanding			85,198				89,102				85,076				88,155
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			949				970				825				1,193
Add: Shares underlying 0.25% convertible senior notes			7,590				7,590				7,590				7,590
Add: Shares underlying 0.875% convertible senior notes			—				13,108				—				13,108
Dilutive weighted average shares outstanding			93,737				110,770				93,491				110,046

EPS

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Basic EPS		$	0.15			$	0.27			$	0.28			$	0.60
Diluted EPS		$	0.14			$	0.23			$	0.27			$	0.51

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the periods indicated below, the weighted average number of shares set forth in the table below, underlying outstanding stock options, employee stock purchase plan options, restricted stock units, and warrants, is 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, the weighted average number of shares underlying Ciena’s previously outstanding 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 summarizes the shares excluded from the calculation of the denominator for Basic and Diluted EPS due to their anti-dilutive effect for the periods indicated (in thousands):

Shares excluded from EPS Denominator due to anti-dilutive effect

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Shares underlying stock options, restricted stock units and warrants			4,345				5,278				4,266				3,980
3.75% convertible notes			742				—				742				377
Total excluded due to anti-dilutive effect			5,087				5,278				5,008				4,357

(14) 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 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.

(15) SHARE-BASED COMPENSATION EXPENSE

     Ciena has outstanding equity awards issued under its legacy equity plans and equity plans assumed as a result of previous acquisitions. In connection with its acquisition of World Wide Packets during the second quarter of fiscal 2008, Ciena assumed the World Wide Packets, Inc. 2000 Stock Incentive Plan and exchanged outstanding options at closing for options to acquire approximately 0.9 million shares of Ciena common stock. Ciena will make future equity awards exclusively from the 2008 Omnibus Incentive Plan and 2003 Employee Stock Purchase Plan described below.

Ciena Corporation 2008 Omnibus Incentive Plan

     The 2008 Omnibus Incentive Plan (the “2008 Plan”) was approved by Ciena’s Board of Directors on December 12, 2007 and became effective upon the approval of Ciena’s shareholders on March 26, 2008. The 2008 Plan has a ten year term. The 2008 Plan reserves eight million shares of common stock for issuance, subject to increase from time to time by the number of shares: (i) subject to outstanding awards granted under Ciena’s prior equity compensation plans that terminate without delivery of any stock (to the extent such shares would have been available for issuance under such prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition of another company.

     The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and SARs have a maximum term of ten years and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without shareholder approval. Each share subject to an award other than stock options or SARs will reduce the number of shares available for issuance under the 2008 Plan by 1.6 shares. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. As of April 30, 2008, there were 7.8 million shares authorized and available for issuance under the 2008 Plan.

     Stock Options

     Outstanding stock option awards to employees are generally subject to service-based vesting restrictions and vest incrementally over a four-year period. The following table is a summary of Ciena’s stock option activity for the periods indicated (shares in thousands):

						Weighted
						Average
		Options Outstanding				Exercise Price
Balance as of October 31, 2006			7,110				48.52
Granted			695				32.47
Exercised			(1,507	)			23.04
Canceled			(427	)			41.52
Balance as of October 31, 2007			5,871				53.67
Granted			480				33.70
Assumed			934				7.50
Exercised			(538	)			7.21
Canceled			(245	)			60.49
Balance as of April 30, 2008			6,502			$	49.15

     The total intrinsic value of options exercised during the first six months of fiscal 2007 and fiscal 2008 was $2.3 million and $12.8 million, respectively. The weighted average fair value of each stock option granted by Ciena in the first six months of fiscal 2007 and 2008 was $15.77 and $16.95, respectively.

     The following table summarizes information with respect to stock options outstanding at April 30, 2008, based on Ciena’s closing stock price of $33.00 per share on the last trading day of Ciena’s second quarter of fiscal 2008 (shares and intrinsic value in thousands):

								Options Outstanding at April 30, 2008																Vested Options at April 30, 2008
												Weighted																Weighted
												Average																Average
												Remaining				Weighted												Remaining				Weighted
Range of								Number				Contractual				Average				Aggregate				Number				Contractual				Average				Aggregate
Exercise								of				Life				Exercise				Intrinsic				of				Life				Exercise				Intrinsic
Price								Shares				(Years)				Price				Value				Shares				(Years)				Price				Value
$ 0.01		-		$	16.52				950				7.42			$	9.40			$	22,425				428				6.77			$	10.85			$	9,483
$ 16.53		-		$	17.43				568				7.06				17.21				8,971				354				6.92				17.14				5,613
$ 17.44		-		$	22.96				476				6.48				21.84				5,317				430				6.23				21.97				4,741
$ 22.97		-		$	31.36				966				7.93				27.70				5,115				447				6.65				27.71				2,363
$ 31.72		-		$	46.97				1,854				6.44				36.52				953				1,266				5.02				35.95				892
$ 46.98		-		$	83.13				712				3.91				60.22				-				712				3.91				60.22				-
$ 83.14		-		$	1,046.50				976				2.76				156.83				-				976				2.76				156.83				-
$ 0.01		-		$	1,046.50				6,502				6.03			$	49.15			$	42,781				4,613				4.95			$	59.41			$	23,092

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

     Ciena recognizes the fair value of service-based options as stock-based compensation expense on a straight-line basis over the requisite service period. Ciena estimates the fair value of each option award on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions:

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Expected volatility			55.8%				53.0%				55.8%				53.0%
Risk-free interest rate			4.4% - 4.7%				2.7% - 3.2%				4.4% - 5.0%				2.7% - 3.6%
Expected life (years)			6.0 - 6.1				5.1 - 5.3				6.0 - 6.4				5.1 - 5.3
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 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 considered its options to be “plain vanilla,” it calculated the expected term using the simplified method as prescribed in SAB 107 for fiscal 2007. Under SAB 107, options are considered to be “plain vanilla” if they have the following basic characteristics: they are granted “at-the-money”; exercisability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; there is a limited exercise period following termination of service; and the options are non-transferable and non-hedgeable. Beginning in fiscal 2008, as prescribed by SAB 107, Ciena gathered more detailed historical information about specific exercise behavior of its grantees, which it used to determine the expected term.

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

     Because share-based compensation expense is recognized only for those awards that are ultimately expected to vest, the amount of share-based compensation expense recognized reflects a reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises those estimates in subsequent periods based upon new or changed information. 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.

     Restricted Stock Units

     A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena common stock as the unit vests. Ciena’s outstanding restricted stock unit awards are subject to service-based vesting conditions and/or performance-based vesting conditions. Awards subject to service-based conditions typically vest in increments over a four-year period. Awards with performance-based vesting conditions require the achievement of certain operational, financial or other performance criteria or targets as a condition of vesting, or acceleration of vesting, of such awards.

     The aggregate intrinsic value of Ciena’s restricted stock units is based on Ciena’s closing stock price on the last trading day of each period as indicated. The following table is a summary of Ciena’s restricted stock unit activity for the periods indicated, with the aggregate intrinsic value of the balance outstanding for each period, based on Ciena’s closing stock price on the last trading day of the relevant period (shares and fair value in thousands):

						Weighted
						Average
		Restricted				Grant Date				Aggregate
		Stock Units				Fair Value				Intrinsic
		Outstanding				Per Share				Value
Balance as of October 31, 2006			162			$	22.99			$	3,829
Granted			1,216
Vested			(176	)
Canceled or forfeited			(67	)
Balance as of October 31, 2007			1,135				27.94				53,236
Granted			1,388
Vested			(335	)
Canceled or forfeited			(62	)
Balance as of April 30, 2008			2,126			$	31.32			$	70,165

     The total fair value of restricted stock units that vested and were converted into common stock during the first six months of fiscal 2007 and fiscal 2008 was $2.5 million, and $11.3 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena in the first six months of fiscal 2007 and 2008 was $27.83 and $31.99, respectively.

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

     The fair value of each restricted stock unit award is estimated using the intrinsic value method which is based on the closing price on the date of grant. Share-based expense for service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably over the vesting period on a straight-line basis.

     Share-based expense for performance-based restricted stock unit awards, net of estimated forfeitures, is recognized ratably over the performance period based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved involves judgment, and the estimate of expense is revised periodically based on the probability of achieving the performance targets. Revisions are reflected in the period in which the estimate is changed. If any performance goals are not met, no compensation cost is ultimately recognized against that goal and, to the extent previously recognized, compensation cost is reversed.

2003 Employee Stock Purchase Plan

     In March 2003, Ciena shareholders approved the 2003 Employee Stock Purchase Plan (the “ESPP”), which has a ten-year term. 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. On December 31 of each year, the number of shares available under the ESPP will increase 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 2.9 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. The following table is a summary of ESPP activity for the periods indicated (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 March 15, 2007			(119	)			1,137
Issued September 14, 2007			(45	)			581
Balance as of October 31, 2007			3,383
Evergreen provision			188
Issued March 15, 2008			(38	)		$	99
Balance as of April 30, 2008			3,533

     The amendments to the ESPP for offer periods on or after September 15, 2006 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 final offer period prior to September 15, 2006 was completed during the second quarter of fiscal 2008.

Share-Based Compensation Recognized under SFAS 123(R)

     The following table summarizes share-based compensation expense for the periods indicated (in thousands):

		Quarter Ended April 30,								Six Months Ended April 30,
		2007				2008				2007				2008
Product costs		$	362			$	742			$	583			$	1,307
Service costs			285				392				478				638
Stock-based compensation expense included in cost of sales			647				1,134				1,061				1,945
Research and development			1,085				2,286				1,828				3,463
Sales and marketing			1,866				3,022				2,906				5,486
General and administrative			1,892				2,233				2,892				4,442
Stock-based compensation expense included in operating expense			4,843				7,541				7,626				13,391
Stock-based compensation expense capitalized in inventory, net			158				196				250				416
Total stock-based compensation		$	5,648			$	8,871			$	8,937			$	15,752