SEC Filing - Ciena Corporation

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Filed Pursuant to Rule 424(b)4
Registration No. 333-17729

5,000,000 SHARES
[CIENA LOGO]

COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------

Of the 5,000,000 shares of Common Stock offered, 4,000,000 shares are being
offered hereby in the United States and 1,000,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".

Prior to this offering, there has been no public market for the Common
Stock of CIENA Corporation. For factors considered in determining the initial
public offering price, see "Underwriting".

The Underwriters have reserved up to 9.2% of the shares of Common Stock
offered in the offerings for sale, at the initial public offering price, to one
of the Company's international distributors and certain employees and associates
of the Company. See "Underwriting".

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CIEN".

------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ------------

Per Share.................................... $23.00 $1.61 $21.39
Total (3).................................... $115,000,000 $8,050,000 $106,950,000

- ------------------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $1,100,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 600,000 shares at the initial public offering
price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional 150,000 shares
as part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to the Company will be $132,250,000, $9,257,500 and
$122,992,500, respectively. See "Underwriting".

------------------------

The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about February 12, 1997, against payment therefor in immediately available
funds.

GOLDMAN, SACHS & CO.
ALEX. BROWN & SONS
INCORPORATED

WESSELS, ARNOLD & HENDERSON

WILLIAM K. WOODRUFF & COMPANY
INCORPORATED
------------------------

The date of this Prospectus is February 7, 1997.
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Filed Pursuant to Rule 424(b)4
Registration No. 333-17729

5,000,000 SHARES

[CIENA LOGO]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------

Of the 5,000,000 shares of Common Stock offered, 1,000,000 shares are being
offered hereby in an international offering outside the United States and
4,000,000 shares are being offered in a concurrent United States offering. The
initial public offering price and the aggregate underwriting discount per share
will be identical for both offerings. See "Underwriting".

Prior to this offering, there has been no public market for the Common
Stock of CIENA Corporation. For factors considered in determining the initial
public offering price, see "Underwriting".

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CIEN".
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ ------------

Per Share.................................... $23.00 $1.61 $21.39
Total (3).................................... $115,000,000 $8,050,000 $106,950,000

- ---------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $1,100,000 payable by the Company.
(3) The Company has granted the International Underwriters an option for 30 days
to purchase up to an additional 150,000 shares at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Company has granted the U.S. Underwriters
a similar option with respect to an additional 600,000 shares as part of the
concurrent U.S. offering. If such options are exercised in full, the total
initial public offering price, underwriting discount and proceeds to the
Company will be $132,250,000, $9,257,500 and $122,992,500, respectively. See
"Underwriting".
------------------------

The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates for the shares will be ready for delivery in New York, New
York, on or about February 12, 1997, against payment therefor in immediately
available funds.

GOLDMAN SACHS INTERNATIONAL

ALEX. BROWN & SONS
INTERNATIONAL

WESSELS, ARNOLD & HENDERSON

WILLIAM K. WOODRUFF & COMPANY
INCORPORATED

------------------------

The date of this Prospectus is February 7, 1997.
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This diagram shows the
CIENA MultiWave 1600 system.

The Company intends to furnish to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three fiscal quarters of
each fiscal year of the Company.
------------------------

CIENA(TM), the CIENA logo(TM), MultiWave(TM) and WaveWatcher(TM) are
trademarks of the Company. All other brand names or trademarks appearing in this
Prospectus are the property of their respective owners.
------------------------

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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This diagram shows the
CIENA MultiWave 1600 system.

This Prospectus does not constitute an offer to sell or the solicitation of
an offer to buy the shares of Common Stock in any jurisdiction in which such
offer or solicitation is unlawful. There are restrictions on the offer and sale
of the shares of Common Stock in the United Kingdom. All applicable provisions
of the Financial Services Act 1986 and the Public Offers of Securities
Regulations 1995 with respect to anything done by any person in relation to the
shares of Common Stock, in, from or otherwise involving the United Kingdom must
be complied with. See "Underwriting".

In this Prospectus, references to "dollars", "U.S.$" and "$" are to United
States dollars.
------------------------

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
over-allotment options granted to the Underwriters and has been adjusted to
reflect a five-for-one split of the Company's Common Stock effective on December
9, 1996 and the conversion of the Company's mandatorily redeemable convertible
preferred stock (the "Convertible Preferred Stock") into 73,315,740 shares of
Common Stock and the exercise of certain warrants to purchase 300,000 shares of
Convertible Preferred Stock which are convertible into 1,500,000 shares of
Common Stock upon the closing of the Offerings.

THE COMPANY

CIENA Corporation ("CIENA" or the "Company") designs, manufactures and
sells dense wavelength division multiplexing ("DWDM") systems for long distance
fiberoptic telecommunications networks. CIENA's DWDM solution, the MultiWave
1600 system, alleviates capacity, or bandwidth, constraints in high traffic
fiberoptic routes without requiring the installation of new fiber. In addition,
the MultiWave 1600 system enables flexible provisioning of additional bandwidth
without requiring an upgrade of existing network transmission equipment. The
MultiWave 1600 system can increase the carrying capacity of a single optical
fiber 16 fold by allowing simultaneous transmission of up to 16 optical channels
per fiber. This permits fiber currently carrying signals at transmission speeds
of up to 2.5 gigabits per second ("Gb/s") to carry up to 40 Gb/s. CIENA's
MultiWave 1600 system includes optical transmission terminals, optical
amplifiers and network management software. CIENA's system is designed with an
open architecture that allows the MultiWave 1600 system to interoperate with
carriers' existing fiberoptic transmission systems having a broad range of
transmission speeds and signal formats.

The Company believes it is a worldwide market leader in field deployment of
open architecture DWDM systems. CIENA's MultiWave 1600 system was introduced
into field trials in the long distance network of Sprint Corporation ("Sprint")
in May 1996 and LDDS WorldCom ("WorldCom") in August 1996. The MultiWave 1600
system began carrying live traffic in the Sprint network in October 1996, and
the field trial in the WorldCom network was successfully completed in December
1996. The Company has a three-year non-exclusive supply agreement with Sprint
which expires in December 1998, a supply agreement with WorldCom which, subject
to certain conditions, is exclusive through December 1997 and an agreement to
supply Teleway Japan Corporation ("Teleway") with the Company's MultiWave 1600
system. Through October 31, 1996, the Company recorded $54.8 million in revenue,
all of which was derived from sales of the MultiWave 1600 system to Sprint. The
Company is actively seeking additional customers among other long distance
carriers in the worldwide telecommunications market.

The Company was incorporated in Delaware in November 1992. The Company's
principal executive offices are located at 8530 Corridor Road, Savage, Maryland
20763, and its telephone number is (301) 317-5800.

THE OFFERINGS

The offering of 4,000,000 shares of Common Stock initially being offered in
the United States (the "U.S. Offering") and the concurrent offering of 1,000,000
shares of Common Stock initially being offered outside the United States (the
"International Offering") are collectively referred to herein as the
"Offerings". The closing of the International Offering is conditioned upon the
closing of the U.S. Offering and vice versa. See "Underwriting".

Common Stock offered by the Company
U.S. Offering................................................... 4,000,000 shares
International Offering.......................................... 1,000,000 shares
Common Stock to be outstanding after the Offerings(1)............. 93,007,325 shares
Nasdaq National Market Symbol..................................... "CIEN"
Use of Proceeds................................................... General corporate
purposes. See "Use of
Proceeds".

- ---------------
(1) Excludes 11,757,960 shares of Common Stock issuable upon exercise of options
and certain warrants outstanding on October 31, 1996, at a weighted average
exercise price of $.95 per share. See "Capitalization" and
"Management -- Stock Plans".

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SUMMARY FINANCIAL INFORMATION(1)
(in thousands, except per share data)

FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 2, 1992) YEAR ENDED OCTOBER 31,
THROUGH --------------------------------
OCTOBER 31, 1993 1994 1995 1996
------------------ ------- ------- ----------

STATEMENT OF OPERATIONS DATA:
Revenue................................... $ -- $ -- $ -- $ 54,838
Gross profit.............................. -- -- -- 32,994
Operating expenses
Research and development............. -- 1,287 6,361 8,922
Selling and marketing................ -- 295 481 3,780
General and administrative........... 123 787 896 3,905
Income (loss) from operations............. (123) (2,369) (7,738) 16,387
Net income (loss)......................... $ (123) $(2,407) $(7,629) $ 14,718
===== ======= ======= =======
Pro forma net income per common and common
equivalent share(2)..................... $ .15
=======

OCTOBER 31, 1996
--------------------------
ACTUAL PRO FORMA
-------- AS ADJUSTED(3)
--------------
(UNAUDITED)

BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 22,557 $129,007
Working capital................................................... 35,856 142,306
Total assets...................................................... 67,301 173,751
Long-term debt, excluding current portion......................... 2,673 2,673
Mandatorily redeemable preferred stock............................ 40,404 --
Stockholders' equity.............................................. 4,970 151,824

- ---------------
(1) During the period from November 2, 1992 to October 31, 1995, CIENA was a
development stage company. Planned principal operations commenced during
fiscal year 1996.

(2) The pro forma weighted average common and common equivalent shares
outstanding for the year ended October 31, 1996 was 99,111,000. Pro forma
net income per common and common equivalent share is computed using the pro
forma weighted average number of common and common equivalent shares
outstanding. Pro forma weighted average common and common equivalent shares
outstanding include Common Stock, stock options and warrants using the
treasury stock method and the assumed conversion of all outstanding shares
of Convertible Preferred Stock into Common Stock. See Note 1 of Notes to
Financial Statements.

(3) As adjusted to reflect the exercise of certain outstanding warrants to
purchase 300,000 shares of Convertible Preferred Stock which are convertible
into 1,500,000 shares of Common Stock of the Company, the conversion upon
the closing of the Offerings of all outstanding shares of Convertible
Preferred Stock into 73,315,740 shares of Common Stock and the sale of
Common Stock offered by the Company hereby and the application of the
estimated net proceeds therefrom.

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RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating the
Company and its business before purchasing Common Stock in the Offerings.

CONCENTRATION OF POTENTIAL CUSTOMERS; DEPENDENCE ON MAJOR CUSTOMERS

The Company has only three current customers and few potential customers,
consisting almost exclusively of long distance telecommunications carriers.
There are only a small number of long distance telecommunications carriers, and
the substantial capital requirements involved in the establishment of long
distance fiberoptic networks significantly limit additional entrants into this
market. The Company's business will for the foreseeable future be dependent on
this small number of existing and potential customers, and that number may
decrease if and as customers merge with or acquire one another. All of the
Company's revenue for the fiscal year ended October 31, 1996 was derived from
Sprint, and substantially all of the Company's revenue for fiscal 1997 is
expected to be derived from Sprint and WorldCom. WorldCom may terminate all or
any part of an outstanding purchase order upon the payment of a termination fee,
and the Company's agreement with WorldCom does not require minimum purchase
commitments. There can be no assurance the Company will be able to develop
additional customers in the long distance telecommunications market.
Accordingly, the loss of any one of the Company's customers, or the reduction,
delay or cancellation of orders or a delay in shipment of the Company's products
to such customers, could materially and adversely affect the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

The Company's dependence on sizable orders from very few customers makes
the relationship between the Company and each customer critically important to
the Company's business. While each customer relationship is typically structured
around a detailed, heavily negotiated contract, as the relationship evolves over
time, adjustments to such items as product specifications, laboratory and field
testing plans, customer forecasts and delivery timetables, and installation and
field support requirements may be required in response to customer demands and
expectations. The inability of the Company to manage its customer relationships
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.

RECENT PRODUCT INTRODUCTION

The Company first began commercial shipments of its MultiWave 1600 system
in May 1996. The Company's first operational systems only began carrying live
traffic in October 1996 and therefore do not have a history of live traffic
operation over an extended period of time. If reliability, quality or network
monitoring problems should develop a number of material and adverse effects
could result, including manufacturing rework costs, high service and warranty
expense, high levels of product returns, delays in collecting accounts
receivable, reduced orders from existing customers and declining level of
interest from potential customers. The Company is aware of instances in which
installation and activation of certain MultiWave 1600 systems have been delayed
due to faulty components found in certain portions of these systems. Although
the Company maintains accruals for product warranties, there can be no assurance
that actual costs will not exceed these amounts. There is limited operating
history of open architecture wavelength division multiplexing technology in
fiberoptic networks, and in particular of MultiWave 1600 systems, and the
equipment must be handled with care by trained installers. Accordingly, the
Company expects there will be interruptions or delays from time to time in the
activation of the systems, particularly because the Company does not control all
aspects of the customer's installation and activation activities. If significant
interruptions or delays occur, or if their cause is not promptly identified,
diagnosed and resolved, confidence in the MultiWave 1600 system could be
undermined. An undermining of confidence in the MultiWave 1600 system would
materially and adversely affect the Company's customer relationships, business,
financial condition and results of operations.

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MANAGEMENT OF EXPANSION

The Company is experiencing rapid expansion in all areas of its operations,
particularly in manufacturing, and the Company anticipates that this expansion
will continue in the near future. Total personnel has grown from 49 on October
31, 1995 to 225 on October 31, 1996, with 125 of the 176 new employees devoted
to manufacturing. This expansion has placed strains on the managerial, financial
and personnel resources of the Company and will continue to do so. The rapid
pace and volume of new hiring could adversely affect the efficiency of the
Company's manufacturing process. Any delays or difficulties in the Company's
manufacturing process caused by these factors or others could make it difficult
for the Company to meet its delivery commitments to customers. The Company is in
the process of substantially increasing its flow of materials, optical assembly,
final assembly and final component module and system test functions to respond
to customer demand. The Company is expanding its manufacturing capacity at its
existing facility in Savage and intends to lease a third facility. The pace of
the Company's expansion, in combination with the complexity of the technology
involved in the manufacture of the Company's systems, demands an unusually high
level of managerial effectiveness in anticipating, planning, coordinating and
meeting the operational needs of the Company and the needs of the Company's
customers for quality, reliability, timely delivery and post-installation field
support. Given the small number of potential customers for the Company's
systems, the adverse effect on the Company resulting from a lack of effective
management in any of these areas will be magnified. The Company's key management
employees have not had previous experience in managing companies undergoing such
rapid expansion. Inability to manage the expansion of the Company's business
could have a material adverse effect on its business, financial condition and
results of operations. In addition, the Company's manufacturing expansion and
related capital expenditures are being made in anticipation of a level of
customer orders that has not been historically experienced by the Company and
that may not be achieved. The Company is also seeking to achieve ISO 9001
certification for its manufacturing facility. If the Company fails to achieve
such certification, its competitive position may be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

DEPENDENCE ON A SINGLE PRODUCT -- THE MULTIWAVE 1600 SYSTEM

The MultiWave 1600 system is the Company's only product and is focused
exclusively on providing additional bandwidth to long distance
telecommunications carriers. Accordingly, a softening or slowdown in demand for
the Company's product or for additional bandwidth by long distance
telecommunications carriers would materially and adversely affect the Company's
business, financial condition and results of operations. Patent litigation
recently brought against the Company by a competitor could also adversely affect
demand for the MultiWave 1600 system. There can be no assurance that the Company
will be successful in developing any other products or taking other steps to
reduce the risk associated with any softening or slowdown in the demand for
additional bandwidth, nor is there any assurance the Company will be able to
leverage successfully its DWDM technology into other network applications.
Conversely, if the demand for additional bandwidth accelerates, there is no
assurance that the Company's MultiWave 1600 system will deliver sufficient
capacity as rapidly as needed, or that competing DWDM products from other
vendors offering higher capacity would not displace or render obsolete the
MultiWave 1600 system.

FLUCTUATION IN QUARTERLY AND ANNUAL RESULTS

The Company's revenue and operating results may vary significantly from
quarter to quarter and from year to year as a result of a number of factors,
including the size and timing of orders, product mix and shipments of systems.
The timing of order placement, size of orders, satisfaction of contractual
customer acceptance criteria, as well as order delays or deferrals and shipment
delays and deferrals, may cause material fluctuations in revenue. Delivery of
new equipment for installation is also likely to be deferred during the high
telecommunications traffic periods in November and December so as not to risk
network reliability problems. The Company's expense levels in the future

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will be partially based on its expectations of long term future revenue and as a
result net income in any quarterly period in which material orders are shipped
or delayed could vary significantly. Due to this likelihood of significant
quarterly fluctuation in operating results, the Company believes quarter-
to-quarter comparisons of its results of operations, particularly during the
next two to three years of operations, may not necessarily be meaningful
indicators of year-to-year performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

LONG AND UNPREDICTABLE SALES CYCLES

The Company expects that the period of time between initial customer
contact and an actual purchase order may span a year or more. In addition, even
when committed to proceed with deployment of equipment, long distance
telecommunications carriers typically undertake extensive and lengthy product
evaluation and factory acceptance and field testing of new equipment before
purchasing and installing any of it in their networks. Additionally, the
purchase of network equipment such as DWDM equipment is typically carried out by
network operators pursuant to multiyear purchasing programs which may increase
or decrease annually as the operators adjust their capital equipment budgets and
purchasing priorities. The Company's customers do not typically share
information on the duration or magnitude of planned purchasing programs, nor do
they consistently provide to the Company advance notice of contemplated changes
in their capital equipment budgets and purchasing priorities. These
uncertainties substantially complicate the Company's manufacturing planning.
Curtailment or termination of customer purchasing programs, decreases in
customer capital budgets or reduction in the purchasing priority assigned to
equipment such as DWDM equipment, particularly if significant and unanticipated
by the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. Long distance carriers may also
encounter delays in their build out of new routes or in their installation of
new equipment in existing routes, with the result that orders for the MultiWave
1600 system may be delayed or deferred. Any delay or deferral of orders for the
MultiWave 1600 system would have a material adverse effect on the Company's
business, financial condition and results of operations.

COMPETITION

The competition to achieve higher and more cost-effective bandwidth in the
global telecommunications industry is intense and is dominated by a small number
of very large companies with greater financial, technical and marketing
resources, greater manufacturing capacity and more established customer
relationships with network operators than the Company. Each of Lucent
Technologies Inc., formerly part of AT&T Corporation ("Lucent"), Alcatel Alsthom
Group ("Alcatel"), Northern Telecom Inc. ("Nortel"), NEC Corporation ("NEC"),
Pirelli SpA ("Pirelli"), Siemens AG ("Siemens") and ECI Telecom Ltd. ("ECI")
offer various forms of alternative transmission enhancing equipment and in some
cases are offering or have announced an intention to offer DWDM equipment. Such
competitors use their advantages in resources and alternative equipment in
different ways. For example, Lucent, Alcatel, Nortel, NEC and Siemens are
already providers of a full complement of switches, fiberoptic transmission
terminals and fiberoptic signal regenerators and thereby can position themselves
as vertically integrated, "one-stop shopping" solution providers to potential
customers. Further, in certain cases, competitors have offered the Company's
target customers, on an immediate delivery basis, off-the-shelf time division
multiplexing ("TDM") transmission equipment at comparatively lower prices, with
a promise to upgrade to DWDM or other improved equipment in the future. The
substantial system integration resources and manufacturing capability of the TDM
suppliers, in combination with any difference in timeliness of delivery, can be
important to long distance network operators. Finally, as and when these
competitors are able to offer DWDM systems in combination with their own
fiberoptic transmission terminals, they can be expected to press further on the
attractiveness of a "one-stop shopping" solution. The Company expects
competition in general to intensify substantially, especially over the next few
quarters, and further expects competition to be broadly based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability, service commitment and installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate

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network needs and foreseeable scaleability requirements. A U.S. affiliate of
Pirelli instituted litigation against the Company on December 20, 1996, alleging
infringement of five U.S. patents held by Pirelli (the "Pirelli Litigation").
Pirelli and other competitors could use the existence of the Pirelli Litigation
to raise questions in customers' and potential customers' minds as to the
Company's ability to manufacture and deliver the MultiWave 1600 system. There
can be no assurance that the Company will be able to compete successfully with
its existing or new competitors or that competitive pressures faced by the
Company will not result in lower prices for the Company's products and otherwise
materially and adversely affect its business, financial condition and results of
operations.

TECHNOLOGICAL CHANGE AND NEW PRODUCTS

The Company expects that new technologies will emerge as competition in the
telecommunications industry increases and the need for higher and more cost
efficient bandwidth expands. The Company's ability to anticipate changes in
technology, industry standards, customer requirements and product offerings and
to develop and introduce new and enhanced products will be significant factors
in the Company's ability to remain a leader in the deployment of open
architecture DWDM systems. The market for telecommunications equipment is
characterized by substantial capital investment and diverse and competing
technologies such as fiberoptic, cable, wireless and satellite technologies. The
accelerating pace of deregulation in the telecommunications industry will likely
intensify the competition for improved technology. Many of the Company's
competitors have substantially greater financial, technical and marketing
resources and manufacturing capacity with which to compete for new technologies
and for market acceptance of their products. The introduction of new products
embodying new technologies or the emergence of new industry standards could
render the Company's existing product uncompetitive from a pricing standpoint,
obsolete or unmarketable. Any of these outcomes would have a material and
adverse effect on the Company's business, financial condition and results of
operations.

PROPRIETARY RIGHTS

The Company relies on patents, contractual rights, trade secrets,
trademarks and copyrights to establish and protect its proprietary rights in its
product. While the Company does not expect that its proprietary rights in its
technology will prevent competitors from developing technologies and products
functionally similar to the Company's, the Company believes many aspects of its
DWDM technologies and know-how are proprietary, and intends to monitor closely
the DWDM products introduced by competitors for any infringement of the
Company's proprietary rights. Additionally, the Company expects that DWDM
technologies and know-how in general will become increasingly valuable
intellectual properties as the competition to achieve higher and more cost
effective bandwidth intensifies. The Company believes this increasing value in
an industry marked by a few very large competing suppliers represents a
competitive environment where intellectual property disputes are likely. On
December 20, 1996, a U.S. affiliate of Pirelli filed a lawsuit against the
Company alleging infringement of five U.S. patents held by Pirelli (the "Pirelli
Litigation"). Intellectual property disputes may be initiated by competitors
against the Company for tactical purposes to gain competitive advantage or
overcome competitive disadvantage, even if the merits of a specific dispute are
doubtful. In the future, the Company may be required to bring or defend against
other litigation to enforce any patents issued or assigned to the Company, to
protect trademarks, trade secrets and other intellectual property rights owned
by the Company, to defend the Company against claimed infringement of the rights
of others and to determine the scope and validity of the proprietary rights of
others. Any litigation, including the Pirelli Litigation, could be costly and a
diversion of management's attention, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Adverse determinations in litigation, including in the Pirelli Litigation, could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

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The Company has received, and may receive in the future, notices from
holders of patents in the optical technology field that raise issues as to
possible infringement by the Company's products. Pirelli sent a notice in
December 1995 identifying eleven patents it possesses in the field of optical
communications. The Company believes the MultiWave 1600 system does not infringe
any valid patents cited in the notices received. However, questions of
infringement in the field of DWDM technologies involve highly technical and
subjective analyses. There can be no assurance that any such patent holders or
others will not in the future initiate legal proceedings against the Company or
that, if any such proceedings were initiated, the Company would be successful in
defending against these actions. On December 20, 1996, a U.S. affiliate of
Pirelli filed a lawsuit against the Company alleging infringement of five U.S.
patents. Even if the Company is successful in defending against the Pirelli
Litigation or any other such actions, these actions could have an adverse effect
on existing and potential customer relationships and therefore could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's existing customer agreements provide for
indemnification of Sprint, WorldCom and Teleway for liability that may be
incurred in connection with the infringement of a third party's intellectual
property rights, and the Company expects that it will be requested to agree to
indemnify other potential customers in the future. There can be no assurance
that such indemnification against alleged liability will not be required from
the Company in the future.

Patent applications in the United States are not publicly disclosed until
the patent issues. The Company anticipates, based on the size and sophistication
of its competitors and the history of rapid technological advances in its
industry, that several competitors may have patent applications in progress in
the United States that, if issued, could relate to the Company's products. If
such patents were to issue, there can be no assurance that the patent holders or
licensees will not assert infringement claims against the Company or that such
claims will not be successful. The Company could incur substantial costs in
defending itself and its customers against any such claims, regardless of the
merits of such claims. Parties making such claims may be able to obtain
injunctive or other equitable relief which could effectively block the Company's
ability to sell its products, and each claim could result in an award of
substantial damages. In the event of a successful claim of infringement, the
Company and its customers may be required to obtain one or more licenses from
third parties. There can be no assurance that the Company or its customers could
obtain necessary licenses from third parties at a reasonable or acceptable cost
or at all.

Substantial inventories of intellectual property are held by a few industry
participants, such as Bell Laboratories (now owned by Lucent) and major
universities and research laboratories. This concentration of intellectual
property in the hands of a few major entities also poses certain risks to the
Company in seeking to hire qualified personnel. The Company has on a few
occasions recruited such personnel from competitors. The Company has in the past
received letters from counsel to Lucent asserting that the hiring of their
personnel compromises Lucent's intellectual property. There can be no assurance
that other companies will not claim the misappropriation or infringement of
their intellectual property, particularly when and if employees of these
companies leave to work for the Company. To date, the Company has not
experienced litigation concerning the assertions by Lucent, and believes there
is no basis for claims against the Company. Nevertheless, there can be no
assurance that the Company will be able to avoid litigation in the future,
particularly if new employees join the Company after having worked for a
competing company. Such litigation could be very expensive to defend, regardless
of the merits of the claims.

LITIGATION

On December 20, 1996, eight days after the Company's initial filing of the
registration statement of which this prospectus is a part, a U.S. affiliate of
Pirelli filed suit in U.S. District Court in Delaware, alleging wilful
infringement by the Company of five U.S. patents held by Pirelli (the "Pirelli
Litigation"). The lawsuit seeks treble damages, attorneys' fees and costs, as
well as preliminary and permanent injunctive relief against the alleged
infringement.

9
12

There can be no assurance that the Company will be successful in the
defense of the Pirelli Litigation, and an adverse determination in the
litigation could result from a finding of infringement of only one claim of a
single patent. The Company may consider settlement due to the costs and
uncertainties associated with litigation in general and patent infringement
litigation in particular and due to the fact that an adverse determination in
the litigation could preclude CIENA from producing the MultiWave 1600 system
until it were able to implement a non-infringing alternative design to any
portion of the system to which such a determination applied. There can be no
assurance that any settlement will be reached by the parties. An adverse
determination in, or settlement of, the Pirelli Litigation could involve the
payment of significant amounts, or could include terms in addition to such
payments, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company expects that defense of the lawsuit will be costly and will
involve a diversion of the time and attention of some members of management.
Further, Pirelli and other competitors may use the existence of the Pirelli
Litigation to raise questions in customers' and potential customers' minds as to
the Company's ability to manufacture and deliver the MultiWave 1600 system.
There can be no assurance that such efforts by Pirelli and others will not
disrupt the Company's existing and prospective customer relationships.

The Company and certain directors are defendants in another lawsuit
recently brought by entities controlled by a stockholder of the Company
concerning alleged entitlement to additional shares of Convertible Preferred
Stock. No assurance can be given that this lawsuit will not result in an adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Legal Proceedings".

DEPENDENCE ON SUPPLIERS

Suppliers in the specialized, high technology sector of the optical
communications industry are generally not as plentiful or, in some cases, as
reliable, as suppliers in more mature industries. The Company is dependent on a
limited number of suppliers for components of the MultiWave 1600 system as well
as equipment used to manufacture the MultiWave 1600 system. The MultiWave 1600
system has over 600 components, and certain key optical and electronic
components are currently available only from a sole source, where the Company
has identified no other supplier for the component. While alternative suppliers
have been identified for certain other key optical and electronic components,
those alternative sources have not been qualified by the Company. The Company
has to date conducted its business with suppliers through the issuance of
conventional purchase orders against the Company's forecasted requirements. The
Company is seeking to negotiate long term supply agreements with key suppliers,
but currently has no such agreements. The Company has from time to time
experienced minor delays in the receipt of key components, and any future
difficulty in obtaining sufficient and timely delivery of them could result in
delays or reductions in product shipments which, in turn, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's strategy to have portions of its final
product assembled and, in certain cases, tested, by third parties involves
certain risks, including the potential absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies,
and reduced control over delivery schedules, manufacturing yields, quality and
costs. In the event that any significant supplier or subcontractor were to
become unable or unwilling to continue to manufacture and/or test the Company's
systems in required volumes, the Company would have to identify and qualify
acceptable replacements. This process could also be lengthy and no assurance can
be given that any additional sources would become available to the Company on a
timely basis. A key item of equipment, the E-2000 Diamond connector, which is
used to manufacture a portion of the MultiWave 1600 system, is available only
from a sole source - the Diamond Company. A delay or reduction in component or
equipment shipments, an increase in component or equipment costs or a delay or
increase in costs in the assembly and testing of products by third party
subcontractors could materially and adversely affect the Company's business,
financial condition and results of operations.

10
13

COMPETITORS AS SUPPLIERS

Certain of the Company's component suppliers are both primary sources for
such components and major competitors in the market for system equipment. For
example, the Company buys certain key components from Lucent, Alcatel, Nortel,
NEC and Siemens, each of which offers optical communications systems and
equipment which are competitive with the Company's MultiWave 1600 system. Lucent
is the sole source of two integrated circuits and is one of two suppliers of
Erbium-doped fiber. Alcatel and Nortel are suppliers of lasers used in the
MultiWave 1600 system. NEC is a supplier of certain testing equipment. The
Company's business, financial condition and results of operations could be
materially and adversely affected if these supply relationships were to decline
in reliability or otherwise change in any manner adverse to the Company.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES

The Company was founded in November 1992 and introduced its MultiWave 1600
system in field trials in May 1996. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company, its product and
prospects can be based. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets and companies experiencing rapid expansion in their operations.
To address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
management and other employees, continue to upgrade its technologies and
commercialize products and services which incorporate such technologies and
achieve market acceptance for its MultiWave 1600 system. There can be no
assurance that the Company will be successful in addressing such risks. The
Company incurred net losses in each quarter from inception through the second
quarter of fiscal 1996. While the Company reported net income for fiscal 1996,
there can be no assurance that the Company will sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon a number of key
technical and management employees including Dr. Nettles, Dr. Huber, Mr.
Chaddick and Mr. Huang. The loss of the services of any of the Company's key
employees, none of whom is bound to a term of employment by an employment
agreement, would have a material adverse effect on the Company. The Company
generally does not maintain insurance policies on the lives of such employees.
In addition, while key employees are generally bound by Company-wide standard
non-disclosure and proprietary rights agreements, the Company has not entered
into separate non-competition agreements with any of its employees. The
Company's success will also depend in large part upon its ability to attract and
retain highly-skilled technical, managerial, sales and marketing personnel,
particularly those skilled and experienced with optical communications
equipment. Competition for such personnel is intense and there can be no
assurance that the Company will be successful in retaining its existing key
personnel and in attracting and retaining the personnel it requires. Failure to
attract and retain key personnel will have a material adverse effect on the
Company's business, financial condition and results of operations.

DISCRETIONARY USE OF PROCEEDS

The net proceeds to the Company from the Offerings, estimated at $105.9
million, will be used for general corporate purposes and have not been
designated for any particular purpose. Accordingly, the Company will have broad
discretion as to the application of such proceeds. See "Use of Proceeds".

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after the
Offerings could adversely affect prevailing market prices for the Common Stock.
The 5,000,000 shares of Common

11
14

Stock offered hereby will be freely tradeable without restriction in the public
market as of the date of this Prospectus except as described in "Underwriting".
Within 90 days after the date of this Prospectus, approximately 71,538,747
shares (including 5,011,912 shares issuable upon the exercise of options and
warrants) will become eligible for sale in the public market, subject in some
cases to the volume and other restrictions of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"). Of these shares, holders of
66,018,610 shares and options and warrants to purchase 5,011,912 shares are
subject to lock-up agreements. Shares covered by these lock-up agreements are
subject to restrictions on resale in the public market for a period of 180 days
following the date of this Prospectus, subject to release, directly or
indirectly at the discretion of the Underwriters. Upon the expiration of the
lock-up period, approximately 72,406,035 shares will become eligible for sale in
the public market subject in some cases to the volume and other restrictions of
Rule 144 under the Securities Act. The holders of approximately 74,815,680
shares of Common Stock are entitled to certain registration rights with respect
to such shares under the Securities Act. In addition, the Company intends to
file a registration statement under the Securities Act promptly following the
effective date of this Registration Statement to register all of the shares of
Common Stock issued or reserved for issuance upon the exercise of options issued
or that may be issued under the Company's Amended and Restated 1994 Stock Option
Plan and 1996 Outside Directors Stock Option Plan. As of October 31, 1996, there
were outstanding options for the purchase of 11,082,960 shares, of which options
for approximately 2,684,355 shares were vested. See "Management -- Stock Plans,"
"Underwriting" and "Shares Eligible for Future Sale".

NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offerings, there has been no public market for the Common
Stock of the Company. The initial public offering price has been determined by
negotiations among the Company and the Representatives of the Underwriters. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. There can be no assurance that an active public
market will develop or be sustained after the Offerings or that the market price
of the Common Stock will not decline below the public offering price. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, announcements of technological innovations, the introduction
of new products or changes in product pricing policies by the Company or its
competitors, proprietary rights or product liability litigation or changes in
earnings estimates by analysts could cause the market price of the Common Stock
to fluctuate substantially. In addition, stock prices for many technology
companies fluctuate widely for reasons which may be unrelated to operating
results. These fluctuations, as well as general economic, political and market
conditions such as recessions, international instabilities or military
conflicts, may materially and adversely affect the market price of the Common
Stock.

CONTROL BY EXISTING STOCKHOLDERS

The Company's officers, directors and their affiliates will, in the
aggregate, beneficially own approximately 54.7% of the Company's outstanding
shares after the Offerings. As a result, these stockholders, if acting together,
would be able effectively to control substantially all matters requiring
approval by the stockholders of the Company, including the election of
directors. This ability may have the effect of delaying or preventing a change
in control of the Company, or causing a change in control of the Company which
may not be favored by the Company's other stockholders.

EFFECT OF CERTAIN CHARTER, BYLAW AND OTHER PROVISIONS

Certain provisions of the Company's Third Amended and Restated Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), and bylaws
and certain other contractual provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common

12
15

Stock. Certain of these provisions allow the Company to issue preferred stock
with rights senior to those of the Common Stock without any further vote or
action by the stockholders, provide for a classified board of directors,
eliminate the right of the stockholders to call a special meeting of
stockholders, eliminate the right of stockholders to act by written consent, and
impose various procedural and other requirements which could make it difficult
for stockholders to effect certain corporate actions.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution of $21.37 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution. See "Dilution".

13
16

USE OF PROCEEDS

The principal purpose of the Offerings is to increase the Company's working
capital and equity base, create a public market for the Company's Common Stock,
facilitate future access to public capital markets and provide increased
visibility and credibility for the Company in its marketplace. The net proceeds
to the Company from the sale of the 5,000,000 shares of Common Stock offered by
the Company hereby are estimated to be $105.9 million ($121.9 million if the
over-allotment options are exercised in full), after deducting the underwriting
discount and estimated offering expenses. The Company also expects to receive
additional proceeds of approximately $0.6 million from the exercise of certain
outstanding warrants to purchase 300,000 shares of Convertible Preferred Stock
which are convertible into 1,500,000 shares of Common Stock.

The Company has no current plans for the net proceeds of the Offerings. The
Company intends to add the net proceeds from the Offerings and from the exercise
of warrants to working capital, where such proceeds will be available to support
general corporate purposes which are expected to include capital equipment
expenditures to support selling and marketing, manufacturing and product
development activities. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies. Pending use of the net proceeds for any
purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade obligations.

DIVIDEND POLICY

The Company has never paid or declared any cash dividends on its capital
stock. It is the present policy of the Company to retain earnings to finance the
growth and development of the business and, therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's credit agreement with
Mercantile-Safe Deposit & Trust Company prohibits the Company from paying cash
dividends on its capital stock.

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of
October 31, 1996 (i) on an actual basis and (ii) as adjusted to reflect the
exercise of certain outstanding warrants to purchase 300,000 shares of
Convertible Preferred Stock which are convertible into 1,500,000 shares of
Common Stock of the Company, the conversion of all outstanding shares of
Convertible Preferred Stock into 73,315,740 shares of Common Stock upon the
closing of the Offerings and the sale of 5,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Company's financial
statements and notes thereto appearing elsewhere in this Prospectus.

OCTOBER 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)

Long-Term Debt........................................................ $ 2,673 $ 2,673
Series A Convertible Preferred Stock, $.01 par value (the "Series A
Preferred Stock"); 4,500,000 shares authorized, 3,590,157 shares
issued and outstanding (actual); no shares authorized, issued and
outstanding (as adjusted)(1)........................................ 3,492 --
Series B Convertible Preferred Stock, $.01 par value (the "Series B
Preferred Stock"); 8,000,000 shares authorized, 7,354,092 shares
issued and outstanding (actual); no shares authorized, issued and
outstanding (as adjusted)(1)........................................ 10,962 --
Series C Convertible Preferred Stock, $.01 par value (the "Series C
Preferred Stock"); 3,750,000 shares authorized, 3,718,899 shares
issued and outstanding (actual); no shares authorized, issued and
outstanding (as adjusted)(1)........................................ 25,950 --
Stockholders' equity:
Preferred Stock, $.01 par value; no shares authorized, issued and
outstanding (actual); 20,000,000 shares authorized, no shares
issued and outstanding (as adjusted)(2)......................... -- --
Common Stock, $.01 par value, 180,000,000 shares authorized;
13,191,585 shares issued and outstanding (actual); 93,007,325
shares issued and outstanding (as adjusted)(2)(3)............... 132 930
Additional paid-in capital....................................... 339 146,395
Notes receivable from stockholders............................... (60) (60)
Retained earnings................................................ 4,559 4,559
------- -----------
Total stockholders' equity............................................ 4,970 151,824
------- -----------
Total capitalization.................................................. $48,047 $ 154,497
======== ==========

- ---------------
(1) See Note 8 of Notes to Financial Statements.

(2) See Note 14 of Notes to Financial Statements.

(3) Excludes 19,426,505 shares of Common Stock reserved for issuance under the
Company's Amended and Restated 1994 Stock Option Plan, under which options
to purchase 11,007,960 shares at a weighted average exercise price of $.96
were outstanding as of October 31, 1996, and 750,000 shares reserved for
issuance under the Company's 1996 Outside Directors Stock Option Plan, under
which options to purchase 75,000 shares at a weighted average exercise price
of $2.30 were outstanding as of October 31, 1996. Also excludes 675,000
shares of Common Stock reserved for issuance pursuant to the exercise of
warrants outstanding as of October 31, 1996. See "Management -- Stock Plans"
and Note 9 of Notes to Financial Statements.

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DILUTION

The pro forma net tangible book value of the Company as of October 31, 1996
was $46.0 million or approximately $.52 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's pro forma
stockholders' equity, less intangible assets, divided by 88,007,325 pro forma
shares of Common Stock outstanding as of October 31, 1996. The preceding pro
forma information gives effect to (i) the conversion of the Company's
Convertible Preferred Stock into 73,315,740 shares of Common Stock and (ii) the
exercise of certain warrants to purchase 300,000 shares of Convertible Preferred
Stock which are convertible into 1,500,000 shares of Common Stock. Assuming the
sale by the Company of 5,000,000 shares of Common Stock offered hereby and
receipt of the estimated net proceeds therefrom, the pro forma adjusted net
tangible book value of the Company as of October 31, 1996 would have been
approximately $151.8 million or $1.63 per share. This represents an immediate
increase in such net tangible book value of $1.11 per share to existing
stockholders and an immediate dilution of $21.37 per share to new investors. The
following table illustrates this per share dilution:

Initial public offering price per share.............................. $ 23.00
Pro forma net tangible book value per share as of October 31,
1996........................................................... $.52
Increase per share of Common Stock attributable to the
Offerings...................................................... 1.11
----
Pro forma net tangible book value per share after the Offerings...... 1.63
-------
Net tangible book value dilution per share to new investors.......... $ 21.37
======

The following table summarizes, on a pro forma basis as of October 31,
1996, the total number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid, by
existing stockholders and by new investors (without giving effect to the
underwriting discount and estimated offering expenses):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------

Existing stockholders(1)............... 88,007,325 94.6% $ 41,416,000 26.5% $ .47
New investors.......................... 5,000,000 5.4 115,000,000 73.5 $ 23.00
---------- ------- ------------ -------
Total.................................. 93,007,325 100.0% $156,416,000 100.0%
========== ====== ============= ======

- ---------------
(1) Excludes 19,426,505 shares of Common Stock reserved for issuance under the
Company's Amended and Restated 1994 Stock Option Plan, under which options
to purchase 11,007,960 shares at a weighted average exercise price of $.96
were outstanding as of October 31, 1996, and 750,000 shares reserved for
issuance under the Company's 1996 Outside Directors Stock Option Plan,
under which options to purchase 75,000 shares at a weighted average
exercise price of $2.30 were outstanding as of October 31, 1996. Also
excludes 675,000 shares of Common Stock reserved for issuance pursuant to
the exercise of warrants outstanding as of October 31, 1996. See
"Management -- Stock Plans" and Note 9 of Notes to Financial Statements.

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SELECTED FINANCIAL DATA

The following selected financial data as of October 31, 1995 and 1996 and
for the years ended October 31, 1994, 1995 and 1996 have been derived from the
audited financial statements of the Company included elsewhere in this
Prospectus. The selected financial data as of October 31, 1993 and 1994 and for
the period from inception (November 2, 1992) through October 31, 1993 have been
derived from the Company's accounting records.

The data set forth below are qualified by reference to, and should be read
in conjunction with, the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" thereof included elsewhere in this Prospectus.

FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 2, 1992) YEAR ENDED OCTOBER 31,(1)
THROUGH --------------------------------
OCTOBER 31, 1993(1) 1994 1995 1996
------------------- ------- ------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue................................... $ -- $ -- $ -- $ 54,838
Cost of goods sold........................ -- -- -- 21,844
-------- ------- ------- ----------
Gross profit......................... -- -- -- 32,994
Operating expenses:
Research and development............. -- 1,287 6,361 8,922
Selling and marketing................ -- 295 481 3,780
General and administrative........... 123 787 896 3,905
-------- ------- ------- ----------
Total operating expenses.................. 123 2,369 7,738 16,607
-------- ------- ------- ----------
Income (loss) from operations............. (123) (2,369) (7,738) 16,387
Other income (expense), net............... -- (38) 109 581
-------- ------- ------- ----------
Income (loss) before income taxes......... (123) (2,407) (7,629) 16,968
Provision for income taxes................ -- -- -- 2,250
-------- ------- ------- ----------
Net income (loss)......................... $(123) $(2,407) $(7,629) $ 14,718
================ ======== ======== ==========
Pro forma net income per common and common
equivalent share(2)..................... $ .15
==========

OCTOBER 31,(1)
-------------------------------------
1993 1994 1995 1996
---- ------- ------- -------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 10 $ 1,908 $ 5,032 $22,557
Working capital......................................... (35) 932 3,069 35,856
Total assets............................................ 13 2,497 7,383 67,301
Long-term debt, excluding current portion............... -- 392 856 2,673
Mandatorily redeemable preferred stock.................. -- 3,492 14,454 40,404
Stockholders' equity (deficit).......................... (35) (2,388) (9,930) 4,970

- ---------------
(1) The Company 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. Fiscal 1994 and 1995 comprised 52 weeks and fiscal 1996
comprised 53 weeks.

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20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's financial statements and notes
thereto included elsewhere in this Prospectus. The information in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" as well as those discussed elsewhere in
this Prospectus.

OVERVIEW

CIENA was incorporated in November 1992. From incorporation through April
1994, the Company's principal objective was to secure sufficient equity
financing to enable the Company to commence product development efforts based on
its optical communications technology. The Company secured its initial round of
equity financing in April 1994.

The engineering design and development efforts begun in April 1994 took on
greater product focus in early 1995 as the Company began working with Sprint to
refine the Company's design of its DWDM system to meet Sprint's requirements.
Satisfactory preliminary laboratory testing at Sprint in October 1995 led to the
execution of a three-year non-exclusive supply agreement in December 1995. The
agreement called for factory acceptance testing, followed by field testing,
prior to any obligation of Sprint to pay for any systems. The Company passed the
factory acceptance testing in April 1996, and shipped commercially deployable
systems for field testing in May 1996. Field testing was satisfactorily passed
in July 1996, and live traffic began being carried over the Company's MultiWave
1600 system in October 1996. The supply agreement was amended in December 1996
to provide a more definitive purchase and delivery schedule during 1997 in
combination with a reduction in the Company's prices relating thereto. The
Company made initial contact with WorldCom in February 1995 and WorldCom agreed
in July 1996 to commence field testing of the MultiWave 1600 system in August
1996. A supply agreement with WorldCom, which, subject to certain conditions, is
exclusive through December 1997, was signed in September 1996. In December 1996,
the field trial in the WorldCom network was successfully completed. The Company
also has shipped a MultiWave 1600 system for Teleway's network in Japan.

The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain customer
acceptance or has agreements pertaining to installation services, revenue is
deferred until no significant obligations remain. Revenue for installation
services is recognized as the services are performed. Amounts received in excess
of revenue recognized are recorded as deferred revenue. For distributor sales
where risks of ownership have not transferred, the Company recognizes revenue
when the product is shipped through to the end user. The Company's initial
recognition of revenue from Sprint occurred in the quarter ended July 31, 1996,
after notification by Sprint of satisfactory completion of field testing. All of
the Company's revenue of $54.8 million through October 31, 1996 was derived from
MultiWave 1600 system sales to Sprint.

The Company is currently engaged in continued efforts to expand its
manufacturing capabilities. Approximately one-third of the Company's current
50,500 square foot facility in Savage, Maryland is used for manufacturing
operations; the Company intends to convert the entire facility to manufacturing
operations by April 30, 1997, while transferring other operating functions to an
approximately 96,000 square foot facility, approximately 10 miles from Savage,
near the Baltimore/Washington International Airport. The Company intends to
lease additional facilities of 50,000 to 60,000 square feet as early as the
second quarter of 1997.

RESULTS OF OPERATIONS

FISCAL YEARS ENDED 1994, 1995 AND 1996

For the fiscal years ended October 31, 1994 and 1995, the Company was in
the development stage, generated no revenue and had losses from operations of
$2.4 million and $7.7 million, respectively. By the end of fiscal year 1995, the
Company had begun to devote substantial resources to the development of
manufacturing capabilities and the expansion of its selling and

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marketing efforts and general and administrative support infrastructure. The
level of expenditures increased toward the end of fiscal 1996, as increased
demand for the Company's MultiWave 1600 system required rapid expansion of
manufacturing capabilities and of technical and field support staff. For the
fiscal year ended October 31, 1996, the Company generated revenue of $54.8
million, had gross profit of $33.0 million and incurred operating expenses of
$16.6 million.

QUARTERLY RESULTS OF OPERATIONS

The tables below set forth the operating results and percentage of revenue
represented by certain items in the Company's statements of operations for each
of the four quarters in the fiscal year ended October 31, 1996. This information
is unaudited, but in the opinion of the Company reflects all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. The results for any quarter are not
necessarily indicative of results for any future period. Operating results as a
percentage of revenue for the quarters ended January 31 and April 30, 1996 are
excluded due to the absence of revenue for those periods:

FISCAL QUARTER ENDED
--------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31,
1996 1996 1996 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue........................................................... $ -- $ -- $ 16,923 $ 37,915
Cost of goods sold................................................ -- -- 7,346 14,498
-------- -------- -------- --------
Gross profit.................................................. -- -- 9,577 23,417
Operating expenses:
Research and development...................................... 2,473 1,746 1,964 2,739
Selling and marketing......................................... 491 700 1,130 1,459
General and administrative.................................... 499 526 1,064 1,816
-------- -------- -------- --------
Total operating expenses.................................. 3,463 2,972 4,158 6,014
-------- -------- -------- --------
Income (loss) from operations..................................... (3,463) (2,972) 5,419 17,403
Other income (expense), net....................................... 129 237 75 140
-------- -------- -------- --------
Income (loss) before income taxes................................. (3,334) (2,735) 5,494 17,543
Provision (benefit) for income taxes.............................. -- -- (4,600) 6,850
-------- -------- -------- --------
Net income (loss)................................................. $ (3,334) $ (2,735) $ 10,094 $ 10,693
======== ======== ======== ========
Pro forma net income (loss) per common and common equivalent
share........................................................... $ (.03) $ (.03) $ .10 $ .11
======== ======== ======== ========
Pro forma weighted average common and common equivalent shares
outstanding..................................................... 99,111 99,111 99,111 99,111
======== ======== ======== ========

FISCAL QUARTER ENDED
--------------------------------------------
JAN. 31, APR. 30, JUL. 31, OCT. 31,
1996 1996 1996 1996
-------- -------- -------- --------
(AS A PERCENTAGE OF REVENUE)

Revenue........................................................... -- -- 100.0% 100.0%
Cost of goods sold................................................ -- -- 43.4 38.2
-------- -------- -------- --------
Gross profit.................................................. -- -- 56.6 61.8
Operating expenses:
Research and development...................................... -- -- 11.6 7.2
Selling and marketing......................................... -- -- 6.7 3.8
General and administrative.................................... -- -- 6.3 4.8
-------- -------- -------- --------
Total operating expenses.................................. -- -- 24.6 15.8
-------- -------- -------- --------
Income (loss) from operations..................................... -- -- 32.0 46.0
Other income (expense), net....................................... -- -- 0.4 0.3
-------- -------- -------- --------
Income (loss) before income taxes................................. -- -- 32.4 46.3
Provision (benefit) for income taxes.............................. -- -- (27.2) 18.1
-------- -------- -------- --------
Net income (loss)................................................. -- -- 59.6% 28.2%
======== ======== ======== ========

THREE MONTHS ENDED JANUARY 31, 1996, APRIL 30, 1996, JULY 31, 1996 AND OCTOBER
31, 1996

REVENUE. The Company began shipping the MultiWave 1600 system for field
testing in May 1996 with customer acceptance by Sprint occurring in July 1996.
Revenue totalled $16.9 million for the quarter ended July 31, 1996. Revenue for
the quarter ended October 31, 1996 increased

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22

124% over the previous quarter to $37.9 million. The increase in revenue from
quarter to quarter was due to the increased sales to Sprint influenced by
increases in the Company's manufacturing capacity and customer confidence. While
the Company achieved quarter to quarter revenue growth of 124% from the third to
fourth quarters of fiscal 1996, the Company does not expect to sustain this rate
of sequential quarterly revenue growth in future periods. See "Risk Factors".

GROSS PROFIT. Cost of goods sold consists of component costs, direct
compensation costs, warranty and other contractual obligations, royalties,
license fees and overhead related to the Company's manufacturing operations.
Gross margins were 56.6% and 61.8% for the quarters ended July 31, 1996 and
October 31, 1996, respectively. The increase in gross margin was affected by
fixed overhead costs being allocated over a larger revenue base and an
improvement in manufacturing efficiencies. The Company's gross margins in the
future may be affected by a number of factors, including competitive market
pricing, manufacturing volumes and efficiencies and fluctuations in component
costs. The Company's future gross margins may also be affected by the mix of
product features and configurations sold in a period as well as the extent of
services provided.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of compensation costs for research and development staff, depreciation
of test equipment, certain software development costs and prototype materials.
Research and development expenses fluctuated from $2.5 million for the quarter
ended January 31, 1996 to $1.7 million, $2.0 million and $2.7 million for the
quarters ended April 30, July 31 and October 31, 1996, respectively. First
quarter activity was attributable in part to selecting materials and equipment
while building prototype systems which in turn supported the development
activities for the second and third quarters. The fourth quarter development
expenditures of $2.7 million, which were significantly greater in absolute
dollars than the previous two quarters, were related to increased staffing
levels, outside consulting services and the purchase of prototype materials for
the development of the optical add/drop multiplexer. During the third and fourth
quarters, research and development expenses were 11.6% and 7.2% of revenue,
respectively. The decrease in research and development expenses as a percentage
of revenue from quarter to quarter was a function of the rapid revenue growth.
The Company expects that its research and development expenditures will
generally continue to increase in absolute dollars during fiscal 1997 to support
the continued development of new MultiWave features and products and develop
possible product cost reductions. The Company has expensed research and
development costs as incurred.

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist of
compensation costs for selling and marketing staff, certain pre-sales and
post-sales support, travel expenses, trade shows and other marketing programs.
Selling and marketing expenses increased from quarter to quarter during fiscal
year 1996. The costs incurred were $0.5 million, $0.7 million, $1.1 million and
$1.5 million for the quarters ended January 31, April 30, July 31, and October
31, 1996, respectively. The quarterly increases were primarily the result of
increased payroll costs reflecting the hiring of new employees for sales,
technical assistance and field support for the Company's customers. Other
factors contributing to the increases in the third and fourth quarters included
commissions earned and trade show participation. During the third and fourth
quarters, selling and marketing expenses were 6.7% and 3.8% of revenue,
respectively. The decrease in selling and marketing expenses as a percentage of
revenue was a function of the rapid revenue growth. The Company anticipates that
its selling and marketing expenses will increase in absolute dollars during
fiscal 1997 as additional personnel are hired and offices are opened to allow
the Company to pursue new market opportunities and service new customers.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist principally of expenses for finance, administration and general
management activities. The expenses totalled $0.5 million, $0.5 million, $1.1
million and $1.8 million for the quarters ended January 31, April 30, July 31,
and October 31, 1996, respectively. The increases in general and administrative
expenses in the third and fourth quarters compared to the first and second
quarters were primarily due to increased staffing. The Company also incurred
significant legal expenses in the fourth

20
23

quarter of 1996 in connection with certain litigation. The Company believes that
its general and administrative expenses will increase in fiscal 1997 as a result
of the expansion of the Company's administrative staff required to support its
expanding operations, an increase in expenses associated with operating as a
public company and legal expenses associated with recently instituted
litigation. See "Business -- Legal Proceedings".

OTHER INCOME (EXPENSE), NET. Other income (expense), net, consists of
interest income earned on the Company's cash and cash equivalents, net of
interest expense associated with the Company's debt obligations. The Company
believes that other income (expense), net, will fluctuate from quarter to
quarter primarily depending upon the level of the Company's cash balances,
funding required for daily operations and the retirement of its debt
obligations. The Company believes that other income will increase in absolute
dollars in fiscal 1997 as a result of the investment of the net proceeds of the
Offerings.

PROVISION (BENEFIT) FOR INCOME TAXES. During fiscal years 1993 through
1995 and the first two quarters of fiscal 1996, a valuation allowance had been
recorded to offset the Company's net deferred tax assets, including the possible
future benefit from realization of tax operating loss carryforwards. The
recording of such valuation allowance was based upon management's determination
that realization of the net deferred tax assets was not "more likely than not"
(as defined in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes"). During the third quarter of 1996, the Company received
product acceptance from its initial customer and started profitable operations,
at which time the Company fully reversed its previously established deferred tax
valuation allowance. The tax benefit of $4.6 million recorded in the third
quarter reflects the impact of such reversal. See Note 10 of Notes to Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations and capital
expenditures principally through the sale of Convertible Preferred Stock for
proceeds totalling $40.6 million and capital lease financing totalling $4.1
million. At the end of fiscal 1996, the Company's principal source of liquidity
was its cash of $22.6 million. In November 1996, the Company established an
unsecured $15.0 million bank revolving line of credit. Borrowings under this
line bear interest at the bank's prime rate. As of November 30, 1996, there were
no borrowings outstanding under the line of credit. The line of credit expires
in November 1997 and requires that the Company maintain certain financial ratios
and minimum profitability and tangible net worth. See Note 6 of Notes to
Financial Statements.

Capital equipment expenditures from inception through October 31, 1996
totalled $11.7 million. These expenditures were primarily for test,
manufacturing and computer equipment. The Company expects additional capital
equipment expenditures to be made during fiscal 1997 to support selling and
marketing, manufacturing and product development activities. In addition, since
its inception the Company has used $2.4 million for the construction of
leasehold improvements and expects to use an additional $5.0 million of capital
in the construction of leasehold improvements for its new facility and the
conversion to full manufacturing of its current facility during fiscal 1997. The
Company intends to lease additional facilities of 50,000 to 60,000 square feet
as early as the second quarter of fiscal 1997 and may spend up to $5.0 million
to $8.0 million in improving such facilities as and to the extent necessary to
meet expansion requirements.

The Company believes that the proceeds from the Offerings, combined with
its existing cash balance, its line of credit and the cash flows expected from
future operations, will be sufficient to meet the Company's capital requirements
for at least the next 18 to 24 months.

21
24

BUSINESS

OVERVIEW

CIENA designs, manufactures and sells DWDM systems for long distance
fiberoptic telecommunications networks. CIENA's DWDM solution, the MultiWave
1600 system, alleviates capacity, or bandwidth, constraints in high traffic
fiberoptic routes without requiring the installation of new fiber. In addition,
the MultiWave 1600 system enables flexible provisioning of additional bandwidth
without requiring an upgrade of existing network transmission equipment. The
MultiWave 1600 system can increase the carrying capacity of a single optical
fiber 16 fold by allowing simultaneous transmission of up to 16 optical channels
per fiber. This permits fiber currently carrying signals at transmission speeds
of up to 2.5 Gb/s to carry up to 40 Gb/s. CIENA's MultiWave 1600 system includes
optical transmission terminals, optical amplifiers and network management
software. CIENA's system is designed with an open architecture that allows the
MultiWave 1600 system to interoperate with carriers' existing fiberoptic
transmission systems having a broad range of transmission speeds and signal
formats.

The Company believes it is a worldwide market leader in field deployment of
open architecture DWDM systems. CIENA's MultiWave 1600 system was introduced
into field trials in the long distance network of Sprint in May 1996 and
WorldCom in August 1996. The MultiWave 1600 system began carrying live traffic
in the Sprint network in October 1996 and the field trial in the WorldCom
network was successfully completed in December 1996. The Company has a
three-year non-exclusive supply agreement with Sprint which expires in December
1998, a supply agreement with WorldCom which, subject to certain conditions, is
exclusive through December 1997 and an agreement to supply Teleway with the
Company's MultiWave 1600 system. Through October 31, 1996, the Company recorded
$54.8 million in revenue, all of which was derived from sales of the MultiWave
1600 system to Sprint. The Company is actively seeking additional customers
among other long distance carriers in the worldwide telecommunications market.

INDUSTRY BACKGROUND

The four largest long distance carriers in the United States, AT&T
Corporation ("AT&T"), MCI Communications Inc. ("MCI"), Sprint and WorldCom, have
widely deployed fiberoptic cable forming the backbone of their long distance
networks. Growth in utilization of long distance networks has increased both the
type of traffic -- from voice alone to voice, data and video -- and the volume
of traffic carried over these fiberoptic networks. This growth in utilization
has been caused by factors such as:

- increased use of office automation, distributed computing,
electronic mail, facsimile transmission, electronic
transaction processing, video conferencing, remote access
telecommuting, local and wide area networking and the
growing use of the Internet;

- widespread deregulation of the telecommunications industry
and the consequent increase in competition among, and
lowering of prices by, service providers in the long
distance market; and

- development of high bandwidth, network access technologies,
such as cable modems, hybrid fiber coaxial architectures
and digital subscriber lines, that permit users to transmit
and receive high volumes of information.

Increased utilization creates transmission bottlenecks on heavily used
routes that were originally designed for significantly less traffic. Although
exact statistics are not available, the Company believes that this increase in
type and volume of utilization has caused some long distance telecommunications
carriers to handle traffic over certain long distance routes at or near the
maximum capacity of the existing installed fiber and electronic-based
transmission systems currently in use.

22
25

The growth in demand for, and the resulting strains on, capacity of the
fiberoptic telecommunications networks have been coupled with an increasing need
for network reliability to support mission critical data communications. As
end-users become more dependent on around-the-clock network availability, they
become less tolerant of service interruptions which can be caused by factors
such as equipment failure, fiber cuts or high traffic volume.

This demand for greater reliability has led long distance carriers to adopt
"ring architecture" in which long distance routes are linked in a ring
configuration so that in the event of a fiberoptic cable cut or other equipment
failure between two points of the ring, the signal can be immediately redirected
through the reverse "protection path" of the ring. The service break associated
with a fiber cut or other equipment failure in a network using ring architecture
can be restored in approximately 50 milliseconds, which is essentially
unnoticeable by the consumer. However, many ring architectures now being
deployed demand twice as much fiber capacity (due to the need to maintain a
redundant alternative path to serve as a protection path for each fiber in use)
as non-ring based architectures. AT&T, Sprint and WorldCom have all announced an
intention to implement ring architecture for their networks, which will place
greater bandwidth demand on their existing fiberoptic networks.

The shortage of bandwidth available in existing fiberoptic networks can be
addressed in several ways. One solution is to install additional fiberoptic
cable along existing routes or in new fiberoptic routes. However, the
installation of additional fiber, and particularly the creation of new
fiberoptic routes, is a costly and time-consuming process, involving extensive
negotiation and acquisition of necessary rights of way, as well as the actual
construction effort. The Company believes that the average cost of creating new
underground fiberoptic routes is approximately $43,400 per kilometer ($70,000
per mile). Another solution is to increase the transmission speed of the
installed systems. However, this approach is also costly. Existing long distance
telecommunications routes generally use TDM fiberoptic transmission terminals at
either end of the route to send and receive signals. Opto-electronic signal
regenerators ("regenerators") are then placed between terminals along the
fiberoptic cables, spaced at regular intervals of 35-50 kilometers
(approximately 22 to 31 miles). These regenerators process, amplify and re-time
the signal through a process that involves conversion of the optical signal to
electronic form and back to optical form. However, terminals and regenerators
are "bit-rate specific," meaning upgrade of a route segment to handle higher
transmission speeds requires replacement of all terminals and regenerators. A
large number of regenerators are needed on a route of significant length, and
any upgrade of a route segment using TDM technology would require a significant
investment in new equipment as well as significant installation costs.

Certain types of existing fiber have been shown to display incompatibility
problems with very high speed TDM equipment. "Non-dispersion shifted" fiber
constitutes the majority of fiber installed in North America and Europe, while
"dispersion shifted" fiber has been popular in Japan. "Reduced dispersion" fiber
is a recent development that is beginning to see applications in some new fiber
installations. At lower transmission rates, such as 2.5 Gb/s, TDM-based
equipment is technically viable for use with these fiber types and widely
available commercially. As an upgrade to existing telecommunications links with
transmission rates below 2.5 Gb/s, TDM at 2.5 Gb/s can represent an alternative
incremental approach to the enhancement of transmission capacity. However, at
the 10 Gb/s transmission rate, transmission over non-dispersion shifted fiber
can result in significant impairments to and distortion of the signal.

CIENA and others have observed that the potential for an alternative
technological solution to laying new fiber or upgrading capacity to higher
electronic transmission rates exists because the bandwidth intrinsic to existing
fiber is vastly underutilized. For example, transmission systems which use TDM
and transmit at 2.5 Gb/s use substantially less than one percent of the inherent
bandwidth of the fiber currently deployed in United States fiberoptic networks.
An optical multiplexing technology called wavelength division multiplexing
("WDM") has long been recognized for its potential to better utilize fiber
bandwidth by enabling the simultaneous transmission of multiple

23
26

optical signals on discrete channels on a single fiber. Until recently, however,
technological barriers have limited exploitation of the potential of WDM as a
commercially viable solution. DWDM is an extension of WDM technology and refers
to the simultaneous transmission of more than four channels on a single fiber.

THE CIENA SOLUTION

CIENA has deployed a DWDM system that enhances the transmission capacity of
a single optical fiber 16 fold, without requiring significant modification or
upgrade to transmission equipment. The MultiWave 1600 system includes terminals,
optical amplifiers and network management software that enable simultaneous
transmission of up to 16 optical channels on a single fiber at rates of up to
2.5 Gb/s per channel. The MultiWave 1600 system permits the transmission of
optical signals over routes of up to 600 kilometers (372 miles) without
opto-electronic regeneration. CIENA's implementation of DWDM technology
incorporates the following features:

- OPEN ARCHITECTURE SYSTEM. CIENA's system is designed with an open
architecture that allows the MultiWave 1600 system to interoperate with
carriers' existing fiberoptic transmission systems having a broad range
of transmission speeds and signal formats. This approach is distinguished
from a closed architecture system design pursued by companies that
manufacture other telecommunications equipment and may seek to preserve
the market for their network equipment.

- MODULAR DESIGN. The MultiWave 1600 system design is modular and allows
capacity-specific configurations and the ability to add additional
capacity through a modular upgrade. This enables a customer to select the
number of channels to use in a particular fiber and preserves the
customer's ability to respond quickly to increased demand for capacity
without significant additional equipment purchases.

- TACTICAL IMPLEMENTATION. CIENA's MultiWave 1600 system can be tactically
implemented on a route-by-route basis, providing relief on capacity
constrained routes without mandating a network-wide architectural or
transmission equipment change. In the context of new network
construction, the Company believes that its ability to permit 40 Gb/s
capacity per fiber, together with the elimination of multiple
regenerators, make the MultiWave 1600 system cost-efficient.

- SCALEABLE AMPLIFIERS. The Company's optical amplifiers, when installed
to accommodate 16 channels, do not need to be changed as channels are
added or as transmission speeds are increased to up to 2.5 Gb/s. Unlike a
TDM upgrade solution which involves replacement of all transmission
equipment along a fiber route, a channel upgrade of a CIENA MultiWave
1600 system involves no replacement of existing transmission equipment
until all 16 channels are in service. Similarly, increases in
transmission rates up to a maximum of 2.5 Gb/s do not require replacement
of or modification to the optical amplifiers.

- MANAGEMENT SOFTWARE. CIENA's MultiWave 1600 system includes network
management software enabling customers to receive early warnings of
network problems and to manage and monitor network performance. The
Company's commitment to providing standards compliant network management
interfaces at all levels, from individual network elements to the element
management system, affords rapid integration into existing
telecommunication management operations. The Company provides standards
compliant network management systems based upon Simple Network Management
Protocol (SNMP), Transmission Control Protocol/Internet Protocol (TCP/IP)
and the International Telecommunications Union (ITU) Telecommunications
Management Network (TMN) standards.

- FIBER COMPATIBILITY. The CIENA MultiWave 1600 system is compatible with
dispersion shifted, reduced dispersion and non-dispersion shifted fiber.
Non-dispersion shifted fiber constitutes the majority of fiber installed
in North America and Europe.

CIENA's MultiWave 1600 system is based upon the use of three core enabling
technologies that assist in overcoming many of the constraints that limited
commercial introduction of WDM technol-

24
27

ogy: Erbium-doped fiber amplifiers enabling the direct amplification of optical
signals without the use of electronic regenerators; in-fiber Bragg gratings
enabling precise filtering of multiple optical signals in a single fiber; and
network management software developed by the Company permitting a customer to
manage effectively the status and functions of the CIENA MultiWave 1600 system
in conjunction with the network operator's management of other parts of its
network.

CIENA'S STRATEGY

The Company's strategy is to maintain and build upon its market leadership
in the deployment of DWDM systems. Important elements of the Company's strategy
include:

- MAINTAIN LEADERSHIP IN DEPLOYMENT OF DWDM IN LONG DISTANCE NETWORKS. The
Company believes that the technological, operational and cost benefits of
the Company's DWDM systems create competitive advantages for long
distance telecommunications carriers worldwide. The Company also believes
that achieving early widespread operational deployment of its systems in
a particular carrier's network will provide CIENA significant competitive
advantages with respect to additional DWDM deployments and channel
upgrades within that network and will enhance its marketing to other
carriers as a field proven supplier. The Company therefore intends to
continue aggressively pursuing DWDM deployment opportunities among long
distance carriers in the domestic and foreign long distance markets. The
Company will focus its MultiWave product development efforts on expanding
the current 16 channel capacity of the MultiWave 1600 system to 40
channels while adding operational features designed to make MultiWave
products as attractive and flexible as possible to long distance
telecommunications carriers.

- CONTINUE TO EMPHASIZE TECHNICAL SUPPORT AND CUSTOMER SERVICE. The
Company markets a technically advanced system to sophisticated customers.
The nature of the Company's system and market require a high level of
technical support and customer service. The Company expects to have
full-time customer support offices in Kansas City, Kansas (to support
Sprint), Tulsa, Oklahoma (to support WorldCom) and other selected
locations where it develops significant customer relationships, to
provide on-going support to its customers.

- CONTINUE TO DEVELOP WORLD CLASS MANUFACTURING CAPABILITY. The Company's
system serves a mission critical role in its customers' networks. Quality
assurance and manufacturing excellence are necessary for the Company to
achieve success. CIENA believes it has developed and will continue to
enhance a world class manufacturing capability. The Company invested $5.9
million in capital improvements in fiscal 1996 and hired 125 employees in
that year to increase manufacturing capacity and efficiency and improve
manufacturing quality. The Company is working actively to achieve ISO
9001 certification. ISO 9001 is an internationally recognized documented
standard prescribing quality assurance management. The Company believes
that ISO 9001 certification will not only serve as a guide for quality
management but may enhance the Company's competitive position, especially
among potential customers who view such certification as an independent
validation of quality assurance.

- EXPAND SALES AND MARKETING EFFORTS. The nature of the target customer
base for MultiWave 1600 systems requires a focused sales effort on a
customer-by-customer basis. The Company will continue to increase its
sales and marketing efforts by focusing on the worldwide market of long
distance carriers. In fiscal 1996, the Company increased its sales and
marketing force by 12 persons. The Company will continue to strengthen
its marketing programs and increase its international presence through
both direct sales and international distributors.

- LEVERAGE CORE COMPETENCIES IN FIBEROPTIC COMMUNICATIONS. The Company
expects to leverage the core competencies it has developed in the design,
development, manufacturing and commercial introduction of the MultiWave
1600 system by exploring other areas in the

25
28

telecommunications market where these competencies can be used to solve related
problems. This may take the form of new product development or may involve
strategic alliances or acquisitions.

NETWORK ARCHITECTURE

A CIENA MultiWave 1600 system is a combination of equipment and software
that is installed on a particular long distance route segment. A MultiWave 1600
system consists of one MultiWave terminal on each end of the route segment, one
or more MultiWave optical amplifiers along the route (depending on route length)
and CIENA's WaveWatcher network management software. The diagram below depicts
an operating configuration of a deployed MultiWave 1600 system in a four-fiber
ring architecture network configuration:
LOGO
The MultiWave terminal at one end of the route multiplexes the customer's
optical signals into as many as 16 discrete optical channels and transmits those
channels simultaneously on the outbound fiber of the fiber pair. A MultiWave
terminal at the other end of the route demultiplexes the inbound multichannel
signal into 16 individual signals that are directed to the customer's receivers.
Optical amplifiers placed along the route provide optical amplification of the
composite multichannel signal over long route lengths. The Company's WaveWatcher
software provides continuous network management capability by monitoring system
functions.

26
29

The diagram below compares (i) traditional transmission equipment
configuration for a high traffic (16 signal) long distance route of 600
kilometers (372 miles), using TDM transmission terminals and regenerators with
(ii) the same high traffic (16 signal) long distance route configured with a
MultiWave 1600 system.

LOGO
In the TDM configuration above, 16 fiber pairs, and a total of 272
regenerators, are needed to transport 16 channels over the route. Each
regenerator converts the channels from optical to electrical and back to optical
format at 35-50 kilometer (22 to 31 mile) intervals. In order to upgrade the
transmission capacity of the typical TDM network route, as shown forth above,
using traditional TDM technology, all the fiberoptic transmission terminals and
all 272 regenerators would need to be replaced. This process entails significant
equipment costs, requires rerouting of transmissions and

27
30

can be time-consuming and, potentially, an operational bottleneck. While the TDM
configuration above is typical, the actual number of regenerators may be less
than depicted above.

By contrast, as shown above, the same high traffic (16 signal)
long-distance route can be configured with a MultiWave 1600 system. The 272
regenerators are replaced with four MultiWave optical amplifiers and only one
fiber pair is required for transmission of 16 signals. As a result, 15 of the 16
fiber pairs that were previously used are freed for future use. The maintenance
costs associated with the 272 regenerators are eliminated and replaced by the
lower maintenance costs of four optical amplifiers. Because each regenerator
must be housed in a weather-protected, environmentally controlled shelter,
elimination of regenerator sites may also significantly lower operational costs.
Increasing the availability of a number of fiber pairs is especially significant
to carriers that have implemented or are planning to implement ring
architectures and those providing leased transmission capacity to other
operators.

THE MULTIWAVE 1600 SYSTEM

A MultiWave 1600 system is installed in a discrete route segment defined at
each end by the presence of the customer's fiberoptic transmission terminals.
The MultiWave 1600 system features an open architecture which interoperates with
a broad range of models of fiberoptic transmission terminals. The MultiWave 1600
system can be flexibly configured based on the customer's capacity needs with up
to 16 channels, and the initial channel configuration, if less than 16 channels,
can be supplemented whenever additional capacity is needed. The modular design
of the MultiWave 1600 system allows the network operator to add capacity without
interrupting existing MultiWave traffic.

MULTIWAVE TERMINAL. The CIENA MultiWave terminal is a modular DWDM
terminal which can multiplex and amplify signals from transmitters into 16
discrete optical channels for transmission over a pair of fibers to the other
MultiWave terminal and demultiplex the received multichannel signal into 16
individual signals. The MultiWave terminal functions in the same manner over a
broad range of transmission speeds, up to approximately 2.5 Gb/s per channel,
and operates without material modifications to existing fiberoptic transmission
systems. Each MultiWave terminal consists of up to two channel shelves (up to
eight channels per shelf) and a common equipment shelf. The MultiWave terminal
can transport over total route lengths of up to 600 kilometers (372 miles) at up
to 2.5 Gb/s per channel without regeneration or impairment of the signal.

MULTIWAVE OPTICAL AMPLIFIER. The CIENA MultiWave optical amplifier is a
modular Erbium-doped fiber amplifier that provides direct composite optical
amplification of the 16 optical channels carried by the MultiWave 1600 system. A
single MultiWave optical amplifier shelf is capable of amplifying the system's
entire 40 Gb/s capacity (16 channels times approximately 2.5 Gb/s per channel).
CIENA's MultiWave optical amplifiers take the place of the customer's existing
regenerators on routes of up to 600 kilometers (372 miles), and can be spaced as
much as 120 kilometers (74 miles) apart.

WAVEWATCHER NETWORK MANAGEMENT SYSTEM. WaveWatcher is the MultiWave 1600
system's integrated network management software package. The network element
manager uses a separate out-of-band optical service channel to communicate
network management information and provides a single view of multiple CIENA
systems through graphical user interfaces and supported operating system
interfaces. WaveWatcher has been designed to adhere to evolving open system
standards for network management software and operates on a UNIX platform.
WaveWatcher provides fault, performance, security and configuration management
of optical networking systems.

The Company is also introducing an optical add/drop multiplexer to enable
carriers to reroute traffic to different geographic areas without requiring
extensive termination equipment. A network operator may optically remove up to
four channels from the composite signal at a point along a fiber route where the
optical add/drop multiplexer is installed. The installation of an additional
optical add/drop multiplexer at a different point along that route would enable
the network operator to

28
31

reuse those channels. The optical add/drop multiplexer also will provide optical
amplification for up to 16 channels.

A typical MultiWave 1600 system ranges in price from $500,000 to
$1,500,000, depending on such factors as customer needs for number of channels,
route length (which affects the number of optical amplifiers required), network
management software configuration and other negotiated terms and conditions. As
required, systems initially configured for less than 16 channels can be upgraded
to carry up to 16 channels at additional cost.

PRODUCT DEVELOPMENT

The Company expects the primary focus of its product development efforts
will be in the further enhancement and refinement of the MultiWave 1600 system.
The Company will focus its product development efforts on expanding the current
16 channel capacity of the MultiWave 1600 system to 40 channels while adding
operational features designed to make the Company's products attractive to a
wide range of network operators.

The Company has developed core competencies in DWDM technology through the
design, development, manufacturing and commercial introduction of the MultiWave
1600 system. In the future, the Company intends to migrate its core competencies
in this area to other segments of the telecommunications network. This migration
may take the form of new product development or may involve strategic alliances
or acquisitions.

As of October 31, 1996, there were 38 persons working in the Company's
research and development area. The Company's research and development
expenditures were $1.3 million, $6.4 million and $8.9 million for fiscal 1994,
1995 and 1996, respectively.

CUSTOMERS

SPRINT RELATIONSHIP

In December 1995, the Company entered into a three-year supply agreement
with Sprint, with the option for Sprint to extend the term of the agreement for
an additional year. Prices for all equipment purchased by Sprint under the terms
of the supply agreement are fixed for the initial three-year term but the prices
charged to Sprint for any deliverable under the supply agreement will not at any
time be higher than the Company's final net price to any "similarly situated
customer". The supply agreement does not obligate Sprint to make any minimum
purchases from the Company. The agreement requires that the Company set up and
maintain, at the Company's expense, certain test facilities for a period of 10
years.

The Company must maintain two years of backwards compatibility for any
enhancements or upgrades to the software. The Company also warrants each
deliverable provided by the Company for 60 months from the date of delivery,
with Sprint having the right until December 2005 to purchase an unlimited number
of one-year extensions of any or all warranties. Upgrades are provided at no
cost to Sprint during the warranty or extended warranty periods. The supply
agreement contains penalties for failure to respond to various types of system
failures in a timely manner. The supply agreement with Sprint also provides
Sprint with a perpetual, non-exclusive license to certain software and a license
to use, modify and enhance the Company's source code under certain conditions.

The supply agreement was amended in December 1996 to provide for a more
definitive purchase and delivery schedule during 1997 in combination with a
reduction in the Company's prices relating thereto. As a result of the
amendment, the Company anticipates that Sprint's purchases during this period
will approximate $130 million, and is planning to expand its production capacity
accordingly. There can be no assurance that these purchases will occur or that
the Company will be able to execute its expansion plan so as to assure timely
delivery of all purchased

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equipment, and the failure to deliver in a timely manner may result in a
reduction of Sprint's actual purchases in 1997.

WORLDCOM RELATIONSHIP

In September 1996, the Company entered into a supply agreement with
WorldCom. Pursuant to the terms of the supply agreement, the Company will be,
subject to certain conditions, the exclusive supplier of DWDM systems for
WorldCom through December 1997. The agreement does not require a minimum
purchase commitment; if WorldCom, however, does not purchase a certain minimum
amount of equipment, all prices for equipment purchased under the agreement
increase. WorldCom may terminate all or any part of an outstanding purchase
order upon the payment of a termination fee.

The Company has granted to WorldCom, pursuant to the supply agreement, a
license to use certain software. The Company has also granted WorldCom the
option to purchase the source code for certain software at any time during the
term of the agreement for a one-time payment. If WorldCom exercises this option,
the Company has no further obligation to provide support or maintenance services
or to provide upgrades or enhancements with respect to this software.

Under product and pricing attachments currently in effect, the Company
provides WorldCom with software upgrades at no charge for a period of 10 years
from installation and provides a five-year warranty for products.

TELEWAY RELATIONSHIP

The Company has entered into a two-year agreement with NISSHO Electronics
Corporation ("NISSHO") to act as a distributor of the Company's MultiWave 1600
system in Japan. Through NISSHO, the Company has shipped a MultiWave 1600 system
to Teleway.

OTHER POTENTIAL CUSTOMER RELATIONSHIPS

The Company is actively working to develop customer relationships with long
distance carriers worldwide. The Company has contacted other long distance
carriers and is responding to requests for proposals as well as engaging in
direct and indirect sales efforts.

Under the Telecommunications Act of 1996, regional Bell operating companies
("RBOCs") are newly eligible to enter the long distance market once they have
met certain requirements for opening their local markets to competition. The
Company anticipates that one or more of the RBOCs will move into the long
distance market, although the timing of that move is uncertain, and the question
of how such a move will be implemented is unclear -- e.g., through the
establishment of owned network facilities, through the purchase of long distance
capacity from other long distance carriers, or through some combination of the
two. In the deregulated market, utility companies are also known to be exploring
the use of their existing rights of way to develop fiberoptic-based
telecommunications networks, although it is not possible to predict the pace or
scope of their efforts.

Internationally, the market for DWDM systems is still developing. The
deregulation and competition which have characterized the United States long
distance market are much less pronounced in most international markets, and the
data communications applications which fuel the demand for high bandwidth
transmission systems in the United States are not as widely used in
international markets. The Company intends to concentrate its international
sales and marketing efforts in countries or regions where there is competition
among two or more long distance carriers, where there are significant bandwidth
constraints and where there is significant potential for near term growth in
telecommunications services.

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SALES AND MARKETING

The Company has organized its resources for the separate but coordinated
approach to United States customers and international customers. In the United
States market, a sales team, comprised of an account manager, systems engineers
and technical support and training personnel, is assigned responsibility for
each customer account, and for the coordination and pursuit of sales contacts.
In the international market, the Company currently pursues prospective customers
through direct sales efforts, as well as through distributors, independent
marketing representatives and independent sales consultants. The Company has
distributor or marketing representative arrangements covering Austria, Germany,
Italy and Switzerland in Europe, and the Republic of Korea and Japan in Asia.
The Company has additional representative support in the U.K., Belgium and
Brazil. The Company intends to establish a direct sales presence in Europe and
in Asia over the next 12 to 18 months.

The Company's MultiWave 1600 systems require a relatively large investment,
and the Company's target customers in the long distance telecommunications
market -- where network capacity and reliability are critical -- are highly
demanding and technically sophisticated. There are only a small number of such
customers in any country or geographic market. Also, every network operator has
unique configuration requirements which impact the integration of DWDM systems
with existing transmission equipment. The convergence of these factors leads to
a very long sales cycle for the MultiWave 1600 system, often more than a year
between initial introduction to the Company and commitment to purchase, and has
further led CIENA to pursue sales efforts on a focused, customer-by-customer
basis.

In support of its worldwide selling efforts, the Company conducts marketing
programs intended to position and promote its products within the
telecommunications industry. Marketing personnel coordinate the Company's
participation in trade shows and conduct media relations activities with trade
and general business publications.

COMPETITION

The market for increased bandwidth is highly competitive, and the Company
expects the level of competition to increase in the future. In addition,
competition in the telecommunications equipment industry generally is intense,
particularly in that portion of the industry devoted to delivering higher and
more cost effective bandwidth throughout the telecommunications network.
However, the Company believes that its position as a leading supplier of open
architecture DWDM systems and the field-tested design and technology of its
product give it a current competitive advantage.

The competition faced by the Company is dominated by a small number of very
large, usually multinational, vertically integrated companies, each of which has
substantially greater financial, technical and marketing resources, and greater
manufacturing capacity as well as more established customer relationships with
long distance carriers than the Company. Included among the Company's
competitors are Lucent, Nortel, Alcatel, NEC and Pirelli. Each of the Company's
major competitors is believed to be in various stages of development,
introduction or deployment of DWDM products directly competitive with the
Company's MultiWave system. Pirelli, in particular, is known to have deployed
open architecture WDM equipment and has announced the introduction of a
32-channel DWDM system. A U.S. affiliate of Pirelli recently brought patent
infringement litigation against the Company. See "Business -- Legal
Proceedings". Lucent has an especially prominent role in the market because of
its historical affiliation with AT&T. Lucent has announced it is supplying
closed architecture DWDM system equipment to AT&T, and has announced an
intention to introduce in the near future an open architecture DWDM system.
Although Lucent's prior affiliation with AT&T may have inhibited its
relationships as a supplier to other carriers, the spin-off of Lucent into a
separate company may make it more attractive to potential customers as a
supplier.

In addition to DWDM suppliers, traditional TDM-based transmission equipment
suppliers compete with the Company in the market for transmission capacity.
Lucent, Alcatel, Nortel, Fujitsu

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and NEC are already providers of a full complement of such equipment. These and
other competitors have introduced or are expected to introduce equipment which
will offer 10 Gb/s transmission capability, and MCI has recently announced
limited deployment of such equipment. The viability of widescale deployment of
10 Gb/s TDM based equipment has yet to be demonstrated. Because of the
transmission rate employed, the 10 Gb/s TDM equipment requires digital
multiplexing circuits operating at microwave frequencies, which can lead to
instability. This can complicate reproducibility, which may in turn result in
delays in introduction and higher manufacturing costs. More significantly, at
the 10 Gb/s transmission rate, dispersion distortion effects in the fiber can
result in significant impairments and limitations, particularly in transmission
over non-dispersion shifted fiber, which comprises most of the installed fiber
in current long distance networks in the United States. However, at lower rates,
such as 2.5 Gb/s, TDM-based equipment is technically viable and widely available
commercially, and, as an upgrade to existing lower transmission rate
telecommunications links, can represent an alternative incremental approach to
the enhancement of transmission capacity.

Additionally, while the Company believes the open architecture of its
MultiWave 1600 system is attractive to some customers, certain of the Company's
competitors are able to offer more extensive TDM-based product lines under
closed architectures which may provide perceived network-wide cost and operating
efficiencies not available from the Company. For example, Lucent, Alcatel,
Nortel and NEC are already providers of a full complement of TDM terminals,
switches and regenerators, and thereby seek to position themselves as vertically
integrated, "one-stop shopping" solution providers to potential customers. The
Company expects competition in general to intensify substantially over the next
few quarters. The Company believes that competition is based on varying
combinations of price, manufacturing capacity, timely delivery, system
reliability and service commitment, installed customer base, as well as on the
comprehensiveness of the system solution in meeting immediate network needs and
foreseeable scaleability requirements. Further, in certain cases, competitors
have offered the Company's target customers on an immediate delivery basis, off
the shelf TDM transmission equipment at comparatively lower prices, with a
promise to upgrade to DWDM or other improved equipment in the future. While the
Company is ramping up its manufacturing capability as rapidly as it believes
prudent, the Company is not currently able to offer MultiWave 1600 system
delivery times of less than three to four months. The substantial system
integration resources and manufacturing capability of the TDM competitors, in
combination with any difference in timeliness of delivery, can be important to
long distance network operators for whom a less significant increase in
transmission capacity (as opposed to the 16-fold increase available through
MultiWave) is acceptable. In addition, as and when these competitors are able to
offer DWDM systems in combination with their own terminals, they can be expected
to further emphasize the attractiveness of a one-stop shopping solution.

MANUFACTURING

The Company manufactures the in-fiber Bragg gratings and Erbium-doped fiber
amplifiers used in the MultiWave 1600 system, and conducts all optical assembly,
final assembly and final component, module and system test functions, at its
manufacturing facility in Savage, Maryland. The Company has invested
significantly in automated production capabilities and manufacturing process
improvements and expects to further enhance its manufacturing process with
additional production process control systems. However, certain critical
functions, including aspects of fiber splicing, require a highly skilled manual
work force, and the Company puts significant efforts into training and
maintaining the quality of its manufacturing work force. The Company is also
currently working towards obtaining an ISO 9001 certification, which it believes
will be a further competitive strength. To the extent that the Company does not
achieve ISO 9001 certification and its competitors do, the Company's competitive
position may be materially and adversely affected.

Electronic board assemblies are currently subcontracted to third parties to
enable the Company to concentrate on its core manufacturing competencies in
gratings production and optical assembly

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capabilities. The Company has not experienced any significant delays or material
unanticipated costs resulting from the use of subcontractors; however, such a
strategy involves certain risks, including the potential absence of adequate
capacity, the unavailability of or interruptions in access to certain process
technologies, and reduced control over delivery schedules, manufacturing yields,
quality and costs. In the event that any significant subcontractor were to
become unable or unwilling to continue to manufacture and/or test the Company's
assemblies in required volumes, the Company would have to identify and qualify
acceptable replacements. This qualification process could also be lengthy and no
assurance can be given that any additional sources would become available to the
Company on a timely basis. A delay or reduction in component shipments, or a
delay or increase in costs in the assembly and testing of products by third
party subcontractors, could materially and adversely affect the Company's
business, financial condition and results of operations.

The Company's MultiWave 1600 system utilizes in excess of 600 parts, many
of which are customized for the Company. Component suppliers in the specialized,
high technology end of the optical communications industry are generally not as
plentiful or, in some cases, as reliable, as component suppliers in more mature
industries. Certain key optical and electronic components used in the Company's
MultiWave 1600 system are currently available only from sole sources. The
Company has from time to time experienced minor delays in the receipt of these
components, and any future difficulty in obtaining sufficient and timely
delivery of them could result in delays or reductions in product shipments
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations. While alternative suppliers have
been identified for certain other key optical and electronic components, those
alternative sources have not been qualified. The time and expense involved in
qualifying each additional source are significant. Accordingly, the Company will
for the near term continue to be dependent on sole and single source suppliers
of certain key components. See "Risk Factors -- Dependence on Suppliers" and
"-- Competitors as Suppliers".

PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS

The Company has licensed certain key enabling technologies with respect to
the production of in-fiber Bragg gratings, utilized publicly available
technology associated with Erbium-doped fiber amplifiers, and applied its
design, engineering and manufacturing skills to develop its MultiWave 1600
system. These licenses expire when the last of the licensed patents expires or
is abandoned. The Company also licenses from third parties certain software
components for its network management software. These software licenses are
perpetual but will generally terminate after an uncured breach of the agreement
by the Company. The Company has applied for trademark registration for Ciena,
MultiWave and WaveWatcher. Opposition has been filed with the United States
Patent and Trademark Office with respect to the Company's registration of
WaveWatcher. The Company also relies on contractual rights, trade secrets and
copyrights to establish and protect its proprietary rights in its products.

The Company intends to enforce vigorously its intellectual property rights
if infringement or misappropriation occurs. However, the Company does not expect
its proprietary rights in its technology will prevent competitors from
developing technologies and equipment functionally similar to the Company's.

The Company's practice is to require its employees and consultants to
execute non-disclosure and proprietary rights agreements upon commencement of
employment or consulting arrangements with the Company. These agreements
acknowledge the Company's exclusive ownership of all intellectual property
developed by the individual during the course of his work with the Company and
require that all proprietary information disclosed to the individual will remain
confidential.

As of January 1, 1997, the Company had received seven United States
patents, had received notice of allowance of two more, and had 16 pending patent
applications. The issued patents relate

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to (i) an optical monitoring channel for WDM systems capable of surviving
failure of an optical amplifier, (ii) an in-fiber Bragg grating system for
optical cable television systems that allows the network operator to remove and
insert different optical frequencies and switch video signals on demand, (iii) a
WDM optical communication system with remodulators to carry multiple optical
signals of different wavelengths simultaneously, (iv) a WDM system that can be
expanded with additional optical signals, (v) an optical system which uses
optical amplifiers with flattened gain curves, (vi) a method for removing and
inserting optical carriers in a WDM system and (vii) an optical system with
tunable in-fiber gratings. Allowed patent applications relate to other aspects
of in-fiber Bragg gratings technology and other aspects of WDM system design.
Patents afford the holder the right to exclusive use for 17 years. Of the seven
United States patents that have been issued, one will expire in 2012 and the
remaining will expire in 2013. In addition, the Company holds a non-exclusive,
perpetual license from General Instrument Corporation for a portfolio of 32
United States and foreign patents relating to optical communications, primarily
for video-on-demand applications. See "Risk Factors -- Proprietary Rights".

EMPLOYEES

As of October 31, 1996, the Company employed 225 persons, of whom 38 were
primarily engaged in research and development activities, 135 in manufacturing,
20 in sales, marketing, customer support and related activities and 32 in
administration. None of the Company's employees are currently represented by a
labor union. The Company considers its relations with its employees to be good.

FACILITIES

The Company's principal executive offices, manufacturing and research and
development facilities are all located in Savage, Maryland and consist of
approximately 50,500 square feet under a lease that will expire in December
2001, absent exercise of a renewal option for an additional five years. The base
rent averages approximately $35,775 per month for the first six years. The
Company signed a lease in October 1996 for a facility approximately 10 miles
from Savage, near the Baltimore/Washington International Airport ("BWI"). This
facility consists of approximately 96,000 square feet, and is expected to be
suitable for occupancy by March 1997. Base rent is approximately $102,000 per
month, with annual rate increases each of the ten years of the initial lease
term, with a final year rate of approximately $126,000 per month. The Company
intends to convert substantially all of its current Savage, Maryland, facility
into a manufacturing facility (manufacturing currently occupies approximately
19,000 of the 50,500 square feet at the Savage facility), and relocate the
corporate, sales and marketing and product development functions to the BWI
facility. The Company also intends in the second quarter of fiscal 1997 to lease
additional facilities of 50,000 to 60,000 square feet to accommodate additional
expansion.

LEGAL PROCEEDINGS

Pirelli Litigation. On December 20, 1996, a U.S. affiliate of Pirelli
filed suit in U.S. District Court in Delaware, alleging wilful infringement by
the Company of five U.S. patents held by Pirelli. The lawsuit seeks treble
damages, attorneys' fees and costs, as well as preliminary and permanent
injunctive relief against the alleged infringement.

Prior to the lawsuit, the Company was aware of several Pirelli patents in
the fiberoptic field, including the five alleged in the Pirelli lawsuit to have
been infringed by the Company. The Company had taken those patents and others
into account in the design and development of its MultiWave 1600 system in order
to avoid infringement. The Company believes its MultiWave 1600 system does not
infringe any valid Pirelli patents and intends to defend itself vigorously.
However, there can be no assurance that the Company will be successful in the
defense of the Pirelli Litigation and an adverse determination in the litigation
could result from a finding of infringement of only one claim of a single
patent. The Company may consider settlement due to the costs and uncertainties
associated with

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litigation in general and patent infringement litigation in particular and due
to the fact that an adverse determination in the litigation could preclude CIENA
from producing the MultiWave 1600 system until it were able to implement a
non-infringing alternative design to any portion of the system to which such a
determination applied. There can be no assurance that any settlement will be
reached by the parties. An adverse determination in, or settlement of, the
Pirelli Litigation could involve the payment of significant amounts, or could
include terms in addition to such payments, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company expects that defense of the lawsuit will be costly and will
involve a diversion of the time and attention of some members of management.
Further, the Company expects that Pirelli and other competitors may use the
existence of the Pirelli lawsuit to raise questions in customers' and potential
customers' minds as to the Company's ability to manufacture and deliver the
MultiWave 1600 system. There can be no assurance that such efforts by Pirelli
and others will not disrupt the Company's existing and prospective customer
relationships.

Kimberlin Litigation. Kevin Kimberlin and parties controlled by him (the
"Kimberlin Parties") are owners of Common Stock, Series A, Series B and Series C
Preferred Stock and certain warrants to purchase Series B Preferred Stock. On
November 20, 1996, the Kimberlin Parties filed suit in U.S. District Court for
the Southern District of New York against the Company, and certain directors of
the Company, alleging that the Kimberlin Parties were entitled to purchase
additional shares of Series C Preferred Stock at the time of the closing of the
Series C Preferred Stock financing, but were denied that opportunity by the
defendants. The lawsuit alleges that certain rights of first refusal existing
under the Series B Preferred Stock Purchase Agreement entitled the Kimberlin
Parties to purchase more shares of Series C Preferred Stock than were in fact
purchased by them at the time of the closing of the Series C Preferred Stock
financing in December 1995. The lawsuit claims breach of contract, breach of
fiduciary duty and violation of Securities and Exchange Commission Rule 10b-5 by
the defendants. The Kimberlin Parties seek to recover unspecified actual and
punitive damages.

The number of shares to be purchased by each party to the Series C
Preferred Stock financing was communicated in writing to the Kimberlin Parties
in December 1995 prior to the Series C closing. Further, as permitted under the
Series B Preferred Stock Purchase Agreement, the Series C Preferred Stock
Purchase Agreement expressly stated that all rights of first refusal referred to
in the lawsuit were waived. The required number of Series B investors, including
the Kimberlin Parties, signed the Series C Preferred Stock Purchase Agreement
containing that waiver. In July 1996, the Kimberlin Parties reaffirmed to the
Company in writing that their beneficial ownership of shares did not include any
shares which they have subsequently claimed in the lawsuit they were entitled to
purchase. The Company believes that the Kimberlin Parties' claims, brought as
the Offerings were being prepared, are without merit and intends to defend
itself vigorously. On January 6, 1997, the Company filed its answer to the
Kimberlin Parties' complaint, and filed a counterclaim for rescission of the
sale of the shares of Series C Preferred Stock purchased by the Kimberlin
Parties in the Series C Preferred Stock financing. Discovery proceedings are now
ongoing.

The Company is not currently a party to any other legal proceedings.

PLAN OF OPERATIONS FOR BALANCE OF FISCAL 1997

The Company's plan of operations for the remainder of the 1997 fiscal year
is to continue manufacturing, marketing and supporting the MultiWave 1600
system. The Company intends to relocate its principal executive offices during
the fiscal 1997, to convert substantially all of its current Savage, Maryland,
facility into a manufacturing facility and to lease another 50,000 to 60,000
square feet of space for additional expansion. The Company will seek to develop
additional customer relationships by responding to requests for proposals and
engaging in direct and indirect sales efforts. Product development efforts for
the balance of the fiscal year will be focused on expanding the capacity of the
MultiWave 1600 system and adding operational features to the MultiWave

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product. The Company anticipates that it will hire additional employees in all
areas of operations during fiscal 1997, and intends to continue its technical
support and customer service efforts by opening an office in Kansas City, Kansas
(to support Sprint), Tulsa, Oklahoma (to support WorldCom), and other selected
locations where it develops significant customer relationships. The net proceeds
from the Offerings and from the exercise of warrants will be added by the
Company to working capital, where such proceeds will be available to support
general corporate purposes which are expected to include capital equipment
expenditures to support selling and marketing, manufacturing and product
development activities. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreement with respect to any material acquisition of other
businesses, products or technologies. The Company does not believe it will be
necessary to seek additional external funding for its operations for the balance
of fiscal 1997.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth certain information concerning each of the
directors and executive officers of the Company:

NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------

Patrick H. Nettles, Ph.D. ......... 53 President, Chief Executive Officer and Director
David R. Huber, Ph.D. ............. 46 Senior Vice President, Chief Scientist and
Director
Steve W. Chaddick.................. 45 Senior Vice President, Products and Technologies
Lawrence P. Huang.................. 45 Senior Vice President, Sales and Marketing
Stephen B. Alexander............... 37 Vice President, Transport Products
Joseph R. Chinnici................. 42 Vice President, Finance and Chief Financial
Officer
Mark Cummings...................... 45 Vice President, Operations
W. Michael Fagen................... 41 Vice President, Business Development
G. Eric Georgatos.................. 41 Vice President, General Counsel and Secretary
Jesus Leon......................... 52 Vice President, Access Products
Rebecca K. Seidman................. 50 Vice President, Human Resources Development
Jon W. Bayless, Ph.D.(1)(2)........ 56 Chairman of the Board of Directors
Harvey B. Cash..................... 58 Director
Clifford W. Higgerson(2)........... 57 Director
Billy B. Oliver(1)................. 71 Director
Michael J. Zak(1)(2)............... 43 Director

- ---------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

PATRICK H. NETTLES, PH.D., has served as Chief Executive Officer of the
Company since February 1994, as President and Chief Executive Officer since
April 1994 and as Director since February 1994. From 1992 until 1994, Dr.
Nettles served as Executive Vice President and Chief Operating Officer of Blyth
Holdings Inc., a publicly-held supplier of client/server software. From late
1990 through 1992, Dr. Nettles was President and Chief Executive Officer of
Protocol Engines Inc., a development stage enterprise, formed as an outgrowth of
Silicon Graphics Inc., and targeted toward very large scale integration based
solutions for high-performance computer networking. From 1989 to 1990, Dr.
Nettles was Chief Financial Officer of Optilink, a venture start-up which was
acquired by DSC Communications. Dr. Nettles received his B.S. degree from the
Georgia Institute of Technology and his Ph.D. from the California Institute of
Technology.

DAVID R. HUBER, PH.D., founded the Company in November 1992, served as
President from November 1992 until April 1994 and has served as Director since
November 1992. From April 1994 until September 1996 he served as Vice President
and Chief Technical Officer. Dr. Huber has served as Senior Vice President and
Chief Scientist since September 1996. From 1989 through 1992, Dr. Huber managed
the Lightwave Research and Development Program for the Jerrold Communications
Division of General Instruments. Dr. Huber holds a B.S. degree in physics from
Eastern Oregon State College and a Ph.D. degree in electrical engineering from
Brigham Young University.

STEVE W. CHADDICK has served as Senior Vice President, Products and
Technologies since September 1996, and was previously Vice President of Product
Development for the Company since joining it in 1994. Prior to joining the
Company, Mr. Chaddick was Vice President of Engineering at AT&T Tridom, a
company he co-founded in 1983 and which was acquired by AT&T in 1988. AT&T

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Tridom focused on the development of very small aperture satellite terminal
systems. Mr. Chaddick was responsible for all product development at AT&T
Tridom, including hardware, embedded systems software and network management
software. Mr. Chaddick received both his B.S. and M.S. degrees in electrical
engineering from the Georgia Institute of Technology.

LAWRENCE P. HUANG has served as Senior Vice President, Sales and Marketing
of the Company since November 1996 and served as Vice President, Sales and
Marketing of the Company since joining it in April 1994. Prior to joining CIENA,
Mr. Huang was Vice President/General Manager and Vice President of Sales and
Marketing of AT&T Tridom, which he co-founded with Mr. Chaddick in 1983. Mr.
Huang holds a B.S. in industrial management from the Georgia Institute of
Technology and an M.B.A. from Georgia State University.

STEPHEN B. ALEXANDER has served as Vice President, Transport Products since
September 1996, and was previously Director of Lightwave Systems at the Company
since joining it in 1994. From 1982 until joining the Company, he was employed
at MIT Lincoln Laboratory, where he last held the position of Assistant Leader
of the Optical Communications Technology Group. Mr. Alexander is an Associate
Editor for the Journal of Lightwave Technology and a General Chair of the
conference on Optical Fiber Communication (OFC) for 1997. He is author of the
tutorial text Optical Communication Receiver Design. Mr. Alexander received both
his B.S. and M.S. degrees in electrical engineering from the Georgia Institute
of Technology.

JOSEPH R. CHINNICI joined the Company in February 1994 as Controller, and
became Vice President, Finance and Chief Financial Officer in May 1995. From
1993 through 1994, Mr. Chinnici served as a financial consultant for Halston
Borghese Inc. From 1977 to 1993, Mr. Chinnici held a variety of accounting and
finance assignments for Playtex Apparel Inc. (now a division of Sara Lee
Corporation), ending this period as Director of Operations Accounting and
Financial Analysis. Mr. Chinnici holds a B.S. in accounting from Villanova
University and an M.B.A. from Southern Illinois University.

MARK CUMMINGS joined the Company in May 1996 as Vice President,
Manufacturing and was promoted to Vice President, Operations in September 1996.
From 1985 to 1996, Mr. Cummings was Vice President, Operations for Cray
Communications, Inc., an international manufacturer of communications equipment.
From 1975 to 1985, Mr. Cummings was Manager of Manufacturing Engineering at
Taylor Instruments, and from 1973 to 1975, an Industrial Engineer at Siemens
Stromberg Carlson Inc. Mr. Cummings holds a B.S. in electronic technology from
the State University of New York at Buffalo, and is currently in the Masters
program in advanced manufacturing systems at the University of Maryland.

W. MICHAEL FAGEN has served as Vice President, Business Development of the
Company since joining it in October 1995. From 1991 through 1995, Mr. Fagen
pursued advanced degree studies in international relations at George Washington
University, Washington, D.C. and Universidad Para la Paz, San Jose, Costa Rica.
Prior to 1991, Mr. Fagen served as Director of Sales for Telebit Corporation;
Director of Marketing and Strategic Account Development for Vitalink
Communications Corporation; National Account Manager for AT&T/Southern Bell; and
Marketing Representative for Major Accounts at IBM Corp. Mr. Fagen holds a B.A.
from The University of the South, an M.A. in international relations from La
Universidad Para la Paz and a Ph.D. in political science (pending) from the
George Washington University.

G. ERIC GEORGATOS has served as the Company's Vice President, General
Counsel and Secretary since February 1996. From 1980 to 1995, Mr. Georgatos was
an attorney and member of Gray Cary Ware & Friedenrich, a Professional
Corporation, a law firm based in California, where he served as outside general
corporate counsel for a variety of emerging companies. Mr. Georgatos holds a
B.S. degree in business administration from the University of Southern
California and a J.D. from the University of California Los Angeles.

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41

JESUS LEON joined the Company in November 1996 as Vice President, Access
Products. From December 1995 to October 1996, Mr. Leon served as Vice President,
Engineering, for the Access Systems Division of Alcatel Standard Electrica, S.A.
("Alcatel Electrica"), a division of Alcatel Alsthom Group. Alcatel Electrica is
a leading global supplier of telecommunications equipment. Mr. Leon led Alcatel
Electrica's product development for all access products with responsibility for
over 1,200 engineers in Europe, Australia and South Africa. Mr. Leon served in
various positions with Alcatel Electrica from 1990-1991. Mr. Leon holds a
B.S.E.E. and M.E. from the University of Florida, an A.B.D. (all but doctoral
dissertation) from the Georgia Institute of Technology and an M.B.A. from
Georgia State University.

REBECCA K. SEIDMAN joined the Company in April 1996 as Director of Human
Resources Development, and was promoted to Vice President, Human Resources
Development in June 1996. From 1984 until joining the Company, Ms. Seidman
served consecutively as Director of Marketing, Vice President, Administration,
and Principal of Walpert, Smullian & Blumenthal, P.A., a regional accounting and
consulting firm. Ms. Seidman is a Phi Beta Kappa graduate of Goucher College and
co-author of Total Quality Distribution, a book discussing practical
applications of Total Quality in the wholesale distribution industry.

JON W. BAYLESS, PH.D. has been a Director of the Company since April 1994
and has served as Chairman of the Board of Directors since November 1996. Dr.
Bayless is a general partner of various venture capital funds associated with
Sevin Rosen Funds where, since 1981, he has focused on developing business
opportunities in the fields of telecommunications and computers. Mr. Bayless is
also the controlling stockholder and sole director of Jon W. Bayless, Inc., the
general partner of Atlantic Partners L.P., which is the general partner of Citi
Growth Fund L.P., a venture capital investment firm. Dr. Bayless currently
serves as a director of 3DX Technologies Inc. and of several private companies.
Dr. Bayless is also Chairman of the Board of Directors of Shared Resource
Exchange, Inc. Shared Resource Exchange, Inc. filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code in August 1996. A plan under Chapter
11 has been approved. Dr. Bayless has held faculty positions at Southern
Methodist University, Virginia Polytechnic Institute, and the Catholic
University of America. He holds patents in the field of digital
telecommunications, and is a senior member of the Institute of Electronic
Engineers. Dr. Bayless earned his B.S. degree in electrical engineering at the
University of Oklahoma. He earned his M.S. degree in electrical engineering at
the University of Alabama, and his Ph.D. in electrical engineering at Arizona
State University.

HARVEY B. CASH has been a Director of the Company since April 1994. Mr.
Cash is a general partner of InterWest Partners, a venture capital firm in Menlo
Park, California which he joined in 1985. Mr. Cash is Chairman of the Board of
Cyrix Corporation and serves on the board of directors of ProNet, Inc.,
Benchmarq, Microelectronics, Heritage Media Corporation, AMX Corporation, i(2)
Technologies Inc. and Aurora Electronics, Inc. He is also an advisor to Austin
Ventures. Mr. Cash received a B.S. in electrical engineering from Texas A&M
University and an M.B.A. from Western Michigan University.

CLIFFORD W. HIGGERSON has been a Director of the Company since April 1994.
Mr. Higgerson has since 1991 been a general partner of Vanguard Venture
Partners, a venture capital firm specializing in high technology start-ups,
located in Palo Alto, California. Prior to joining Vanguard in July 1991, Mr.
Higgerson was the managing partner of Communications Ventures, Inc. and prior to
that was a Managing Partner of Hambrecht & Quist. Mr. Higgerson is also a
director of Advanced Fibre Communications and Digital Microwave Corp. Mr.
Higgerson earned his B.S. in electrical engineering from the University of
Illinois and an M.B.A. in finance from the University of California at Berkeley.

BILLY B. OLIVER has been a Director of the Company since June 1996. Since
his retirement in 1985 after nearly 40 years of services at AT&T, Mr. Oliver has
worked as a self-employed communications consultant. During his last 15 years
with AT&T, he held the position of Vice President,

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42

Engineering Planning and Design, where he was directly involved in and had
significant responsibility for the evolution of AT&T's long distance network
during that period. He was a co-recipient of the Alexander Graham Bell Medal for
the conception and implementation of Nonhierarchical Routing in AT&T's network.
Mr. Oliver is also a director of Digital Microwave Corp., Communications Network
Enhancement Inc. and Enterprise Network Services Inc. Mr. Oliver earned his
B.S.E.E. degree from North Carolina State University.

MICHAEL J. ZAK has been a Director of the Company since December 1994. He
has been employed by Charles River Ventures of Boston, Massachusetts since 1991
and has been a general partner of Charles River Partnership VII and its related
entities since 1993. From 1986 through 1991, he was a founder and corporate
officer of Concord Communications, Inc., a manufacturer of data communications
systems. He is a director of ON Technology Corporation as well as five other
private companies. Mr. Zak has a B.S. degree in engineering from Cornell
University and an M.B.A. from Harvard Business School.

BOARD OF DIRECTORS

Upon the effective date of the Registration Statement of which this
Prospectus is a part, the Board of Directors will be divided into three classes.
Each class of Directors will consist of two or more Directors. At each annual
meeting of stockholders following the Offerings, one class of Directors will be
elected to a three-year term to succeed the Directors of the same class whose
terms are then expiring. The Class I Directors, whose terms will expire at the
1997 annual meeting of stockholders, will be Dr. Nettles and Mr. Bayless, the
Class II Directors, whose terms will expire at the 1998 annual meeting of
stockholders, will be Messrs. Zak and Cash, and the Class III Directors, whose
terms will expire at the 1999 annual meeting of stockholders, will be Messrs.
Oliver, Higgerson and Huber. See "Description of Capital Stock -- Delaware Law
and Certain Provisions of the Third Amended and Restated Certificate of
Incorporation".

Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the Directors or officers of
the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has established an Audit Committee of non-employee Directors to
make recommendations concerning the engagement of independent public
accountants, review the plans and results of the audit engagement with the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls. Dr. Bayless and
Messrs. Zak and Higgerson are the members of the Audit Committee. The Company
has established a Compensation Committee of non-employee Directors to determine
compensation for the Company's executive officers and to administer the
Company's Amended and Restated 1994 Stock Option Plan and the Management
Incentive Compensation Plan. Dr. Bayless and Messrs. Oliver and Zak are the
members of the Compensation Committee.

COMPENSATION OF BOARD OF DIRECTORS

Members of the Board of Directors receive $2,500 for participation in each
meeting of the full Board of Directors and $1,250 for each committee meeting and
are reimbursed for out-of-pocket expenses incurred in connection with attendance
at meetings. The Company has adopted the 1996 Outside Directors Stock Option
Plan and, under such plan, non-employee Directors are eligible to receive stock
options in consideration for their services. See "-- Stock Plans" and "-- 1996
Outside Directors Stock Option Plan".

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43

EXECUTIVE COMPENSATION

The following summary compensation table sets forth the compensation paid
by the Company during the fiscal year ended October 31, 1996 to the Company's
chief executive officer and each of the Company's four other executive officers
whose total compensation for services in all capacities to the Company exceeded
$100,000 during such year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
YEAR SALARY BONUS OPTIONS
---- -------- -------- ------------

Patrick H. Nettles, Ph.D. ........................ 1996 $174,000 $154,000 875,000
President and Chief Executive Officer
David R. Huber, Ph.D. ............................ 1996 153,000 98,000 --
Senior Vice President and Chief Scientist
Steve W. Chaddick................................. 1996 132,000 87,000 312,500
Senior Vice President, Products and Technologies
Lawrence P. Huang................................. 1996 132,000 87,000 312,500
Senior Vice President, Sales and Marketing
Joseph R. Chinnici................................ 1996 115,000 79,000 72,500
Vice President, Finance and Chief Financial
Officer

OPTION GRANTS

The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended October
31, 1996 to each of the Named Executive Officers:

OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------
PERCENT
OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(3)
OPTIONS IN FISCAL PRICE PER EXPIRATION ------------------------
GRANTED(1) 1996 SHARE(2) DATE 5% 10%
---------- --------- --------- ---------- ---------- ----------

Patrick H. Nettles,
Ph.D. .................. 875,000 15.1% $2.30 6/21/06 $1,266,000 $3,207,000
David R. Huber, Ph.D...... -- -- -- -- -- --
Steve W. Chaddick......... 312,500 5.4 2.30 6/21/06 452,000 1,146,000
Lawrence P. Huang......... 312,500 5.4 2.30 6/21/06 452,000 1,146,000
Joseph R. Chinnici........ 72,500 1.3 2.30 6/21/06 105,000 266,000

(2) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant. The Company's Common Stock was not publicly
traded at the time of the option grants.

(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price

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appreciation are provided in accordance with rules of the United States
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the option holders'
continued employment through the vesting period. This table does not take
into account any appreciation in the price of the Common Stock from the
date of grant to date. Assuming the fair market value of the Common Stock
at the date of grant was the initial public offering price of $23.00, the
potential realizable value of these options (a) at a 5% assumed annual
rate of stock price appreciation would be $30,769,000 for Dr. Nettles,
$10,989,000 for Mr. Chaddick, $10,989,000 for Mr. Huang and $2,549,000 for
Mr. Chinnici and (b) at a 10% assumed annual rate of stock price
appreciation would be $50,187,000 for Dr. Nettles, $17,924,000 for Mr.
Chaddick, $17,924,000 for Mr. Huang and $4,158,000 for Mr. Chinnici.

AGGREGATED OPTION EXERCISES IN LAST FISCAL AND FISCAL YEAR-END OPTION VALUES

The following table provides the specified information concerning
unexercised options held as of October 31, 1996 by the Named Executive Officers:

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
OCTOBER 31, 1996(1) OCTOBER 31, 1996(2)
--------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- -------------- ----------- --------------

Patrick H. Nettles, Ph.D. .............. 875,000 -- $11,935,000 --
David R. Huber, Ph.D. .................. -- -- -- --
Steve W. Chaddick....................... 1,312,500 -- 20,180,000 --
Lawrence P. Huang....................... 1,312,500 -- 20,180,000 --
Joseph R. Chinnici...................... 322,500 -- 4,968,000 --

- ---------------
(1) All options are immediately exercisable at the date of grant, but shares
purchased upon exercise of options are subject to repurchase by the Company
based upon a scheduled vesting period. None of the shares underlying options
held by Dr. Nettles are vested and 562,500, 578,125 and 113,540 of the
shares underlying options held by Messrs. Chaddick, Huang and Chinnici,
respectively, are vested.

(2) Calculated on the basis of the fair market value of the underlying
securities as of October 31, 1996 of $15.94 per share, as determined by the
Company's Board of Directors, less the aggregate exercise price. The value
of vested in-the-money options held by Dr. Nettles is zero and the value of
vested in-the-money options for Messrs. Chaddick, Huang and Chinnici is
$8,954,000, $9,203,000 and $1,807,000, respectively.

No options to purchase the Company's Common Stock were exercised during the
fiscal year ended October 31, 1996 by the Named Executive Officers.

No compensation intended to serve as incentive for performance to occur
over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the Named Executive
Officers.

EMPLOYMENT AGREEMENTS

In April 1994, the Company entered into employment agreements with each of
Dr. Huber and Dr. Nettles. The employment agreements specify that Dr. Huber and
Dr. Nettles are employees at will. In the event that either of them is
terminated for cause, as defined in the employment agreements, he will receive a
severance payment equal to his monthly base salary until the earlier of the
expiration of six months or the commencement of employment with a person or
entity other than the Company.

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MANAGEMENT INCENTIVE COMPENSATION PLAN

The Company has established a management incentive compensation plan (the
"Incentive Plan") pursuant to which management and non-management employees are
eligible to earn up to certain percentages of their base salary as additional
compensation, based upon the achievement of quarterly and annual objectives.
Under the Incentive Plan, the Chief Executive Officer of the Company may earn up
to 50% of his base salary, and Vice Presidents generally may earn up to 35% of
their base salaries, as additional compensation upon the achievement of certain
Company-wide objectives. Department directors and key managers are eligible to
earn up to 15% of their base salaries in additional compensation based on the
achievement of objectives which are specific to their functional department.
Managers and all other salaried employees are eligible to earn up to 7.5% of
their base salaries in additional compensation based on the achievement of
objectives which are specific to their functional department. The quarterly
objectives are determined on a quarter by quarter basis by the Board of
Directors in consultation with management, and address a wide variety of
activities with all functional areas of the Company based on the evolving needs
of the Company. Bonuses are payable quarterly and at year-end under the
Incentive Plan. In addition to amounts paid under the Incentive Plan during
fiscal year 1996, the Company paid additional bonuses to all employees in that
year.

STOCK PLANS

AMENDED AND RESTATED 1994 STOCK OPTION PLAN

A total of 20,050,000 shares of Common Stock are reserved for issuance
under the Company's Amended and Restated 1994 Stock Option Plan (the "Option
Plan"). At October 31, 1996, 259,345 shares of Common Stock subject to
repurchase by the Company had been issued upon exercise of options, 364,150
shares of Common Stock not subject to repurchase had been issued upon exercise
of options and 11,007,960 shares were subject to outstanding options at a
weighted average exercise price of $.96. Options may be granted to employees
(including officers), consultants, advisors and directors, although only
employees and directors and officers who are also employees may receive
"incentive stock options" intended to qualify for certain tax treatment. The
exercise price of nonqualified stock options must equal at least 85% of the fair
market value of the Common Stock as determined by the Board of Directors, and in
the case of incentive stock options must be no less than the fair market value
of the Common Stock as determined by the Board of Directors. These options are
immediately exercisable at the date of grant, but shares purchased upon exercise
of options are subject to repurchase by the Company based upon a scheduled
vesting period. Generally, shares underlying options vest over four years and
options must be exercised within ten years. The Option Plan provides for
accelerated vesting in the event of a change of control of the Company, provided
the subject options have been outstanding for at least 335 days. Furthermore, in
the event of a change in control, the surviving or acquiring company shall
either assume the Company's rights and obligations under outstanding stock
option agreements or substitute options for the acquiring corporation's stock
for the outstanding options.

1996 OUTSIDE DIRECTORS STOCK OPTION PLAN

A total of 750,000 shares of Common Stock have been reserved for issuance
under the 1996 Outside Directors Stock Option Plan (the "Directors Plan"). As of
October 31, 1996, options to purchase 75,000 shares have been granted under the
Directors Plan. The Directors Plan provides for the automatic granting of
nonqualified stock options to Directors of the Company who are not employees of
the Company (the "Outside Directors"). Under the Directors Plan, each current
Outside Director will automatically be granted an option to purchase 25,000
shares of Common Stock on the date of each annual meeting of stockholders after
the close of the Offerings, provided that the Outside Director continues to
serve in such capacity. Additionally, each new Outside Director will
automatically be granted an option to purchase 75,000 shares of Common Stock
upon assuming the office of Director. The exercise price of the options in all
cases will be equal to the fair

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46

market value of the Common Stock on the date of grant. Initial grants vest over
a period of three years and annual grants vest in full on the first anniversary
of the date of grant. Options generally must be exercised within ten years.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Dr. Bayless, Mr. Cash and Mr. Zak served during the fiscal year ended
October 31, 1996 as members of the Compensation Committee of the Board of
Directors. Dr. Bayless is an affiliate of Sevin Rosen Bayless Management Co.,
Sevin Rosen Fund IV L.P. and Sevin Rosen Fund V L.P. (collectively, the "Sevin
Rosen Entities"), Mr. Cash is a general partner of InterWest Management Partners
V, the general partner of InterWest Partners V, L.P., and of InterWest Investors
V, L.P. (collectively, "InterWest"), and Mr. Zak is a general partner of the
general partner of Charles River Partnership VII ("Charles River"). Although
each of Sevin Rosen, InterWest and Charles River is a stockholder of the Company
none of Mr. Cash, Mr. Zak or Dr. Bayless were at any time during the fiscal year
ended October 31, 1996, or at any other time, an officer or employee of the
Company. No member of the Compensation Committee of the Company serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. Mr. Cash is not a current member of the
Compensation Committee. See "Certain Transactions".

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation provides that a Director of the
Company shall not be personally liable for monetary damages to the Company or
its stockholders for a breach of fiduciary duty as a Director, except for
liability as a result of (i) a breach of the Director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of Delaware General Corporation Law and (iv) transactions from which the
Director derived an improper personal benefit. Such limitation of liability does
not affect the availability of equitable remedies such as injunctive relief or
rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, Directors and other agents, to the full extent permitted
under the Delaware General Corporation Law. The Company has entered into
separate indemnification agreements with its directors and certain officers
which may, in some cases, provide broader indemnification protection than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require the Company, among other
things, to indemnify such officers and Directors against certain liabilities
that may arise by reason of their status or service as officers or Directors
(other than liabilities arising from willful misconduct of a culpable nature),
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. In addition, these agreements extend
similar indemnification arrangements to stockholders whose representatives serve
as directors of the Company.

At present, except for the Kimberlin litigation referred to above under
"Business -- Legal Proceedings," there is no pending litigation or proceeding
involving a Director, officer, employee or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification. The Company expects to provide indemnification to its Directors
named in the Kimberlin litigation.

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CERTAIN TRANSACTIONS

STOCK SALES

In April 1994, the Company issued and sold shares of Series A Preferred
Stock at a purchase price of $1.00 per share, in December 1994, the Company
issued and sold shares of Series B Preferred Stock at a purchase price of $1.50
per share and in December 1995, the Company issued and sold shares of Series C
Preferred Stock at a purchase price of $7.00 per share. The shares of Series A,
B and C Preferred Stock were initially convertible into one share of Common
Stock, subject to adjustment. The Company effected a five-for-one stock split on
December 9, 1996, and each share of Series A, B and C Preferred Stock will
convert automatically into five shares of Common Stock upon the closing of the
Offerings. In connection with these transactions, the Company also issued
warrants to purchase Common Stock at an exercise price of $.02 per share. These
warrants have been exercised and the shares of Common Stock issued upon exercise
of the warrants are reflected in the table below.

The purchasers of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Common Stock included, among others, the following
directors, executive officers and holders of more than 5% of the Common Stock:

NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK
NUMBER OF --------- --------- ---------
SHARES OF
COMMON
STOCK
---------
(ADJUSTED
FOR FIVE-
FOR-ONE
SPLIT)

Bessemer Venture Partners III L.P. ("BVP")(1).................... -- -- 626,668 425,997
Charles River(2)................................................. -- -- 1,500,000 250,000
InterWest(3)..................................................... 205,415 1,154,848 744,950 250,000
Japan Associated Finance Co., Ltd., JAFCO G-5 Investment
Enterprise Partnership, JAFCO R-1(A) Investment Enterprise
Partnership, JAFCO R-1(B) Investment Enterprise Partnership and
U.S. Information Technology (collectively the "JAFCO
Entities")(4).................................................. -- -- 1,000,000 171,429
Sevin Rosen Entities(5).......................................... 205,235 1,153,789 744,291 428,571
SVE Star Ventures Enterprises No. II Limited Partnership, SVE
Star Ventures Enterprises No. III Limited Partnership, SVE Star
Ventures Enterprises No. IIIA Limited Partnership, SVE Star
Ventures Managementgesellschaft mbH Nr. 3 & Co. Beteiligungs KG
and SVE Star Ventures Managementgesellschaft mbH Nr. 3
(collectively the "Star Venture Entities")(6).................. -- -- 1,000,000 322,143
Vanguard IV, L.P.(7)............................................. 136,220 750,000 493,999 142,850
Kevin Kimberlin(8)............................................... 76,560 421,520 426,733 72,533

- ---------------
(1) Includes (i) 24,000 shares of Series B Preferred Stock held by persons
associated with Bessemer Securities Corporation ("BSC"), the parent of the
limited partner of BVP, as to which BVP has the power to vote and as to
which BVP disclaims beneficial ownership, and 22,222 shares of Series B
Preferred Stock held by BVP III Special Situations L.P. ("BVP SS"), as to
which Deer III & Co. ("Deer III"), the general partner of BVP, as the
general partner of BVP SS, has voting and investment control and as to which
BVP disclaims beneficial ownership and Deer III disclaims beneficial
ownership except to the extent of its partnership interest in BVP SS, and
(ii) 6,150 shares of Series C Preferred Stock held by persons associated
with BSC, the parent of the limited partner of BVP, as to which BVP has the
power to vote and as to which BVP disclaims beneficial ownership, and 9,523
shares of Series C Preferred Stock held by BVP SS, as to which Deer III, as
the general partner of BVP SS, has voting and investment control and as to
which BVP disclaims beneficial ownership and Deer III disclaims beneficial
ownership except to the extent of its partnership interest in BVP SS. Does
not include (i) 73,332 shares of Series B Preferred Stock held by partners
of Deer III & Co. and persons associated with such partners or Deer III &
Co., and (ii) 6,858 shares of Series C Preferred Stock held by partners of
Deer III & Co. and person associated with such partners of Deer III & Co.

(2) Michael J. Zak, an affiliate of Charles River, is a Director of the Company.

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48

(3) Includes (i) 204,325 shares of Common Stock held by InterWest Partners V
L.P. and 1,090 shares of Common Stock held by InterWest Investors V L.P.,
(ii) 1,148,848 shares of Series A Preferred Stock held by InterWest Partners
V L.P. and 6,000 shares of Series A Preferred Stock held by InterWest
Investors V L.P., (iii) 740,998 shares of Series B Preferred Stock held by
InterWest Partners V L.P. and 3,952 shares of Series B Preferred Stock held
by InterWest Investors V L.P. and (iv) 248,438 shares of Series C Preferred
Stock held by InterWest Partners V L.P. and 1,562 shares of Series C
Preferred Stock held by InterWest Investors V L.P. Harvey B. Cash, an
affiliate of InterWest Partners V L.P., is a Director of the Company.

(4) Includes (i) 40,000 shares of Series B Preferred Stock held by Japan
Associated Finance Co., Ltd. ("JAFCO"); 82,712 shares of Series B Preferred
Stock held by JAFCO G-5 Investment Enterprise Partnership ("JAFCO G-5");
38,644 shares of Series B Preferred Stock held by JAFCO R-1(A) Investment
Enterprise Partnership ("JAFCO R-1(A)"); 38,644 shares of Series B Preferred
Stock held by JAFCO R-1(B) Investment Enterprise Partnership ("JAFCO
R-1(B)") and 800,000 shares of Series B Preferred Stock held by U.S.
Information Technology Investment Enterprise Partnership ("USIT"), and (ii)
6,857 shares of Series C Preferred Stock held by JAFCO; 14,179 shares of
Series C Preferred Stock held by JAFCO G5; 6,625 shares of Series C
Preferred Stock held by JAFCO R-1(A); 6,625 shares of Series C Preferred
Stock held by JAFCO R-1(B) and 137,143 shares of Series C Preferred Stock
held by USIT.

(5) Includes (i) 204,325 shares of Common Stock held by Sevin Rosen Fund IV L.P.
and 910 shares of Common Stock held by Sevin Rosen Bayless Management Co.,
(ii) 1,148,789 shares of Series A Preferred Stock held by Sevin Rosen Fund
IV L.P. and 5,000 shares of Series A Preferred Stock held by Sevin Rosen
Bayless Management Co., (iii) 740,998 shares of Series B Preferred Stock
held by Sevin Rosen Fund IV L.P. and 3,293 shares of Series B Preferred
Stock held by Sevin Rosen Bayless Management Co. and (iv) 285,714 shares of
Series C Preferred Stock held by Sevin Rosen Fund IV L.P. and 142,857 shares
of Series C Preferred Stock held by Sevin Rosen Fund V L.P. Jon W. Bayless,
an affiliate of the Sevin Rosen Entities, is a Director of the Company. Mr.
Bayless disclaims beneficial ownership of the shares owned by each of the
foregoing entities except to the extent of his proportional interest, if
any.

(6) Includes (i) 256,000 shares of Series B Preferred Stock held by SVE Star
Ventures Enterprises No. II Limited Partnership ("Star Enterprises II");
687,100 shares of Series B Preferred Stock held by SVE Star Ventures
Enterprises No. III Limited Partnership ("Star Enterprises III") and 56,900
shares of Series B Preferred Stock held by SVE Star Ventures Enterprises No.
IIIA Limited Partnership ("Star Enterprises IIIA"); and (ii) 33,548 shares
of Series C Preferred Stock held by Star Enterprises II; 90,026 shares of
Series C Preferred Stock held by Star Enterprises III; 7,528 shares of
Series C Preferred Stock held by Star Enterprises IIIA; 107,143 shares of
Series C Preferred Stock held by SVE Star Ventures Managementgesellschaft
mbH Nr. 3 & Co. Beteiligungs KG and 83,898 shares of Series C Preferred
Stock held by SVE Star Ventures Managementgesellschaft mbH Nr. 3.

(7) Clifford W. Higgerson, an affiliate of Vanguard IV, L.P., is a Director of
the Company.

(8) The shares beneficially owned by Kevin Kimberlin include shares of Kevin
Kimberlin Partners L.P. and Spencer Trask Holdings.

In April 1994, the Company sold 3,500,000 shares of Common Stock to Dr.
Nettles at a purchase price of $.02 per share pursuant to a Stock Purchase and
Stock Restriction Agreement dated April 9, 1994. In connection therewith, Dr.
Nettles issued a note to the Company in the amount of $63,000. The note was paid
in full in March 1995. Under the agreement, one quarter of the shares vested on
the first anniversary date of the agreement and the remaining shares vested
monthly at a rate of 1/48th per month. Until the shares are fully vested, they
are subject to certain restrictions

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including forfeiture in the event employment is terminated, restrictions on
transferability and right of first refusal. As of October 31, 1996, 2,183,335 of
the shares were vested under the agreement.

The Company believes that all transactions with affiliates described above
were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. All future transactions, including any
loans, between the Company and its officers, directors, principal stockholders
and their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested Outside Directors, and
will continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.

LITIGATION SETTLEMENT

William K. Woodruff & Company Incorporated ("Woodruff") is participating in
the Offerings as one of the representatives of the U.S. Underwriters and as one
of the International Underwriters as a result of the settlement of litigation
instituted by Woodruff in July 1996 against the Company and certain stockholders
of the Company. Under a 1994 agreement with the Company, Woodruff was granted a
right of first refusal for retention as an "investment banker" in any
transaction for which the Company intended to retain one or more investment
bankers, subject to certain qualifications, at a predetermined level of
compensation. The litigation brought by Woodruff sought to recover monetary,
declaratory and injunctive relief, including injunctive relief compelling the
Company to include Woodruff as a "co-manager" of the Company's initial public
offering under Woodruff's interpretation of the 1994 agreement. Under the terms
of the settlement, the Company has agreed to retain Woodruff as one of the
representatives of the underwriters of the Company's initial public offering,
granted Woodruff warrants to purchase 75,000 shares at an exercise price of
$4.00 per share, made a cash payment to Woodruff of $87,500, and agreed to
arrange for Woodruff to obtain a designated portion of the compensation to be
paid to the underwriters of the Company's initial public offering. The Company
entered into this settlement in order to avoid costly and potentially protracted
litigation over the questions of Woodruff's entitlement to compensation for, and
to participate as a "co-manager" in connection with, the Company's initial
public offering.

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1996, and as adjusted
to reflect the sale of the shares offered hereby, (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each Director and Named Executive Officer, (iii) by all officers
and Directors as a group and (iv) by certain other holders.

PERCENT OF OWNERSHIP
NUMBER OF SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS OWNED(1) OFFERINGS OFFERINGS
- -------------------------------------------------------- ---------------- ---------- ---------

Sevin Rosen Entities(2)................................. 11,838,490 13.5% 12.7%
Two Galleria Tower
13455 Noel Road, Suite 1670
Dallas, Texas 75240
InterWest(3)............................................ 10,954,405 12.4 11.8
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Charles River(4)........................................ 8,750,000 10.0 9.4
c/o Charles River Ventures, Inc.
1000 Winter Street, Suite 3300
Waltham, MA 02154
Star Venture Entities................................... 6,610,715 7.5 7.1
Possartstrasse 9
D-81679 Munich, Germany
JAFCO Entities.......................................... 5,857,145 6.7 6.3
c/o Japan Associated Finance Co., Ltd.
Toshiba Bldg., 10F
1-1-1, Shibaura, Minato-Ku
Tokyo, Japan 105
BVP(5).................................................. 5,263,335 6.0 5.8
1025 Old Country Road
Suite 205
Westbury, NY 11530
Vanguard IV, L.P.(6).................................... 7,070,465 8.0 7.6
525 University Avenue
Suite 600
Palo Alto, CA 94301
Patrick H. Nettles(7)................................... 4,352,135 4.9 4.6
David R. Huber(8)....................................... 6,187,950 7.0 6.7
Steve W. Chaddick(9).................................... 1,312,500 1.5 1.4
Lawrence P. Huang(10)................................... 1,312,500 1.5 1.4
Joseph R. Chinnici(11).................................. 322,500 * *
Jon W. Bayless(12)...................................... 11,838,490 13.4 12.7
Harvey B. Cash(13)...................................... 10,954,405 12.4 11.8
Clifford W. Higgerson(14)............................... 7,070,465 8.0 7.6
Billy B. Oliver(15)..................................... 75,000 * *
Michael J. Zak(16)...................................... 8,750,000 10.0 9.4
All officers and directors as a group (16
persons)(17).......................................... 53,683,445 57.7 54.7
Dr. Meir Barel(18)...................................... 6,610,715 7.5 7.1
Kevin Kimberlin(19)..................................... 4,680,490 5.3 5.0
Weiss, Peck & Greer Venture Capital Funds(20)........... 3,625,000 4.1 3.9

- ---------------
* Represents less than 1%.

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(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the United States Securities and Exchange
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days after October 31, 1996 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.

(2) Represents 11,081,830 shares of Common Stock beneficially owned by Sevin
Rosen Fund IV L.P., 714,285 shares of Common Stock beneficially owned by
Sevin Rosen Fund V L.P., and 42,375 shares beneficially owned by Sevin
Rosen Bayless Management Company. Jon W. Bayless, a director of the
Company, is a general partner of both SRB Associates IV L.P. the general
partner of Sevin Rosen Fund IV L.P., and SRB Associates V L.P., the general
partner of Sevin Rosen Fund V L.P., and is a principal of Sevin Rosen
Bayless Management Company. Dr. Bayless disclaims beneficial ownership of
the shares held by such entities except to the extent of his proportionate
partnership interest therein.

(3) Represents 10,895,745 shares of Common Stock beneficially owned by
InterWest Partners V L.P., and 58,660 shares of Common Stock beneficially
owned by InterWest Investors V L.P. Harvey B. Cash, a director of the
Company, is a special limited partner of InterWest Management Partners V
L.P., which is a general partner of InterWest Partners V L.P. Mr. Cash is
also the general partner of InterWest Investors V L.P. Mr. Cash disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.

(4) Michael J. Zak, a Director of the Company, is a general partner of the
general partner of Charles River Partnership VII. Mr. Zak disclaims
beneficial ownership of the shares held by such entity except to the extent
of his proportionate partnership interest therein.

(5) Includes (i) 24,000 shares of Series B Preferred Stock held by persons
associated with Bessemer Securities Corporation ("BSC"), the parent of the
limited partner of BVP, as to which BVP has the power to vote and as to
which BVP disclaims beneficial ownership, and 22,222 shares of Series B
Preferred Stock held by BVP III Special Situations L.P. ("BVP SS"), as to
which Deer III & Co. ("Deer III"), the general partner of BVP, as the
general partner of BVP SS, has voting and investment control and as to
which BVP disclaims beneficial ownership and Deer III disclaims beneficial
ownership except to the extent of its partnership interest in BVP SS, and
(ii) 6,150 shares of Series C Preferred Stock held by persons associated
with BSC, the parent of the limited partner of BVP, as to which BVP has the
power to vote and as to which BVP disclaims beneficial ownership, and 9,523
shares of Series C Preferred Stock held by BVP SS, as to which Deer III, as
the general partner of BVP SS, has voting and investment control and as to
which BVP disclaims beneficial ownership and Deer III disclaims beneficial
ownership except to the extent of its partnership interest in BVP SS. Does
not include (i) 73,332 shares of Series B Preferred Stock held by partners
of Deer III & Co. and persons associated with such partners or Deer III &
Co., and (ii) 6,858 shares of Series C Preferred Stock held by partners of
Deer III & Co. and person associated with such partners of Deer III & Co.

(6) Clifford W. Higgerson, a Director of the Company, is a general partner of
Vanguard IV, L.P. Mr. Higgerson disclaims beneficial ownership of the
shares held by such entity except to the extent of his proportionate
partnership interest therein.

(7) Includes 875,000 shares of Common Stock issuable upon exercise of options,
all of which are subject to a right of repurchase by the Company. Also
includes 2,383,387 shares of Common Stock, which are not subject to a right
of repurchase by the Company.

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(8) Includes 1,200,000 shares of Common Stock held in trust by Dr. Huber's wife
and 151,320 shares of Common Stock held by Mrs. Huber as custodian on
behalf of their minor children.

(9) Includes 1,312,500 shares issuable upon exercise of stock options, of which
562,500 shares are not subject to a right of repurchase by the Company.

(10) Includes 1,312,500 shares issuable upon exercise of stock options, of which
578,125 shares are not subject to a right of repurchase by the Company.

(11) Includes 322,500 shares issuable upon exercise of stock options, of which
113,540 shares are not subject to a right of repurchase by the Company.

(12) Represents 11,081,830 shares of Common Stock beneficially owned by Sevin
Rosen Fund IV L.P., 714,285 shares of Common Stock beneficially owned by
Sevin Rosen Fund V L.P., and 42,375 shares of Common Stock beneficially
owned by Sevin Rosen Bayless Management Co., which Dr. Bayless may be
deemed to beneficially own by virtue of his status as a general partner of
both SRB Associates IV L.P., the general partner of Sevin Rosen Fund IV
L.P., and SRB Associates V L.P., the general partner of Sevin Rosen Fund V
L.P., and as a principal of Sevin Rosen Bayless Management Co. Dr. Bayless
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest therein.

(13) Represents 10,895,745 shares of Common Stock beneficially owned by
InterWest Partners V L.P., and 58,660 shares of Common Stock beneficially
owned by InterWest Investors V L.P. Harvey B. Cash, a director of the
Company, is a special limited partner of InterWest Management Partners V
L.P., which is a general partner of InterWest Partners V L.P. Mr. Cash is
also the general partner of InterWest Investors V L.P. Mr. Cash disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.

(14) Represents 7,070,465 shares of Common Stock beneficially owned by Vanguard
IV, L.P., which Mr. Higgerson may be deemed to beneficially own by virtue
of his status as a general partner of Vanguard IV, L.P. Mr. Higgerson
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest therein.

(15) Includes 75,000 shares of Common Stock issuable upon exercise of stock
options granted pursuant to the 1996 Outside Directors Plan.

(16) Represents 8,750,000 shares of Common Stock beneficially owned by Charles
River Partnership VII, which Mr. Zak may be deemed to beneficially own by
virtue of his status as a general partner of Charles River Partnership VII.
Mr. Zak disclaims beneficial ownership of the shares held by such entity
except to the extent of his proportionate partnership interest therein.

(17) Includes 3,125,000 shares issuable upon exercise of stock options, of which
1,917,715 shares are subject to a right of repurchase by the Company.

(18) Represents shares beneficially owned by Star Venture Entities of which Dr.
Barel is affiliated. Dr. Barel disclaims beneficial ownership of such
shares except to the extent of his proportional beneficial interest
therein.

(19) Kevin Kimberlin provided initial equity capital during the formation of the
Company. The shares beneficially owned by Kevin Kimberlin include shares of
Kevin Kimberlin Partners L.P. and Spencer Trask Holdings. The address of
Kevin Kimberlin is c/o Spencer Trask, 535 Madison Avenue, New York, New
York 10022. See "Business -- Legal Proceedings".

(20) Represents 1,979,250 shares held of record by WPG Enterprise Fund II, L.P.
and 1,645,750 shares held of record by Weiss, Peck & Greer Venture
Associates III, L.P. The address of the funds is 555 California Street,
Suite 3130, San Francisco, California 94104, Attention: Christopher J.
Schaepe.

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DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 180,000,000 shares
of Common Stock and 20,000,000 shares of preferred stock, par value $.01 per
share. Each outstanding share of Convertible Preferred Stock will be
automatically converted into five shares of Common Stock upon the closing of the
Offerings being made hereby. Upon such conversion, such Convertible Preferred
Stock will be canceled, retired and eliminated from the shares that the Company
is authorized to issue. The following summary of the Company's capital stock
does not purport to be complete and is subject to, and qualified in its entirety
by, the Certificate of Incorporation and bylaws of the Company that are included
as exhibits to the Registration Statement of which this Prospectus forms a part
and by the provisions of applicable law.

COMMON STOCK

As of October 31, 1996, there were 86,507,325 shares of Common Stock
outstanding and held of record by 112 stockholders, as adjusted to reflect the
conversion of the outstanding shares of Convertible Preferred Stock into Common
Stock upon the closing of the Offerings. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the holders of Common Stock. Subject to preferences applicable to any
outstanding preferred stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any preferred stock. Holders of Common Stock have no preemptive or
subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable, and the shares of Common Stock to be issued upon completion
of the Offerings will be fully paid and non-assessable.

As of October 31, 1996, there were warrants to purchase 675,000 shares of
Common Stock outstanding and warrants to purchase 300,000 shares of Convertible
Preferred Stock outstanding. The warrants to purchase Convertible Preferred
Stock expire unless exercised prior to the closing of the Offerings, and an
aggregate of 1,500,000 shares of Common Stock are issuable upon conversion of
such Convertible Preferred Stock.

UNDESIGNATED PREFERRED STOCK

The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series any or all of which may be greater than the rights
of the Common Stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, impairing the liquidation rights of the Common Stock and
delaying or preventing a change in control of the Company without further action
by the stockholders. The Company has no present plans to issue any shares of
preferred stock.

REGISTRATION RIGHTS

Following the sale of the shares of Common Stock offered hereby, the
holders of 74,815,740 shares issuable upon conversion of the outstanding shares
of Convertible Preferred Stock or issued or issuable to certain holders of the
warrants, and certain shares held by certain founders of the Company and their
transferees will have certain rights to register those shares under the
Securities Act. These rights are provided under the terms of certain agreements
among the Company and the holders of such shares. Subject to certain limitations
in such agreements, the

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54

holders of at least 25% of such shares may require, on two occasions, that the
Company use its best efforts to register such shares for public resale, subject
to certain limitations. If the Company registers any of its Common Stock either
for its own account or for the account of other security holders, the holders of
such shares are entitled to include their shares of Common Stock in the
registration, subject to the ability of the underwriters to limit the number of
shares included in the Offerings. The holders of such shares may also require
the Company on no more than one occasion every 12 months to register all or a
portion of their registrable securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price is at least $500,000, and that the total number
of permitted demand registrations on Form S-3 is limited to six. All fees, costs
and expenses of registrations pursuant to Form S-1 (other than underwriting
discounts and commissions) will be borne by the Company. All expenses of demand
registrations pursuant to Form S-3 shall be borne by the holders.

DELAWARE LAW AND CERTAIN PROVISIONS OF THE THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law ("DGCL"). In general, Section 203 of the DGCL
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a Delaware corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision of law can
be expected to have the effect of discouraging hostile takeover attempts,
including attempts that might result in a premium over the market price for the
shares of Common Stock held by stockholders.

The Company's Certificate of Incorporation provides that following the date
of this Prospectus, the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of the
Company and may maintain the incumbency of the Board of Directors, as it
generally makes it more difficult for stockholders to replace a majority of the
directors. The Company's Certificate of Incorporation also eliminates, upon the
closing of the Offerings, the right of stockholders to act without a meeting and
does not provide for cumulative voting in the election of directors. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. The amendment of any of these
provisions would require approval by holders of 66 2/3% or more of the
outstanding Common Stock.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offerings, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.

Upon completion of the Offerings, the Company will have outstanding an
aggregate of 93,007,325 shares of Common Stock, assuming (i) the issuance of
5,000,000 shares of Common Stock in the Offerings, (ii) no exercise of the
Underwriters' over-allotment options and (iii) no exercise of options or
warrants to purchase Common Stock after October 31, 1996 except for 1,500,000
shares issuable upon exercise of warrants expiring at the close of the
Offerings. Of these shares, the 5,000,000 shares sold in the Offerings will be
freely tradable without restriction or further

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registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act and except as described in "Underwriting." Sales by affiliates
will be subject to certain limitations and restrictions described below. Within
90 days after the date of this Prospectus, approximately 71,538,747 shares
(including 5,011,912 shares issuable upon exercise of options and warrants) will
become eligible for sale in the public market subject in some cases to the
volume and other restrictions of Rule 144 under the Securities Act.

Of these shares, holders of 66,018,610 shares and options and warrants to
purchase 5,011,912 shares are subject to lock-up agreements. Shares covered by
these lock-up agreements are subject to restrictions on resale in the public
market for a period of 180 days following the date of this Prospectus, subject
to release, directly or indirectly, by the Representatives of the Underwriters;
provided, however, the representatives of the Underwriters have agreed with the
Company that they will not release from the lock-up agreements any shares held
by holders of more than 100,000 shares (other than any shares purchased in the
Offerings or subsequently in the open market) (a "Significant Locked-Up
Stockholder") without offering other Significant Locked-Up Stockholders the
opportunity to have shares held by them released from their lock-up agreements
on a pro rata basis.

Upon expiration of the lock-up period, 72,406,035 shares will become
eligible for sale in the public market, subject in most cases to the limitations
of Rule 144. The remaining 20,135,015 shares held by existing stockholders will
become eligible for sale at various times over a period of less than two years
and could be sold earlier if the holders exercise registration rights. In
addition, holders of stock options could exercise these options and sell certain
of the shares issued upon exercise as described below.

As of October 31, 1996, there were a total of 11,007,960 shares of Common
Stock subject to outstanding options under the Amended and Restated 1994 Stock
Option Plan, 2,684,355 of which were vested. Promptly following these Offerings,
the Company intends to file a registration statement on Form S-8 under the
Securities Act to register all of the shares of Common Stock issued or reserved
for future issuance under the Option Plan and the Directors Plan. On the date
180 days after the effective date of this Prospectus, a total of 4,114,429
shares of Common Stock subject to outstanding options will be vested and
exercisable. After the effective date of the registration statement on Form S-8,
shares purchased upon exercise of options granted pursuant to the Option Plan or
Directors Plan generally would be available for resale in the public market.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 930,000 shares
immediately after the Offerings) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for a least three years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of the Offerings are
entitled to sell such shares 90 days after the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of Rule 144. The Commission has proposed to amend the
holding period

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required by Rule 144 to permit sales of "restricted securities" after one year
rather than two years and to permit "non-affiliates" to sell without
restrictions, pursuant to Rule 144(k), after a holding period of two years
(including the holding period of any prior owner except an affiliate). If such
proposed amendment is adopted, restricted securities would become freely
tradable (subject to any applicable contractual restrictions) at correspondingly
earlier dates.

CERTAIN U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF THE COMMON STOCK

The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
person that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or a foreign estate or
trust as defined in the U.S. Internal Revenue Code of 1986, as amended (the
"Code") (a "non-U.S. holder"). This discussion does not consider specific facts
and circumstances that may be relevant to a particular non-U.S. holder's tax
position and does not deal with all aspects of United States federal income and
estate taxation that may be relevant to non-U.S. holders, or with U.S. state and
local or non-U.S. tax consequences. Furthermore, the following discussion is
based on provisions of the Code, existing and proposed regulations promulgated
thereunder, and administrative and judicial interpretations thereof as of the
date hereof, all of which are subject to change, possibly with retroactive
effect. Each prospective non-U.S. holder is urged to consult a tax adviser with
respect to the U.S. federal tax consequences of holding and disposing of Common
Stock, as well as any tax consequences that may arise under the laws of any U.S.
state, municipality or other taxing jurisdiction.

An individual may, among other ways, be deemed to be a resident alien (as
opposed to a non-resident alien) with respect to any calendar year by virtue of
being present in the United States on at least 31 days in such calendar year and
for an aggregate of at least 183 days during the current calendar year and the
two preceding calendar years (counting for such purposes all of the days present
in the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year). Resident
aliens are subject to U.S. federal tax as if they were U.S. citizens.

DIVIDENDS

As described above, the Company does not expect to pay dividends. In the
event the Company does pay dividends, dividends paid to a non-U.S. holder of
Common Stock will be subject to withholding of U.S. federal income tax at a rate
of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business by the non-U.S.
holder within the United States. Dividends that are effectively connected with
such holder's conduct of a trade or business in the United States are subject to
U.S. federal income tax on a net income basis at applicable graduated individual
or corporate rates, and are not generally subject to withholding, if the holder
complies with certain certification and disclosure requirements. Any such
effectively connected dividends received by a foreign corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.

Dividends paid to an address outside the United States are presumed to be
paid to a resident of the country of address (unless the payer has knowledge to
the contrary) for purposes of the withholdings discussed above and for purposes
of determining the applicability of a tax treaty rate. Under proposed U.S.
Treasury regulations that are proposed to be effective for distributions after
1997 (the "Proposed Regulations") however, a non-U.S. holder of Common Stock who
wishes to claim the benefit of an applicable treaty rate would be required to
satisfy applicable certification requirements. The Proposed Regulations include
special rules that apply to dividends paid to foreign partnerships. It is not
certain whether, or in what form, the Proposed Regulations will be adopted as
final regulations.

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A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the U.S.
Internal Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock unless (i) the
gain is effectively connected with a trade or business of the non-U.S. holder in
the United States or, if a tax treaty applies, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United States, (ii) in
the case of a non-U.S. holder who is an individual and holds the Common Stock as
a capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale and certain other conditions are met, or
(iii) the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time during the five-year period ending on
the date of the disposition and the non-U.S. holder owned more than 5% of the
Company's Common Stock at any time during such period. The Company believes that
it has not been and it is not a "U.S. real property holding corporation" for
U.S. federal income tax purposes and does not currently anticipate becoming a
"U.S. real property holding corporation." If an individual non-U.S. holder falls
under clause (i) above, he or she will be taxed on his or her net gain derived
from the sale at regular graduated U.S. federal income tax rates. If an
individual non-U.S. holder falls under clause (ii) above, he or she will be
subject to a flat 30% tax on the net gain derived from the sale which gain may
be offset by U.S. capital losses. If a non-U.S. holder that is a foreign
corporation falls under clause (i) above, it will be taxed on its gain at
regular graduated U.S. federal income tax rates and, in addition, may be subject
to the branch profits tax equal to 30% of its "effectively connected earnings
and profits" within the meaning of the Code for the taxable year, as adjusted
for certain items, or at such lower rate as may be specified by an applicable
income tax treaty.

FEDERAL ESTATE TAXES

Common Stock owned or treated as owned by a non-U.S. holder at the time of
death, or Common Stock of which the non-U.S. holder made certain in lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.

U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

The Company must report annually to the U.S. Internal Revenue Service and
to each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends, regardless of whether withholding was
required. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty.

Under current law, backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the U.S. information reporting requirements) will
generally not apply to dividends paid to a non-U.S. holder at an address outside
the United States unless such non-U.S. holder is engaged in a trade or business
in the United States or unless the payer has knowledge that the payee is a U.S.
person. Under the Proposed Regulations, however, dividend payments generally
will be subject to backup withholding unless applicable certification
requirements are satisfied.

In general, backup withholding and information reporting will not apply to
a payment of the proceeds of a sale of Common Stock to or through a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% of more of its gross income for certain periods from the
conduct of

55
58

a trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (1) such
broker has documentary evidence in its records that the beneficial owner is a
non-U.S. holder and certain other conditions are met, or (2) the beneficial
owner otherwise establishes an exemption.

Payment to or through a U.S. office of a broker of the proceeds of a sale
of Common Stock is generally subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. holder, or otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the U.S. Internal Revenue
Service.

LEGAL MATTERS

Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Hogan & Hartson L.L.P., Baltimore,
Maryland, and for the Underwriters by Hale and Dorr LLP, Washington, D.C.

EXPERTS

The financial statements as of October 31, 1996 and 1995 and for each of
the three fiscal years in the period ended October 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement, including
the exhibits thereto. Statements made in this Prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the copy of such documents filed as exhibits to
the Registration Statement for a more complete description of the matter
involved, and each such document shall be deemed qualified in its entirety by
such reference. The Registration Statement, including the exhibits thereto, as
well as other information filed with the Commission, may be inspected without
charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of all or any part thereof
may be obtained from the Commission upon the payment of certain fees prescribed
by the Commission. The Commission also maintains a World Wide Web site that
contains reports, proxy statements and other information regarding registrants,
including the Company, that file such information electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.

56
59

CIENA CORPORATION

INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants..................................................... F-2
Balance Sheets as of October 31, 1995 and 1996........................................ F-3
Statements of Operations for the years ended October 31, 1994, 1995 and 1996.......... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended October
31, 1994, 1995 and 1996............................................................. F-5
Statements of Cash Flows for the years ended October 31, 1994, 1995 and 1996.......... F-6
Notes to Financial Statements......................................................... F-7

F-1
60

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of CIENA Corporation

In our opinion, the accompanying balance sheets and the related statements of
operations, of cash flows and of changes in stockholders' equity (deficit)
present fairly, in all material respects, the financial position of CIENA
Corporation at October 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended October 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP
Falls Church, VA
November 27, 1996, except as to Note
14,
which is as of December 10, 1996

F-2
61

CIENA CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

PRO FORMA
STOCKHOLDERS'
OCTOBER 31, EQUITY AT
---------------------- OCTOBER 31,
1995 1996 1996
--------- --------- ------------

(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 5,032 $ 22,557
Accounts receivable (net of allowance of $--).................................... 8 16,759
Inventories, net................................................................. -- 13,228
Deferred income taxes............................................................ -- 1,834
Prepaid expenses and other....................................................... 22 634
--------- ---------
Total current assets.................................................... 5,062 55,012
Equipment, furniture and fixtures, net............................................... 2,239 11,863
Other assets......................................................................... 82 426
--------- ---------
Total assets................................................................ $ 7,383 $ 67,301
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of capital lease obligations................................ $ 368 $ 960
Current maturities of notes payable.............................................. -- 69
Accounts payable................................................................. 541 6,278
Accrued liabilities.............................................................. 1,084 5,242
Income taxes payable............................................................. -- 3,342
Deferred revenue................................................................. -- 3,265
--------- ---------
Total current liabilities............................................... 1,993 19,156
Capital lease obligations, less current installments................................. 856 2,186
Notes payable, less current maturities............................................... -- 487
Deferred rent........................................................................ 10 98
--------- ---------
Total liabilities....................................................... 2,859 21,927
Commitments and contingencies........................................................ -- --
Mandatorily redeemable preferred stock -- par value $.01, 16,250,000 shares
authorized:
Series A -- 4,500,000 shares authorized; 3,542,520 and 3,590,157 shares issued
and outstanding; zero outstanding pro forma..................................... 3,492 3,492 $ --
Series B -- 8,000,000 shares authorized; 7,354,092 shares issued and outstanding;
zero outstanding pro forma...................................................... 10,962 10,962 --
Series C -- 3,750,000 shares authorized; 3,718,899 shares issued and outstanding;
zero outstanding pro forma...................................................... -- 25,950 --
Stockholders' equity (deficit):
Preferred stock -- par value $.01; 20,000,000 shares authorized; zero shares
issued and outstanding; zero outstanding pro forma.............................. -- -- --
Common stock -- par value $.01; 180,000,000 shares authorized; 11,935,415 and
13,191,585 shares issued and outstanding; 86,507,325 outstanding pro forma...... 119 132 865
Additional paid-in capital....................................................... 110 339 40,010
Notes receivable from stockholders............................................... -- (60) (60)
Retained earnings (deficit)...................................................... (10,159) 4,559 4,559
--------- --------- ------------
Total stockholders' equity (deficit).................................... (9,930) 4,970 $ 45,374
--------- --------- ------------
Total liabilities, mandatorily redeemable preferred stock and stockholders'
equity (deficit)........................................................... $ 7,383 $ 67,301
======== ========

The accompanying notes are an integral part of these financial statements

F-3
62

CIENA CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED OCTOBER 31,
-----------------------------
1994 1995 1996
------- ------- -------

Revenue........................................................ $ -- $ -- $54,838
Cost of goods sold............................................. -- -- 21,844
------- ------- -------
Gross profit.............................................. -- -- 32,994
------- ------- -------
Operating expenses:
Research and development.................................. 1,287 6,361 8,922
Selling and marketing..................................... 295 481 3,780
General and administrative................................ 787 896 3,905
------- ------- -------
Total operating expenses............................. 2,369 7,738 16,607
------- ------- -------
Income (loss) from operations.................................. (2,369) (7,738) 16,387
Interest and other income (expense), net....................... (36) 195 877
Interest expense............................................... (2) (86) (296)
------- ------- -------
Income (loss) before income taxes.............................. (2,407) (7,629) 16,968
Provision for income taxes..................................... -- -- 2,250
------- ------- -------
Net income (loss).............................................. $(2,407) $(7,629) $14,718
======== ======== ========
Pro forma net income per common and common equivalent
share........................................................ $ .15
========
Pro forma weighted average common and common equivalent shares
outstanding.................................................. 99,111
========

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

F-4
63

CIENA CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)

NOTES TOTAL
COMMON STOCK RECEIVABLE RETAINED STOCKHOLDERS'
--------------------- ADDITIONAL FROM EARNINGS EQUITY
SHARES AMOUNT PAID-IN-CAPITAL STOCKHOLDERS (DEFICIT) (DEFICIT)
----------- ------ --------------- ------------ -------- ------------

BALANCE AT OCTOBER 31,
1993.................... 7,066,665 $ 71 $ 17 $ -- $ (123) $ (35)
Issuance of common stock.. 3,750,000 37 39 (65) -- 11
Payment of expenses by
stockholder............. -- -- 43 -- -- 43
Net loss.................. -- -- -- -- (2,407) (2,407)
---------- ---- ----- ---- -------- --------
BALANCE AT OCTOBER 31,
1994.................... 10,816,665 108 99 (65) (2,530) (2,388)
Exercise of warrants...... 1,075,000 11 11 -- -- 22
Exercise of stock
options................. 43,750 -- -- -- -- --
Repayment of receivables
from stockholders....... -- -- -- 65 -- 65
Net loss.................. -- -- -- -- (7,629) (7,629)
---------- ---- ----- ---- -------- --------
BALANCE AT OCTOBER 31,
1995.................... 11,935,415 119 110 -- (10,159) (9,930)
Exercise of warrants...... 676,425 7 -- -- -- 7
Exercise of stock
options................. 579,745 6 71 (60) -- 17
Compensation cost of stock
options................. -- -- 2 -- -- 2
Issuance of warrants for
settlement of certain
equity rights........... -- -- 156 -- -- 156
Net income................ -- -- -- -- 14,718 14,718
---------- ---- ----- ---- -------- --------
BALANCE AT OCTOBER 31,
1996.................... 13,191,585 $132 $ 339 $(60) $ 4,559 $ 4,970
========== ==== ===== ==== ======== ========

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

F-5
64

CIENA CORPORATION

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED OCTOBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------

Cash flows from operating activities:
Net income (loss)............................................. $ (2,407) $ (7,629) $ 14,718
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Non-cash charges from equity transactions................ 75 -- 158
Write down of leasehold improvements..................... -- -- 883
Depreciation and amortization............................ 25 355 1,007
Provision for inventory excess and obsolescence.......... -- -- 1,937
Accrued interest on notes receivable from stockholders... (2) -- (2)
Provision for warranty and other contractual
obligations............................................ -- -- 1,584
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.......... 4 (8) (16,751)
Increase in prepaid expenses and other.............. (2) (16) (612)
Increase in inventories............................. -- -- (15,165)
Increase in deferred income taxes................... -- -- (1,834)
Increase in other assets............................ (26) (56) (343)
Increase in accounts payable and accruals........... 820 757 8,311
Increase in income taxes payable.................... -- -- 3,342
Increase (decrease) in deferred revenue and deferred
rent.............................................. 21 (11) 3,353
-------- -------- ---------
Net cash (used in) provided by operating activities...... (1,492) (6,608) 586
-------- -------- ---------
Cash flows from investing activities:
Additions to equipment, furniture and fixtures................ (585) (2,036) (11,514)
-------- -------- ---------
Net cash used in investing activities.................... (585) (2,036) (11,514)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from notes payable................................... -- -- 556
Proceeds from bridge loan..................................... 200 -- --
Repayment of bridge loan...................................... (200) -- --
Net proceeds from issuance of or subscription to mandatorily
redeemable preferred stock................................. 3,460 10,962 25,950
Proceeds from issuance of common stock and warrants........... 11 22 24
Repayment of notes receivable from stockholders............... -- 65 --
Proceeds from lease financing activities...................... 504 944 2,564
Principal payments on capital lease obligations............... -- (225) (641)
-------- -------- ---------
Net cash provided by financing activities................ 3,975 11,768 28,453
-------- -------- ---------
Net increase in cash and cash equivalents................ 1,898 3,124 17,525
Cash and cash equivalents at beginning of year.................... 10 1,908 5,032
-------- -------- ---------
Cash and cash equivalents at end of year.......................... $ 1,908 $ 5,032 $ 22,557
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest...................................................... $ 2 $ 86 $ 296
======= ======= ========
Income taxes.................................................. $ -- $ -- $ 742
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for notes receivable from stockholders... $ 65 $ -- $ 60
======= ======= ========

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

F-6
65

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS

(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

CIENA Corporation (the "Company" or "CIENA"), a Delaware corporation, was
incorporated on November 2, 1992 as HydraLite Incorporated. Subsequently, the
Company changed its name to Cedrus Corporation and then to CIENA Corporation.
The Company designs, manufactures and sells dense wavelength division
multiplexing systems for long distance fiberoptic telecommunications networks.
During the period from November 2, 1992 to October 31, 1995, CIENA was a
development stage company as defined in Statement of Financial Accounting
Standards No. 7, "Development Stage Enterprises". Planned principal operations
commenced during fiscal 1996 and, accordingly, CIENA is no longer considered a
development stage company.

During fiscal 1996, all of the Company's revenue was attributable to a
single product and to a single customer. Additionally, the Company's access to
certain raw materials is dependent upon single and sole source suppliers.

Fiscal Year

The Company has a 52 or 53 week fiscal year which ends on the Saturday
nearest to the last day of October in each year (November 2, 1996; October 28,
1995; and October 29, 1994). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 1994 and
1995 comprised 52 weeks and fiscal 1996 comprised 53 weeks.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, together with amounts disclosed in the related notes to the
financial statements. Particularly sensitive estimates include reserves for
warranty and other contractual obligations and for excess and obsolete
inventories. Actual results could differ from the recorded estimates.

Pro Forma Stockholders' Equity

CIENA anticipates filing an initial registration statement with the
Securities and Exchange Commission. If the contemplated Offerings are
consummated under the terms presently anticipated, each share of the Mandatorily
Redeemable Series A, B, and C Preferred Stock (collectively, the "Convertible
Preferred Stock") will convert into five shares of the Company's Common Stock.
Pro forma stockholders' equity as of October 31, 1996 reflects the anticipated
conversion of the Convertible Preferred Stock into Common Stock.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company's entire
cash and cash equivalents balance at October 31, 1996 was on deposit with one
financial institution, which represents a concentration of credit risk as
defined under Statement of Financial Accounting Standards No. 105, "Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk". The majority of the
Company's cash equivalents are invested in overnight repurchase agreements,
which are secured by the U.S. Government.

F-7
66

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventories

Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. The Company records a provision for excess and
obsolete inventory whenever such 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
2-5 years for equipment, furniture and fixtures and of 6-10 years for leasehold
improvements.

Revenue Recognition

The Company recognizes product revenue in accordance with the shipping
terms specified. For transactions where the Company has yet to obtain customer
acceptance or has agreements pertaining to installation services, revenue is
deferred until no significant obligations remain. Revenue for installation
services is recognized as the services are performed. Amounts received in excess
of revenue recognized are included as deferred revenue in the accompanying
balance sheets. For distributor sales where risks of ownership have not
transferred, the Company recognizes revenue when the product is shipped through
to the end user.

During fiscal 1996, all of the Company's revenue and related trade accounts
receivable were derived from one customer, which is headquartered within the
United States.

Revenue-Related Accruals

The Company provides for the estimated costs to fulfill customer warranty
and other contractual obligations upon the recognition of the related revenue.
Such reserves are determined based upon actual warranty cost experience,
estimates of component failure rates, and management's industry experience. The
Company's contractual sales arrangements generally do not permit the right of
return of product by the customer.

Research and Development

The Company charges all research and development costs to expense as
incurred.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes". SFAS No. 109 is 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 carryforwards. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future events other
than the enactment of changes in tax laws or rates. A valuation allowance is
recorded if it is "more likely than not" that some portion or all of a deferred
tax asset will not be realized.

F-8
67

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Computation of Pro Forma Net Income per Share

Pro forma net income per common and common equivalent share is computed
using the pro forma weighted average number of common and common equivalent
shares outstanding. Pro forma weighted average common and common equivalent
shares include Common Stock, stock options and warrants using the treasury stock
method and the assumed conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock. Since the conversion of the Convertible
Preferred Stock has a significant effect on the earnings per share calculation,
historical loss per share has not been calculated on the basis that it is
irrelevant.

Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, stock options, warrants and Convertible Preferred Stock issued by
the Company during the twelve months immediately preceding the filing of the
initial registration statement and through the effective date of such
registration statement have been included in the calculation of the pro forma
weighted average shares outstanding using the treasury stock method based on the
estimated initial public offering price.

Software Development Costs

Statement of Financial Accounting Standards No. 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. The Company 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, the Company has not
capitalized any software development costs.

Accounting for Stock Options

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation". The Company's adoption of SFAS No. 123 in fiscal 1997
will not have any effect on the Company's financial condition or results of
operations, as the Company intends to continue to measure compensation cost of
stock options granted to employees using the intrinsic value method provided by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".

(2) INVENTORIES

Inventories are comprised of the following (in thousands):

OCTOBER 31,
1996
-----------

Raw materials................................................... $ 8,585
Work-in-process................................................. 3,629
Finished goods.................................................. 2,951
-----------
15,165
Less reserve for excess and obsolescence........................ (1,937)
-----------
$13,228
=========

F-9
68

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(3) EQUIPMENT, FURNITURE AND FIXTURES

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

OCTOBER 31,
-------------------
1995 1996
------- --------

Equipment, furniture and fixtures........................ $ 2,077 $ 11,647
Leasehold improvements................................... 133 1,141
------- --------
2,210.. 12,788
Accumulated depreciation and amortization................ (381) (1,388)
Construction-in-progress................................. 410 463
------- --------
$ 2,239 $ 11,863
====== ========

In September 1994 and October 1995, the Company entered into separate
master lease agreements to lease certain furniture and equipment. The Company
may lease up to a maximum total of $4.5 million of furniture and equipment under
these agreements, of which $4.1 million had been utilized as of October 31,
1996. Lease terms range from 36 to 48 months. In accordance with Statement of
Financial Accounting Standards No. 13, "Accounting for Leases", the related
leases have been recorded as capital lease transactions.

Furniture and equipment with a cost of $1,541,000 and $4,105,000 and
accumulated depreciation of $311,000 and $1,080,000 have been accounted for as
capital lease assets at October 31, 1995 and 1996, respectively. The Company has
the option to purchase the assets at the end of the lease term.

(4) ACCRUED LIABILITIES

Accrued liabilities are comprised of the following (in thousands):

OCTOBER 31,
------------------
1995 1996
------- -------

Warranty and other contractual obligations......................... $ -- $ 1,584
Accrued compensation............................................... 434 2,314
Unbilled construction-in-progress and leasehold improvements....... 411 50
Other.............................................................. 239 1,294
------- -------
$ 1,084 $ 5,242
====== ======

(5) CAPITAL LEASE OBLIGATIONS

Capital lease obligations are summarized as follows (in thousands):

OCTOBER 31,
1996
-----------

Capital lease obligations, secured by related assets, payable in
monthly installments including interest at rates ranging from
8.72% to 13.15% through June 2000............................. $ 3,146
Less current installments.................................. (960)
-----------
Long-term capital lease obligations........................ $ 2,186
=========

F-10
69

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(5) CAPITAL LEASE OBLIGATIONS -- (CONTINUED)
Future minimum capital lease payments at October 31, 1996 are as follows
(in thousands):

Fiscal year ending October 31,
1997..................................................... $ 1,288
1998..................................................... 1,202
1999..................................................... 942
2000..................................................... 377
-------
3,809
Less amounts representing interest................................. (663)
-------
$ 3,146
======

(6) LINE OF CREDIT

In November 1996, the Company entered into an unsecured line of credit
agreement with a bank, which provides for borrowings of up to $15,000,000.
Interest on borrowings is set at the bank's prime rate (at November 20, 1996 the
rate was 8.25%). Among other provisions, the Company is required to maintain
certain financial covenants, principally certain minimum working capital levels
and monthly profitability levels. The line of credit agreement also prohibits
the Company from paying cash dividends on its capital stock, and expires in
November 1997.

(7) NOTES PAYABLE

In June 1996, the Company borrowed $556,000 from the Maryland Economic
Development Corporation for construction of leasehold improvements and executed
promissory notes of $500,000 and $56,000 with annual interest rates of 6.63% and
3.00%, respectively. Initial interest payments on the notes are due three and
six months following the date of disbursement with quarterly principal payments
commencing on March 31, 1997. The Company provided $56,000 on deposit in escrow
as collateral towards the notes and has recorded such amount as a component of
other assets in the accompanying balance sheet.

The notes payable are due as follows (in thousands):

Fiscal year ending October 31,
1997....................................................... $ 69
1998....................................................... 153
1999....................................................... 104
2000....................................................... 111
2001....................................................... 119
-----
$ 556
=====

(8) MANDATORILY REDEEMABLE PREFERRED STOCK

Each holder of Convertible Preferred Stock is entitled to vote on all
matters on an as if converted basis. Dividends, if declared by the Board of
Directors, are $.06, $.1275 and $.56 per share for the Series A, Series B and
Series C Preferred Stock, respectively. No dividends have been declared through
fiscal 1996. Subsequent to December 1, 2001, Series A dividends accrue on a
quarterly basis and become cumulative. Upon liquidation, holders of the Series
A, Series B and

F-11
70

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(8) MANDATORILY REDEEMABLE PREFERRED STOCK -- (CONTINUED)
Series C Preferred Stock are entitled to receive $1.00, $1.50 and $7.00 per
share, respectively, as adjusted for certain defined recapitalization events,
plus accrued dividends, if any.

Holders of Convertible Preferred Stock may convert each of their shares
into five shares of common stock at any time. Each outstanding share of
Convertible Preferred Stock will be automatically converted into five shares of
Common Stock upon (1) the consummation of the Offerings contemplated by the
Company in its anticipated initial registration statement, or (2) the
affirmative vote of the holders of record of (a) 67% of the outstanding shares
of all series of Convertible Preferred Stock, voting together as one class to
that effect, and (b) 85% of the outstanding shares of Series C Preferred Stock,
voting separately as a class. Each outstanding share of Convertible Preferred
Stock is mandatorily redeemable by the Company at the greater of purchase price
or fair value upon the affirmative vote of holders of 72% of the outstanding
shares for each individual series. A total of 50% of any such redemption is to
be paid seven years from original issuance and 50% eight years from original
issuance. The accompanying financial statements do not reflect any accretion to
redemption value, because of the contemplated Offerings and the related expected
conversion of all Convertible Preferred Stock to Common Stock.

During February 1994, the Company received a two month $200,000 bridge loan
from two investors that subsequently purchased Series A Preferred Stock shares
in April 1994. These two investors received warrants to purchase 50,000 shares
of Series A Preferred Stock at either an exercise price of $1.00 per share or at
a reduced share quantity for a cashless exercise price. The fair value of these
warrants was determined to be immaterial on the date of grant and therefore no
charge was recorded. In September 1996, warrants to purchase 50,000 of these
shares were exercised and exchanged in a cashless exercise for 47,637 shares.

The following is a summary of the Company's Convertible Preferred Stock
activity (dollars in thousands):

SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------- --------- -------

Balance at October 31, 1993........... -- $ -- -- $ -- -- $ --
Issued................................ 3,542,520 3,543 -- -- -- --
Costs associated with issuance........ -- (51) -- -- -- --
--------- ------ --------- ------- --------- -------
Balance at October 31, 1994........... 3,542,520 3,492 -- -- -- --
Issued................................ -- -- 7,354,092 11,031 -- --
Costs associated with issuance........ -- -- -- (69) -- --
--------- ------ --------- ------- --------- -------
Balance at October 31, 1995........... 3,542,520 3,492 7,354,092 10,962 -- --
Issued................................ 47,637 -- -- -- 3,718,899 26,032
Costs associated with issuance........ -- -- -- -- -- (82)
--------- ------ --------- ------- --------- -------
Balance at October 31, 1996........... 3,590,157 $3,492 7,354,092 $10,962 3,718,899 $25,950
========= ====== ========= ======= ========= =======

F-12
71

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) STOCK OPTIONS AND WARRANTS

Stock Warrants

In January 1993, the Company issued a fully paid option to acquire up to
five percent of the Company's outstanding shares of Common Stock after exercise.
This option was issued in connection with the license of certain technologies
described in Note 11. This option was redeemed for 643,090 shares in early
January 1996. As the fair value of these warrants was determined to be
immaterial at the date of issuance, no charge to research and development
expense was recorded.

In connection with the master lease agreement discussed in Note 5, the
Company issued in September 1994, for $600, a warrant to the lessor to acquire
600,000 shares of the Company's Common Stock at an exercise price of $0.20 per
share. As the fair value of these warrants was determined to be immaterial at
the date of issuance, no charge was recorded by the Company.

In connection with the 1994 equity offerings, the Company issued warrants
to investment bankers to purchase 1,075,000 shares of Common Stock at an
exercise price of $0.02 and 150,000 shares of Series A Preferred Stock at an
exercise price of $1.00 per share. No charge was recorded relative to these
warrants as their fair value was determined to be immaterial. The warrants for
the purchase of 1,075,000 shares of Common Stock were exercised in December 1994
for a $21,500 purchase price. During 1995, the warrants to purchase 150,000
shares of Series A Preferred Stock at $1.00 per share were canceled in exchange
for the Company granting options to purchase 300,000 shares of Series B
Preferred Stock at $2.00 per share.

During August 1996, in connection with the settlement of litigation
involving a dispute over certain rights awarded from the April 1994 equity
offerings of Series A Preferred Stock, the Company issued, for $150, a warrant
to an investor to acquire 75,000 shares of the Company's Common Stock at an
exercise price of $4.00 per share. The Company recorded approximately $156,000
in expense for the fair value of the warrant when granted.

Stock Incentive Plans

The Company has an Amended and Restated 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, 20,050,000 shares of the Company's authorized but
unissued Common Stock are reserved for options issuable to employees. These
options are immediately exercisable upon grant, and both the options and the
shares issuable upon exercise of the options generally vest to the employee over
a four year period. The Company has the right to repurchase any exercised and
non-vested shares at the original purchase price from the employees upon
termination of employment. In June 1996 the Company approved the 1996 Outside
Directors Stock Option Plan (the "1996 Plan"). Under the 1996 Plan, 750,000
shares of the Company's authorized but unissued Common Stock are reserved for
options issuable to outside members of the Company's Board of Directors. These
options vest to the director over periods from one to three years, depending on
the type of option granted, and are exercisable once vested. Under the 1994 Plan
and the 1996 Plan, options may be incentive stock options or non-statutory
options, and the exercise price for each option shall be established by the
Board of Directors provided, however, that the exercise price per share shall
not be not less than the fair market value for incentive stock options and not
less than

F-13
72

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) STOCK OPTIONS AND WARRANTS -- (CONTINUED)
85% of fair market value for non-statutory stock options. Following is a summary
of the Company's stock option and warrant activity:

NUMBER OF SHARES (IN THOUSANDS)
-------------------------------------------
PREFERRED PREFERRED
COMMON STOCK STOCK STOCK EXERCISE
------------------- SERIES A SERIES B PRICE
OPTIONS WARRANTS WARRANTS WARRANTS PER SHARE
------- -------- -------- -------- ----------

Balance at October 31, 1993................ -- 386 -- -- $.00- .10
Granted............................... 3,560 1,916 200 -- .00- 1.00
------- -------- -------- -------- ----------
Balance at October 31, 1994................ 3,560 2,302 200 -- .00- 1.00
Granted............................... 3,856 49 -- 300 .00- 2.00
Exercised............................. (44) (1,075) -- -- .02
Canceled.............................. (431) -- (150) -- .02- 1.00
------- -------- -------- -------- ----------
Balance at October 31, 1995................ 6,941 1,276 50 300 .00- 2.00
Granted............................... 5,901 75 -- -- .06-15.94
Exercised............................. (579) (676) (48) -- .00- 1.52
Canceled.............................. (1,180) -- (2) -- .03- 3.69
------- -------- -------- -------- ----------
Balance at October 31, 1996................ 11,083 675 -- 300 $.02-15.94
====== ======= ======= ======= ==========

All of the outstanding warrants above are currently exercisable, except the
Common Stock warrant for 75,000 shares granted to an investor in August 1996.
This warrant becomes exercisable in August 1997. Approximately 3.3 million of
the total outstanding options and warrants were vested at October 31, 1996.

(10) INCOME TAXES

In fiscal 1996, the provision for income taxes consists of the following
(in thousands):

Current:
Federal...................................................... $ 3,452
State........................................................ 632
--------
4,084
--------
Deferred:
Federal...................................................... (1,690)
State........................................................ (144)
--------
(1,834)
--------
$ 2,250
========

In fiscal 1994 and 1995, the tax provision was comprised primarily of a tax
benefit of approximately $960,000 and $3.1 million, respectively, which was
offset by valuation allowance of the same amount.

In fiscal 1994 and 1995, the tax provision differed from the expected tax
benefit, computed by applying the U.S. federal statutory rate of 35% to the loss
before income taxes, principally due to the effect of increases in the valuation
allowance. In fiscal 1996, the tax provision reconciles to the

F-14
73

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(10) INCOME TAXES -- (CONTINUED)
amount computed by multiplying income before income taxes by the U.S. federal
statutory rate of 35% as follows:

Provision at statutory rate......................................... 35.0%
Reversal of valuation allowance..................................... (24.3)
State taxes, net of federal benefit................................. 2.9
Current tax credits................................................. (1.1)
Other............................................................... 0.8
------
13.3%
=====

The components of deferred tax assets were as follows (in thousands):

OCTOBER 31,
-------------------
1995 1996
-------- -------

Reserve for excess and obsolete inventories.............. $ -- $ 736
Accrued warranty and other contractual obligations....... -- 602
Start-up costs deferred for tax purposes................. 496 379
Other accrued expenses not deducted for tax.............. -- 114
Accrual to cash basis adjustments........................ 689 --
Net operating loss carryforward.......................... 2,814 --
Other.................................................... 51 3
-------- -------
Gross deferred tax assets........................... 4,050 1,834
Valuation allowance................................. (4,050) --
-------- -------
Net deferred tax asset......................... $ -- $ 1,834
======== ======

The increase in the valuation allowance during fiscal 1995 was primarily
attributable to the increase in net operating losses. The reversal of the
valuation allowance during the third quarter of fiscal 1996 was attributable to
the receipt of product acceptance by the Company from its initial customer and
the start of profitable operations during that period. In assessing the
realizability of deferred tax assets, management considers whether it is "more
likely than not" (as defined under SFAS No. 109) that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Based upon their evaluation of the evidence relating to net
deferred tax assets at October 31, 1995, management determined that realization
was not "more likely than not" and, accordingly, established a valuation
allowance of $4.1 million.

(11) LICENSE AGREEMENT

The Company has an exclusive agreement to license certain technologies
which requires a 7.5% royalty on sales of products using the licensed
technologies or certain minimum annual requirements. To date, the Company has
incurred only the minimum annual royalty fees of $50,000 and $100,000 for the
years ended October 31, 1995 and 1996, respectively. The Company may terminate
the agreement upon notice to the licensor and would be liable for any payments
accrued or owed prior to such termination.

F-15
74

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(12) EMPLOYEE BENEFIT PLANS

In January 1995, the Company adopted a 401(k) defined contribution profit
sharing plan. The plan covers all full-time employees who are at least 21 years
of age, have completed three months of service and are not covered by a
collective bargaining agreement where retirement benefits are subject to good
faith bargaining. Participants may contribute up to 15% of pretax compensation,
subject to certain limitations. The Company may make discretionary annual profit
sharing contributions of up to the lesser of $30,000 or 25% of each
participant's compensation. The Company has made no profit sharing contributions
to date.

(13) COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company has certain minimum obligations under noncancelable operating
leases expiring on various dates through 2006 for equipment and facilities.
Future annual minimum rental commitments under noncancelable operating leases at
October 31, 1996 are as follows (in thousands):

Fiscal Year Ending
------------------------------------------------------------------
1997.............................................................. $ 1,487
1998.............................................................. 1,816
1999.............................................................. 1,807
2000.............................................................. 1,796
2001.............................................................. 1,796
Thereafter........................................................ 7,245
--------
$ 15,947
========

Rental expense for fiscal 1994, 1995 and 1996 was approximately $42,000,
$111,000 and $602,000, respectively.

Litigation

In November 1996, a stockholder and entities controlled by that stockholder
(the "plaintiffs") who provided initial equity capital during the formation of
the Company and participated in the Series C Preferred Stock financing, filed
suit against the Company and certain directors of the Company (the
"defendants"). This suit alleges that the plaintiffs were entitled by the terms
of an agreement with the Company to purchase approximately 230,000 shares of
additional Series C Preferred Stock, at $7.00 per share, at the time of the
closing of the Series C Preferred Stock financing, but were denied that
opportunity by the defendants. The plaintiffs seek to recover unspecified actual
and punitive damages. The Company believes that the plaintiffs' claims are
without merit and intends to defend itself vigorously. However, due to the very
early stage of this matter, it is not possible to determine what impact, if any,
the outcome of this litigation might have on the financial condition, results of
operations or cash flows of the Company.

The Company has agreed to indemnify its customer for liability incurred in
connection with the infringement of a third-party's intellectual property
rights. Although the Company has not received notice from its customer advising
the Company of any alleged infringement of a third-party's intellectual property
rights, there can be no assurance that such indemnification of alleged liability
will not be required from the Company in the future.

Substantial inventories of intellectual property are held by a few industry
participants and major universities and research laboratories. The Company has
on a few occasions hired personnel from

F-16
75

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(13) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
such parties. The Company has in the past received letters from legal counsel to
one such party, asserting that the hiring of their personnel involves a
compromise of that party's intellectual properties. The Company disagrees with
such assertions and, if any formal claim were to be filed, the Company would
vigorously defend itself. Such litigation could be very expensive to defend,
regardless of the merits of any possible claim.

(14) RECAPITALIZATION AND AUTHORIZATION OF OFFERINGS

On November 22, 1996, the Company's Board of Directors approved the
following effective on December 9, 1996: (i) a five-for-one stock split of the
Company's Common Stock; (ii) an increase in the number of shares of Common Stock
authorized from 112,500,000 to 180,000,000; (iii) an increase in the number of
shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock from one-for-one to five-for-one, and (iv) the authorization of 20,000,000
shares of undesignated Preferred Stock. All references to the number of shares
authorized, issued and outstanding, the Preferred Stock to Common Stock
conversion factor and per share information for all periods presented have been
adjusted to give effect to the aforementioned stock split and share
authorizations.

On December 10, 1996, the Company's Board of Directors authorized
management of the Company to file a registration statement with the Securities
and Exchange Commission for the initial public offering of its common stock. The
Company plans to issue 5,000,000 shares at an estimated initial public offering
price of not less than $17 per share.

(15) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF ACCOUNTANTS' REPORT

On December 20, 1996, one of the Company's competitors filed suit in the
U.S. District Court in Delaware, alleging wilful infringement by the Company of
five U.S. patents held by the competitor. The lawsuit seeks treble damages,
attorneys' fees and costs, as well as preliminary and permanent injunctive
relief against the alleged infringement. The Company believes its product does
not infringe any valid patents identified in the lawsuit and intends to defend
itself vigorously. However, there can be no assurance that the Company will be
successful in the defense of the lawsuit, and an adverse determination in the
litigation could result from a finding of infringement of only one claim of a
single patent. The Company may consider settlement due to the costs and
uncertainties associated with litigation in general and patent infringement
litigation in particular and due to the fact that an adverse determination in
the litigation could preclude the Company from producing its product until it
were able to implement a non-infringing alternative design to any portion of the
system to which such a determination applied. There can be no assurance that any
settlement will be reached by the parties. An adverse determination in, or
settlement of, the litigation could involve the payment of significant amounts,
or could include terms in addition to such payments, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, the Company expects that defense of the lawsuit will
be costly and will involve a diversion of the time and attention of some members
of management. Further, the plaintiff and other competitors may use the
existence of the lawsuit to raise questions in customers' and potential
customers' minds as to the Company's ability to manufacture and deliver its
product. There can be no assurance that such efforts by the plaintiff and others
will not disrupt the Company's existing and prospective customer relationships.
Due to the very early stage of this matter, it is not possible to determine what
impact, if any, the outcome of this litigation might have on the financial
condition, results of operations or cash flows of the Company.

F-17
76

CIENA CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(15) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF ACCOUNTANTS'
REPORT -- (CONTINUED)
With respect to the suit filed in November 1996 by a stockholder and
entities controlled by that stockholder disclosed in Note 13, on January 6,
1997, the Company filed its answer to the plaintiffs' complaint, and filed a
counterclaim for rescission of the sale of the shares of Series C Preferred
Stock purchased by the plaintiffs in the Series C financing. Discovery
proceedings are ongoing.

In December 1996, the Company executed a modification to the license
agreement disclosed in Note 11. As a result, the Company has a perpetual,
royalty-free, non-exclusive license to the same technologies previously
licensed.

Since October 31, 1996, the Company has continued to grant stock options to
employees in the normal course of business. Through January 14, 1997, 605,500
options were granted, with exercise prices ranging from $16.27 to $18.00 per
share.

F-18
77

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Alex. Brown &
Sons Incorporated, Wessels, Arnold & Henderson, L.L.C. and William K. Woodruff &
Company Incorporated are acting as representatives, has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:

NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ------------------------------------------------------------------------------ ------------

Goldman, Sachs & Co. ......................................................... 1,072,000
Alex. Brown & Sons Incorporated............................................... 670,000
Wessels, Arnold & Henderson, L.L.C. .......................................... 670,000
William K. Woodruff & Company Incorporated.................................... 268,000
Bear, Stearns & Co. Inc. ..................................................... 220,000
Cowen & Company............................................................... 220,000
Montgomery Securities......................................................... 220,000
Oppenheimer & Co., Inc. ...................................................... 220,000
UBS Securities LLC............................................................ 220,000
Unterberg Harris.............................................................. 220,000
------------
Total............................................................... 4,000,000
============

Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $.95 per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.

The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the international offering
(the "International Underwriters") providing for the concurrent offer and sale
of 1,000,000 shares of Common Stock in an international offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the two offerings are identical. The closing of the
offering made hereby is a condition to the closing of the international
offering, and vice versa. The representatives of the International Underwriters
are Goldman Sachs International, Alex. Brown & Sons Incorporated, Wessels,
Arnold & Henderson, L.L.C. and William K. Woodruff & Company Incorporated.

Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell

U-1
78

or deliver shares of Common Stock (a) in the United States or to any U.S.
persons or (b) to any person whom it believes intends to reoffer, resell or
deliver the shares in the United States or to any U.S. persons, and (ii) cause
any dealer to whom it may sell such shares at any concession to agree to observe
a similar restriction.

Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.

The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 600,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
4,000,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
150,000 additional shares of Common Stock.

The Company, optionholders, warrantholders and certain stockholders of the
Company have agreed that, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
the Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any securities of the Company (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus) which are substantially
similar to the shares of the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of
Common Stock without the prior written consent of the Representatives, except
for the shares of Common Stock offered in connection with the concurrent U.S.
and international offerings.

The Underwriters have reserved for sale, at the initial public offering
price and subject to local laws for any international sales, up to approximately
211,000 shares of Common Stock for NISSHO Electronics Corporation ("NISSHO") and
certain of its affiliates (together with NISSHO, the "NISSHO Entities"). NISSHO
is a distributor for the Company in Japan, and it and the other NISSHO Entities
have expressed an interest in purchasing such shares in the Offerings. The
NISSHO Entities have also expressed their intention to enter into lock-up
agreements with the Representatives of the Underwriters if such sales take
place, under which they will agree not to sell 105,500 shares for 180 days and
the remaining 105,500 shares for 18 months after the date of the Prospectus. In
addition, the Underwriters have reserved for sale, at the initial public
offering price, shares of Common Stock for certain employees and associates of
the Company in the United States and, subject to local laws, internationally,
who have expressed an interest in purchasing shares of Common Stock in the
Offerings. Such employees and associates will purchase, in the aggregate, less
than 5% of the shares of Common Stock offered in the Offerings. There can be no
assurance that any of the reserved shares will be so purchased. The number of
shares available for sale to the general public in the Offerings will be reduced
to the extent the NISSHO Entities or such other persons purchase such reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as the other shares offered hereby.

The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.

U-2
79

offering price of the Common Stock, in addition to prevailing market conditions,
were the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.

Under the terms of a settlement agreement with the Company entered into in
August 1996, the Company has (i) agreed to retain Woodruff as one of the
representatives of the United States Underwriters and as one of the
International Underwriters, (ii) granted Woodruff warrants to purchase 75,000
shares at a purchase price of $4.00 per share and (iii) made a cash payment to
Woodruff of $87,500. See "Certain Transactions -- Litigation Settlement".
Woodruff has agreed that it will not sell, transfer, assign, pledge or
hypothecate any securities issued upon the exercise of the warrants for a period
of one year following the date of this Prospectus and that its "piggyback"
registration rights under the warrants shall be limited to a term of seven years
from the date of this Prospectus.

The Common Stock will be quoted on the Nasdaq National Market under the
symbol "CIEN".

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

U-3
80

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the International Underwriters named
below, and each of such International Underwriters has severally agreed to
purchase from the Company the respective number of shares of Common Stock set
forth opposite its name below:

NUMBER OF
SHARES OF
UNDERWRITERS COMMON STOCK
- ------------------------------------------------------------------------------ ------------

Goldman Sachs International................................................... 400,000
Alex. Brown & Sons Incorporated............................................... 250,000
Wessels, Arnold & Henderson, L.L.C. .......................................... 250,000
William K. Woodruff & Company Incorporated.................................... 100,000
------------
Total............................................................... 1,000,000
============

Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.

The International Underwriters propose to offer the shares of Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $.95 per share. The International Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.

The Company has entered into an underwriting agreement (the "U.S.
Underwriting Agreement") with the underwriters of the U.S. offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of 4,000,000 shares
of Common Stock in a U.S. offering in the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two offerings
are identical. The closing of the offering made hereby is a condition to the
closing of the U.S. offering, and vice versa. The representatives of the U.S.
Underwriters are Goldman, Sachs & Co., Alex. Brown & Sons Incorporated, Wessels,
Arnold & Henderson, L.L.C. and William K. Woodruff & Company Incorporated.

Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters named herein has agreed pursuant to the Agreement
Between that, as apart of the distribution of the shares offered as a part of
the international offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the
United States or to any United

U-1
81

States persons or (b) to any person who it believes intends to reoffer, resell
or deliver the shares in the U.S. or to any U.S. persons, and (ii) cause any
dealer to whom it may sell such shares at any concession to agree to observe a
similar restriction.

The Company has granted the International Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 150,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the International Underwriters exercise their
over-allotment option, the International Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them, as shown in
the foregoing table, bears to the 1,000,000 shares of Common Stock offered
hereby. The Company has granted the U.S. Underwriters a similar option to
purchase up to an aggregate of 600,000 additional shares of Common Stock.

The Underwriters have reserved for sale, at the initial public offering
price and subject to local laws for any international sales, up to approximately
211,000 shares of Common Stock for NISSHO Electronics Corporation ("NISSHO") and
certain of its affiliates (together with NISSHO, the "NISSHO Entities"). NISSHO
is a distributor for the Company in Japan, and it and the other NISSHO Entities
have expressed an interest in purchasing such shares in the Offerings. The
NISSHO Entities have also expressed their intention to enter into lock-up
agreements with the Underwriters if such sales take place, under which they will
agree not to sell 105,500 shares for 180 days and the remaining 105,500 shares
for 18 months after the date of the Prospectus. In addition, the Underwriters
have reserved for sale, at the initial public offering price, shares of Common
Stock for certain employees and associates of the Company in the United States
and, subject to local laws, internationally, who have expressed an interest in
purchasing shares of Common Stock in the Offerings. Such employees and
associates will purchase, in the aggregate, less than 5% of the shares of Common
Stock offered in the Offerings. There can be no assurance that any of the
reserved shares will be so purchased. The number of shares available for sale to
the general public in the Offerings will be reduced to the extent the NISSHO
Entities or such other persons purchase such reserved shares. Any reserved
shares not so purchased will be offered to the general public on the same basis
as the other shares offered hereby.

Each International Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the shares
of Common Stock will not offer or sell any shares of Common Stock to persons in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which have
not resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (b) it
has complied, and will comply, with all applicable

U-2
82

provisions of the Financial Services Act of 1986 of Great Britain with respect
to anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (c) it has only issued or passed on
and will only issue or pass on in the United Kingdom any document received by it
in connection with the issuance of the shares of Common Stock to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a
person to whom the document may otherwise lawfully be issued or passed on.

Buyers of shares of Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the initial public offering price.

Prior to the Offerings, there has been no public market for the shares. The
initial public offering price was negotiated between the Company and the
representatives of the U.S. Underwriters and the International Underwriters.
Among the factors considered in determining the initial public offering price of
the Common Stock, in addition to prevailing market conditions, were the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.

The Common Stock will be quoted on the Nasdaq National Market under the
symbol "CIEN".

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

U-3
83

[This diagram shows pictures of
various employees of the Company]
84

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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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TABLE OF CONTENTS

PAGE
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Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 14
Dividend Policy.......................... 14
Capitalization........................... 15
Dilution................................. 16
Selected Financial Data.................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 18
Business................................. 22
Management............................... 37
Certain Transactions..................... 45
Principal Stockholders................... 48
Description of Capital Stock............. 51
Shares Eligible for Future Sale.......... 52
Certain U.S. Tax Considerations
Applicable to Non-U.S. Holders of the
Common Stock........................... 54
Legal Matters............................ 56
Experts.................................. 56
Additional Information................... 56
Index to Financial Statements............ F-1
Underwriting............................. U-1

THROUGH AND INCLUDING MARCH 4, 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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5,000,000 SHARES

CIENA CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------

[CIENA LOGO]

------------------------

GOLDMAN, SACHS & CO.

ALEX. BROWN & SONS
INCORPORATED

WESSELS, ARNOLD & HENDERSON

WILLIAM K. WOODRUFF & COMPANY
INCORPORATED

REPRESENTATIVES OF THE UNDERWRITERS

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85

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TABLE OF CONTENTS

PAGE
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CIENA CORPORATION
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------

[CIENA LOGO]

------------------------

GOLDMAN SACHS INTERNATIONAL

ALEX. BROWN & SONS
INTERNATIONAL

WESSELS, ARNOLD & HENDERSON

WILLIAM K. WOODRUFF & COMPANY
INCORPORATED

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