UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended January 31, 2009

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

For the transition period from                      to                     .

Ciena Corporation

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

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

Class		Outstanding at February 28, 2009
common stock, $.01 par value		90,674,100

 

 

CIENA CORPORATION

INDEX

FORM 10-Q

		PAGE
		NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations for the quarters ended January 31, 2008 and January 31, 2009			3
Condensed Consolidated Balance Sheets at October 31, 2008 and January 31, 2009			4
Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 2008 and January 31, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			53
Item 4. Submission of Matters to a Vote of Security Holders			53
Item 5. Other Information			53
Item 6. Exhibits			53
Signatures			54

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

		Quarter Ended January 31,
		2008				2009
Revenues:
Products		$	201,790			$	139,717
Services			25,626				27,683
Total revenue			227,416				167,400
Costs:
Products			91,387				76,367
Services			19,460				19,190
Total cost of goods sold			110,847				95,557
Gross profit			116,569				71,843
Operating expenses:
Research and development			35,444				46,700
Selling and marketing			33,608				33,819
General and administrative			22,628				11,585
Amortization of intangible assets			6,470				6,404
Restructuring cost			—				76
Total operating expenses			98,150				98,584
Income (loss) from operations			18,419				(26,741	)
Interest and other income, net			19,082				4,660
Interest expense			(7,358	)			(1,844	)
Loss on cost method investments			—				(565	)
Income (loss) before income taxes			30,143				(24,490	)
Provision for income taxes			1,336				341
Net income (loss)		$	28,807			$	(24,831	)
Basic net income (loss) per common share		$	0.33			$	(0.27	)
Diluted net income (loss) per potential common share		$	0.28			$	(0.27	)
Weighted average basic common shares outstanding			86,910				90,620
Weighted average dilutive potential common shares outstanding			109,009				90,620

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

CIENA CORPORATION

		October 31,				January 31,
		2008				2009
ASSETS
Current assets:
Cash and cash equivalents		$	550,669			$	534,985
Short-term investments			366,336				387,618
Accounts receivable, net			138,441				130,477
Inventories			93,452				91,283
Prepaid expenses and other			35,888				34,186
Total current assets			1,184,786				1,178,549
Long-term investments			156,171				146,446
Equipment, furniture and fixtures, net			59,967				59,390
Goodwill			455,673				455,673
Other intangible assets, net			92,249				84,194
Other long-term assets			75,748				76,299
Total assets		$	2,024,594			$	2,000,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	44,761			$	50,194
Accrued liabilities			96,143				86,219
Restructuring liabilities			1,668				611
Income taxes payable			—				1,162
Deferred revenue			36,767				35,578
Total current liabilities			179,339				173,764
Long-term deferred revenue			37,660				36,316
Long-term restructuring liabilities			2,557				2,403
Other long-term obligations			8,089				7,966
Convertible notes payable			798,000				798,000
Total liabilities			1,025,645				1,018,449
Commitments and contingencies
Stockholders’ equity:
Preferred stock — par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding			—				—
Common stock — par value $0.01; 290,000,000 shares authorized; 90,470,803 and 90,673,622 shares issued and outstanding			905				907
Additional paid-in capital			5,629,498				5,638,048
Accumulated other comprehensive loss			(1,275	)			(1,843	)
Accumulated deficit			(4,630,179	)			(4,655,010	)
Total stockholders’ equity			998,949				982,102
Total liabilities and stockholders’ equity		$	2,024,594			$	2,000,551

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

CIENA CORPORATION

		Three Months Ended January 31,
		2008				2009
Cash flows from operating activities:
Net income (loss)		$	28,807			$	(24,831	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of discount on marketable securities			(1,296	)			(863	)
Non-cash loss on cost method investments			—				565
Depreciation and amortization of leasehold improvements			3,949				5,097
Share-based compensation			6,881				8,494
Amortization of intangibles			7,438				8,055
Deferred tax provision			471				—
Provision for doubtful accounts			25				42
Provision for inventory excess and obsolescence			5,794				6,548
Provision for warranty			2,914				2,541
Other			1,118				229
Changes in assets and liabilities:
Accounts receivable			(40,586	)			7,922
Inventories			(6,696	)			(4,379	)
Prepaid expenses and other			5,413				(147	)
Accounts payable, accruals and other obligations			6,383				(8,781	)
Income taxes payable			(5,576	)			1,162
Deferred revenue			(1,376	)			(2,533	)
Net cash provided by (used in) operating activities			13,663				(879	)
Cash flows from investing activities:
Payments for equipment, furniture, fixtures and intellectual property			(6,666	)			(6,140	)
Restricted cash			(263	)			(84	)
Purchase of available for sale securities			—				(195,538	)
Proceeds from maturities of available for sale securities			564,376				186,853
Net cash provided by (used in) investing activities			557,447				(14,909	)
Cash flows from financing activities:
Repayment of 3.75% convertible notes payable			(542,262	)			—
Proceeds from issuance of common stock and warrants			1,254				58
Net cash provided by (used in) financing activities			(541,008	)			58
Effect of exchange rate changes on cash and cash equivalents			143				46
Net increase (decrease) in cash and cash equivalents			30,102				(15,730	)
Cash and cash equivalents at beginning of period			892,061				550,669
Cash and cash equivalents at end of period		$	922,306			$	534,985
Supplemental disclosure of cash flow information
Cash paid (refunded) during the period for:
Interest expense		$	12,403			$	2,188
Income taxes, net		$	557			$	(695	)
Non-cash investing and financing activities
Cash paid during the period for:
Purchase of equipment in accounts payable		$	1,355			$	641

CIENA CORPORATION

(1) INTERIM FINANCIAL STATEMENTS

     The interim financial statements included herein for Ciena Corporation (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The October 31, 2008 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, Ciena believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2008.

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

(2) SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Cash and Cash Equivalents

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

Investments

     Ciena’s investments represent investments in marketable debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. Ciena recognizes losses when it determines that declines in the fair value of its investments, below their cost basis, are other-than-temporary. In determining whether a decline in fair value is other-than-temporary, Ciena considers various factors including market price (when available), investment ratings, the financial condition and near-term prospects of the investee, the length of time and the extent to which the fair value has been less than Ciena’s cost basis, and its intent and ability to hold the investment until maturity or for a period of time sufficient to allow for any anticipated recovery in market value. Ciena considers all marketable debt securities that it expects to convert to cash within one year or less to be classified as short-term investments. All others are considered long-term investments.

Inventories

     Inventories are stated at the lower of cost or market, with cost computed using standard cost, which approximates actual cost on a first-in, first-out basis. Ciena records a provision for excess and obsolete inventory when an impairment has been identified.

Equipment, Furniture and Fixtures

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

     Internal use software and web site development costs are capitalized in accordance with Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and Emerging Issues Task Force (EITF) Issue No. 00-2, “Accounting for Web Site Development Costs.” Qualifying costs incurred during the application development stage, which consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful life of the asset.

Goodwill and Other Intangible Assets

     Ciena has recorded goodwill and purchased intangible assets as a result of several acquisitions. Ciena accounts for goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” which requires Ciena to test each reporting unit’s goodwill for impairment on an annual basis, which Ciena has determined to be the last business day of its fiscal September each year. Testing is required between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. Ciena operates its business and tests its goodwill for impairment as a single reporting unit.

     Ciena determined in the first quarter of fiscal 2009 that there were no events or changes in circumstances since the end of fiscal 2008 requiring an interim impairment test. Ciena’s stock price has fluctuated from a high of $20.10 to a low of $5.07 during its last two completed fiscal quarters. The current macroeconomic environment continues to be challenging and Ciena cannot be certain of the duration of these conditions and their potential impact on its stock price performance. If the reduced level of Ciena’s stock price persists and its market capitalization remains below its carrying value for a sustained period, it is reasonably likely that a goodwill impairment assessment prior to the next annual review in the fourth quarter of fiscal 2009 would be necessary and a material impairment of goodwill may be recorded.

     Purchased finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the economic lives of the respective assets, generally three to seven years, which approximates the use of intangible assets. Impairments of finite-lived intangible assets are determined in accordance with SFAS 144.

Minority Equity Investments

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

Concentrations

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

     Historically, a large percentage of Ciena’s revenue has been the result of sales to a small number of communications service providers. Consolidation among Ciena’s customers has increased this concentration. Consequently, Ciena’s accounts receivable are concentrated among these customers. See Notes 7 and 17 below.

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

Revenue Recognition

     Ciena recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectibility is reasonably assured. Customer purchase agreements and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and evidence of customer acceptance, when applicable, are used to verify delivery. Ciena assesses whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Ciena assesses collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are to be performed.

     Some of Ciena’s communications networking equipment is integrated with software that is essential to the functionality of the equipment. Accordingly, Ciena accounts for revenue from such equipment in accordance with Statement of Position No. 97-2, “Software Revenue Recognition,” (SOP 97-2) and all related interpretations. SOP 97-2 incorporates additional guidance unique to software arrangements incorporated with general revenue recognition criteria, such as, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met.

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

Warranty Accruals

     Ciena provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. Estimated warranty costs include material costs, technical support labor costs and associated overhead. The warranty liability is included in cost of goods sold and determined based upon actual warranty cost experience, estimates of component failure rates and management’s industry experience. Ciena’s sales contracts do not permit the right of return of product by the customer after the product has been accepted.

Accounts Receivable, Net

     Ciena’s allowance for doubtful accounts is based on its assessment, on a specific identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from its customers. In determining the appropriate balance for Ciena’s allowance for doubtful accounts, management considers each individual customer account receivable in order to determine collectibility. In doing so, management considers creditworthiness, payment history, account activity and communication with such customer. If a customer’s financial condition changes, Ciena may be required to record an allowance for doubtful accounts, which would negatively affect its results of operations.

Research and Development

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

Advertising Costs

     Ciena expenses all advertising costs as incurred.

Legal Costs

     Ciena expenses legal costs associated with litigation defense as incurred.

Share-Based Compensation Expense

     Ciena accounts for share-based compensation expense in accordance with SFAS 123(R), as interpreted by SAB 107. SFAS 123(R) requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values on the date of grant. Ciena estimates the fair value of each option-based award on the date of grant using the Black-Scholes option-pricing model. This model is affected by Ciena’s stock price as well as estimates regarding a number of variables including expected stock price volatility over the expected term of the award and projected employee stock option exercise behaviors. Ciena estimates the fair value of each share-based award based on the fair value of the underlying common stock on the date of grant. In each case, Ciena only recognizes expense to its consolidated statement of operations for those options or shares that are expected ultimately to vest. Ciena uses two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting method, which considers each performance period or tranche separately, for all other awards. See Note 15 below.

Income Taxes

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

     Ciena adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,” (“FIN 48”) at the beginning of fiscal 2008. The amount of unrecognized tax benefits determined in accordance with FIN 48 decreased by $0.1 million during the first quarter of fiscal 2009 to $5.5 million, which includes $1.2 million of interest and some minor penalties. All of the uncertain tax positions, if recognized, would decrease the effective income tax rate.

     Ciena has not provided U.S. deferred income taxes on the cumulative unremitted earnings of its non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes. These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions and are required to fund foreign operations, capital expenditures, and any expansion requirements.

     Ciena recognizes windfall tax benefits associated with the exercise of stock options or release of restricted stock units directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by Ciena upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena had recorded. When assessing whether a tax benefit relating to share-based compensation has been realized, Ciena follows the tax law “with-and-without” method. Under the with-and-without method, the windfall is considered realized and recognized for financial statement purposes only when an incremental benefit is provided after considering all other tax benefits including Ciena’s net operating losses. The with-and-without method results in the windfall from share-based compensation awards always being effectively the last tax benefit to be considered. Consequently, the windfall attributable to share-based compensation will not be considered realized in instances where Ciena’s net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current year’s taxable income before considering the effects of current-year windfalls.

Loss Contingencies

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

Fair Value of Financial Instruments

     The carrying value of Ciena’s cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximates fair market value due to the relatively short period of time to maturity.

     For those Ciena assets and liabilities that are recorded at fair value on a recurring basis, fair value is determined in accordance with SFAS 157, “Fair Value Measurements,” which was adopted during the first quarter of fiscal 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. See Note 6 below. In accordance with FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,” Ciena has not yet adopted SFAS 157 for all non-financial assets and non-financial liabilities.

     For those Ciena assets and liabilities that were not previously required to be measured at fair value, Ciena has not elected the fair value option in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.”

Foreign Currency

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

Derivatives

     Ciena uses foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. These derivatives are designated as cash flow hedges, have maturities of less than one year and permit net settlement.

     At the inception of the cash flow hedge and on an ongoing basis, Ciena assesses the hedging relationship to determine its effectiveness in offsetting changes in cash flows attributable to the hedged risk during the hedge period. The effective portion of the hedging instrument’s net gain or loss is initially reported as a component of accumulated other comprehensive income (loss), and upon occurrence of the forecasted transaction, is subsequently reclassified into the operating expense line item to which the hedged transaction relates. Any net gain or loss on associated with the ineffectiveness of the hedging instrument is reported in interest and other income, net on Ciena’s condensed consolidated statements of operations. See Note 13 below.

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

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

Software Development Costs

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

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

Segment Reporting

     SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for operating segments and requires certain disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Ciena’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Ciena has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, Ciena considers its business to be in a single reportable segment.

Newly Issued Accounting Standards

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

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Ciena does not believe the adoption of this statement will have a material impact on its financial condition, results of operations and cash flows.

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

     In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Ciena does not believe the adoption of this statement, which will occur in the second quarter of fiscal 2009, will have a material impact on its financial condition, results of operations and cash flows because it only provides for expanded disclosure.

     In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This pronouncement requires enhanced disclosures concerning a company’s treatment of costs incurred to renew or extend the term of a recognized intangible asset. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

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

(3) BUSINESS COMBINATIONS

     On March 3, 2008, Ciena acquired World Wide Packets, Inc. (“World Wide Packets” or “WWP”), a supplier of communications networking equipment that enables the delivery of carrier Ethernet-based services. Prior to the acquisition, World Wide Packets was a privately held company. Ciena’s results of operations in this report include the operations of World Wide Packets beginning on March 3, 2008, the effective date of the acquisition.

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

		Quarter Ended
		January 31,
		2008
Pro forma revenue		$	233,497
Pro forma net income		$	16,225
Pro forma basic net income per common share		$	0.18
Pro forma diluted net income per potential common share		$	0.16

(4) RESTRUCTURING COSTS

     Ciena has previously taken actions to align its workforce, facilities and operating costs with perceived market opportunities and business conditions. Ciena implemented these restructuring plans and incurred the associated liability concurrently in accordance with the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

     The following table sets forth the activity and balance of the restructuring liability accounts for the three months ended January 31, 2009 (in thousands):

		Consolidation
		of excess
		facilities
Balance at October 31, 2008		$	4,225
Additional liability recorded			76
Cash payments			(1,287	)
Balance at January 31, 2009		$	3,014
Current restructuring liabilities		$	611
Non-current restructuring liabilities		$	2,403

     The following table sets forth the activity and balance of the restructuring liability accounts for the three months ended January 31, 2008 (in thousands):

		Consolidation
		of excess
		facilities
Balance at October 31, 2007		$	4,688
Cash payments			(209	)
Balance at January 31, 2008		$	4,479
Current restructuring liabilities		$	914
Non-current restructuring liabilities		$	3,565

(5) MARKETABLE SECURITIES

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

		January 31, 2009
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	104,952			$	171			$	1,753			$	103,370
Asset-backed obligations			3,989				—				4				3,985
U.S. government obligations			424,254				2,234				22				426,466
Publicly traded equity securities			243				—				—				243
		$	533,438			$	2,405			$	1,779			$	534,064
Included in short-term investments			386,370				1,677				429				387,618
Included in long-term investments			147,068				728				1,350				146,446
		$	533,438			$	2,405			$	1,779			$	534,064

		October 31, 2008
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	116,531			$	81			$	2,260			$	114,352
Asset-backed obligations			10,188				—				7				10,181
Commercial paper			49,871				7				8				49,870
U.S. government obligations			334,195				949				40				335,104
Certificate of deposit			13,000				—				—				13,000
		$	523,785			$	1,037			$	2,315			$	522,507
Included in short-term investments			366,054				812				530				366,336
Included in long-term investments			157,731				225				1,785				156,171
		$	523,785			$	1,037			$	2,315			$	522,507

     Gross unrealized losses related to marketable debt investments were primarily due to changes in interest rates. Ciena’s management has determined that the gross unrealized losses at January 31, 2009 are temporary in nature because Ciena has the ability and intent to hold these investments until a recovery of fair value, which may be maturity. As of the dates indicated, gross unrealized losses were as follows (in thousands):

		January 31, 2009
		Unrealized Losses Less								Unrealized Losses 12
		Than 12 Months								Months or Greater								Total
		Gross								Gross								Gross
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
Corporate bonds		$	1,753			$	76,168			$	—			$	—			$	1,753			$	76,168
Asset-backed obligations			4				3,786				—				—				4				3,786
U.S. government obligations			22				23,910				—				—				22				23,910
		$	1,779			$	103,864			$	—			$	—			$	1,779			$	103,864

		October 31, 2008
		Unrealized Losses Less								Unrealized Losses 12
		Than 12 Months								Months or Greater								Total
		Gross								Gross								Gross
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
Corporate bonds		$	2,260			$	88,176			$	—			$	—			$	2,260			$	88,176
Asset-backed obligations			7				10,181				—				—				7				10,181
Commercial paper			8				29,709				—				—				8				29,709
U.S. government obligations			40				23,438				—				—				40				23,438
		$	2,315			$	151,504			$	—			$	—			$	2,315			$	151,504

     The following table summarizes final legal maturities of debt investments at January 31, 2009 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	383,724			$	384,978
Due in 1-2 years			149,714				149,086
Due in 2-3 years			—				—
		$	533,438			$	534,064

(6) FAIR VALUE MEASUREMENTS

     SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. SFAS 157 establishes a valuation hierarchy for disclosure of the inputs for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:

	•		Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
	•		Level 2 inputs are quoted prices for identical assets or liabilities in less active markets or model-derived valuations in which significant inputs are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;
	•		Level 3 inputs are unobservable inputs based on Ciena’s assumptions used to measure assets and liabilities at fair value.

     By distinguishing between inputs that are observable in the marketplace, and therefore more objective, and those that are unobservable and therefore more subjective, the hierarchy is designed to indicate the relative reliability of the fair value measurements. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

     As of the dates indicated, the following tables summarize the fair value of assets and liabilities that are recorded at fair value on a recurring basis (in thousands):

		January 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Corporate bonds		$	—			$	123,370			$	—			$	123,370
Asset-backed obligations			—				3,985				—				3,985
U.S. government obligations			—				426,466				—				426,466
Publicly traded equity securities			243				—				—				243
Total assets measured at fair value		$	243			$	553,821			$	—			$	554,064

		January 31, 2009
		Level 1				Level 2				Level 3				Total
Liabilities:
Foreign currency forward contracts		$	—			$	2,090			$	—			$	2,090
Total liabilities measured at fair value		$	—			$	2,090			$	—			$	2,090

     Ciena classifies investments within Level 1 if quoted prices are available in active markets. Level 1 assets include corporate equity securities publicly traded on major exchanges.

     Ciena classifies items in Level 2 if the investments are valued using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These investments include: U.S. treasuries, government agencies, corporate bonds and commercial paper. Investments are held by a custodian who obtains investment prices from a third party pricing provider that uses standard inputs to models which vary by asset class.

     Ciena did not hold financial assets and liabilities which were recorded at fair value in the Level 3 category as of January 31, 2009.

     As of the dates indicated, the assets and liabilities above were presented on the Company’s condensed consolidated balance sheet as follows (in thousands):

		January 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	—			$	20,000			$	—			$	20,000
Short-term investments			243				387,375				—				387,618
Total current assets measured at fair value			243				407,375				—				407,618
Long-term investments			—				146,446				—				146,446
Total assets measured at fair value		$	243			$	553,821			$	—			$	554,064

		January 31, 2009
		Level 1				Level 2				Level 3				Total
Liabilities:
Accrued liabilities		$	—			$	2,090			$	—			$	2,090
Total current liabilities measured at fair value		$	—			$	2,090			$	—			$	2,090

     During the first quarter of fiscal 2009, a private technology company in which Ciena held a minority equity investment was acquired by a publicly-traded company. This event required Ciena to perform an impairment analysis and measure the investment at fair value. In determining its fair value, Ciena utilized Level 2 inputs including the relevant exchange ratio for the acquisition transaction and the market price of the acquiror’s common stock. As a result, Ciena recorded a non-cash loss on cost method investments of $0.6 million during the first quarter of fiscal 2009.

(7) ACCOUNTS RECEIVABLE

     As of October 31, 2008 and January 31, 2009, three customers accounted for 59.0% and 42.3% of net accounts receivable, respectively.

     Ciena’s allowance for doubtful accounts receivable is based on management’s assessment, on a specific identification basis, of the collectibility of customer accounts, and as of October 31, 2008 and January 31, 2009 was $0.1 million.

(8) INVENTORIES

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

		October 31,				January 31,
		2008				2009
Raw materials		$	19,044			$	23,344
Work-in-process			1,702				916
Finished goods			95,963				91,673
			116,709				115,933
Provision for excess and obsolescence			(23,257	)			(24,650	)
		$	93,452			$	91,283

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value, based on assumptions about future demand and market conditions. During the first three months of fiscal 2009, Ciena recorded a provision for excess and obsolete inventory of $6.5 million, primarily related to changes in forecasted sales for certain products. Deductions from the provision for excess and obsolete inventory generally relate to disposal activities. The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the period indicated (in thousands):

		Inventory Reserve
Reserve for balance as of October 31, 2008		$	23,257
Provision for excess for obsolescence			6,548
Actual inventory disposed			(5,155	)
Reserve balance as of January 31, 2009		$	24,650

     During the first three months of fiscal 2008, Ciena recorded a provision for excess and obsolete inventory of $5.8 million, primarily related to changes in forecasted sales for certain products. Deductions from the provision for excess and obsolete inventory generally relate to disposal activities. The following table summarizes the activity in Ciena’s reserve for excess and obsolete inventory for the period indicated (in thousands):

		Inventory Reserve
Reserve for balance as of October 31, 2007		$	26,170
Provision for excess and obsolescence			5,794
Actual inventory disposed			(2,341	)
Reserve balance as of January 31, 2008		$	29,623

(9) PREPAID EXPENSES AND OTHER

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

		October 31,				January 31,
		2008				2009
Interest receivable		$	2,082			$	3,297
Prepaid VAT and other taxes			15,160				14,108
Deferred deployment expense			4,481				2,872
Prepaid expenses			10,557				9,929
Restricted cash			1,717				2,741
Other non-trade receivables			1,891				1,239
		$	35,888			$	34,186

(10) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				January 31,
		2008				2009
Equipment, furniture and fixtures		$	286,940			$	289,138
Leasehold improvements			40,574				41,378
			327,514				330,516
Accumulated depreciation and amortization			(267,547	)			(271,126	)
		$	59,967			$	59,390

(11) OTHER INTANGIBLE ASSETS

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

		October 31,												January 31,
		2008												2009
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Developed technology		$	185,833			$	(128,255	)		$	57,578			$	185,833			$	(133,067	)		$	52,766
Patents and licenses			47,370				(37,952	)			9,418				47,370				(39,364	)			8,006
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			68,281				(43,028	)			25,253				68,281				(44,859	)			23,422
		$	301,484			$	(209,235	)		$	92,249			$	301,484			$	(217,290	)		$	84,194

     The aggregate amortization expense of other intangible assets was $7.4 million and $8.1 million for the first three months of fiscal 2008 and 2009, respectively. Expected future amortization of other intangible assets for the fiscal years indicated is as follows (in thousands):

Period ended October 31,
2009 (remaining nine months)		$	23,374
2010			27,872
2011			13,852
2012			9,473
2013			7,217
Thereafter			2,406
		$	84,194

(12) OTHER BALANCE SHEET DETAILS

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

		October 31,				January 31,
		2008				2009
Maintenance spares inventory, net		$	30,038			$	33,627
Deferred debt issuance costs, net			15,127				14,553
Investments in privately held companies			6,671				5,671
Restricted cash			20,436				19,496
Other			3,476				2,952
		$	75,748			$	76,299

     Deferred debt issuance costs are amortized using the straight line method which approximates the effect of the effective interest rate method on the maturity of the related debt. Amortization of debt issuance costs, which is included in interest expense, was $1.2 million and $0.6 million during the first three months of fiscal 2008 and fiscal 2009, respectively.

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

		October 31,				January 31,
		2008				2009
Warranty		$	37,258			$	36,107
Compensation, payroll related tax and benefits			35,200				29,673
Interest payable			1,683				765
Foreign currency forward contracts			—				2,090
Other			22,002				17,584
		$	96,143			$	86,219

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

Three months ended		Beginning												Balance at
January 31,		Balance				Provisions				Settlements				end of period
2008		$	33,580				2,914				(2,632	)		$	33,862
2009		$	37,258				2,541				(3,692	)		$	36,107

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

		October 31,				January 31,
		2008				2009
Products		$	13,061			$	13,517
Services			61,366				58,377
			74,427				71,894
Less current portion			(36,767	)			(35,578	)
Long-term deferred revenue		$	37,660			$	36,316

(13) DERIVATIVES

     Ciena uses foreign currency forward contracts to reduce variability in non-U.S. dollar denominated operating expenses. Ciena uses these derivatives to partially offset its market exposure to fluctuations in certain foreign currencies. These derivatives are designated as cash flow hedges and have maturities of less than one year. These forward contracts are not designed to provide foreign currency protection over the long-term. Ciena considers several factors, including offsetting exposures, significance of exposures, costs associated with entering into a particular instrument, and potential effectiveness when designing its hedging activities.

     The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified into the operating expense line item to which the hedged transaction relates. Ciena records the ineffectiveness of the hedging instruments in interest and other income, net on its condensed consolidated statements of operations. As of January 31, 2009, Ciena recorded, as a component of accumulated other comprehensive loss, a $2.1 million net loss associated with its foreign currency forward contracts, and upon occurrence of the forecasted transaction, this loss will be reclassified into the operating expense line item to which the hedged transaction relates. During the first quarter of fiscal 2009, Ciena recorded a loss of $0.2 million to sales and marketing related to the settlement of a forward contract.

     Foreign currency forward contracts outstanding at January 31, 2009 are summarized as follows (in thousands):

		Expected maturity or transaction date
						Less than one				One to three				Three to five
		Total				year				years				years				Thereafter				Fair Value
USD Functional Currency:
Receive EUR / Pay USD
Notional amount		$	32,228			$	32,228			$	—			$	—			$	—			$	(2,638	)
Weighted avg. contract exchange rate			1.3924
Receive INR / Pay USD
Notional amount		$	12,080			$	12,080			$	—			$	—			$	—			$	(374	)
Weighted avg. contract exchange rate			0.0206
Receive CAD / Pay USD
Notional amount		$	11,684			$	11,684			$	—			$	—			$	—			$	(161	)
Weighted avg. contract exchange rate			0.8247
EUR Functional Currency:
Receive GBP / Pay EUR
Notional amount		€	18,622			€	18,622			€	—			€	—			€	—			$	1,083	(1)
Weighted avg. contract exchange rate			1.0809
Total fair value																						$	(2,090	)

(14) EARNINGS (LOSS) PER SHARE CALCULATION

     The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per dilutive potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of (i) common shares outstanding, (ii) shares issuable upon vesting of restricted stock units, (iii) shares issuable upon exercise of outstanding stock options, employee stock purchase plan options and warrants using the treasury stock method; and (iv) shares underlying the 0.25% and 0.875% convertible senior notes.

Numerator

		Quarter Ended January 31,
		2008				2009
Net income (loss)		$	28,807			$	(24,831	)
Add: Interest expense for 0.25% convertible senior notes			471				—
Add: Interest expense for 0.875% convertible senior notes			1,348				—
Net income (loss) used to calculate Diluted EPS		$	30,626			$	(24,831	)

Denominator

		Quarter Ended January 31,
		2008				2009
Basic weighted average shares outstanding			86,910				90,620
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			1,401				—
Add: Shares underlying 0.25% convertible senior notes			7,590				—
Add: Shares underlying 0.875% convertible senior notes			13,108				—
Dilutive weighted average shares outstanding			109,009				90,620

EPS

		Quarter Ended January 31,
		2008				2009
Basic EPS		$	0.33			$	(0.27	)
Diluted EPS		$	0.28			$	(0.27	)

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the first quarter of fiscal 2008, the weighted average number of shares set forth in the table below, underlying outstanding stock options, employee stock purchase plan options, restricted stock units, and warrants, is considered anti-dilutive because the exercise price of these equity awards is greater than the average per share closing price on the NASDAQ Stock Market during this period. In addition, the weighted average number of shares underlying Ciena’s previously outstanding 3.75% convertible notes, are considered anti-dilutive pursuant to SFAS 128 because the related interest expense on a per common share “if converted” basis exceeds Basic EPS for the period.

     For the first quarter of fiscal 2009, the weighted average number of shares set forth in the table below, underlying outstanding stock options, employee stock purchase plan options, restricted stock units, and warrants, is considered anti-dilutive because Ciena incurred a net loss. In addition, the shares, representing the weighted average number of shares issuable upon conversion of Ciena’s 0.25% convertible senior notes and Ciena’s 0.875% convertible senior notes, are considered anti-dilutive pursuant to SFAS 128 because the related interest expense on a per common share “if converted” basis exceeds Basic EPS for the period.

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

Shares excluded from EPS Denominator due to anti-dilutive effect

		Quarter Ended January 31,
		2008				2009
Shares underlying stock options, restricted stock units and warrants			3,209				8,052
3.75% convertible notes			742				—
0.25% convertible senior notes			—				7,539
0.875% convertible senior notes			—				13,108
Total excluded due to anti-dilutive effect			3,951				28,699

(15) SHARE-BASED COMPENSATION EXPENSE

     Ciena makes equity awards under its 2008 Omnibus Incentive Plan (“2008 Plan”) and 2003 Employee Stock Purchase Plan (“ESPP”). These plans were approved by shareholders and are described in Ciena’s annual report on Form 10-K.

2008 Plan

     Ciena grants stock options and restricted stock units under the 2008 Plan. As of January 31, 2009, there were 3.5 million shares authorized and available for issuance thereunder.

     Stock Options

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

		Shares Underlying				Weighted
		Options				Average
		Outstanding				Exercise Price
Balance as of October 31, 2008			6,399			$	48.84
Granted			90				7.81
Exercised			(40	)			1.88
Canceled			(363	)			59.13
Balance as of January 31, 2009			6,086			$	47.93

     The total intrinsic value of options exercised during the first three months of fiscal 2008 and fiscal 2009, was $1.1 million and $0.2 million, respectively. The weighted average fair values of each stock option granted by Ciena during the first three months of fiscal 2008 and fiscal 2009 were $17.92 and $4.43, respectively.

     The following table summarizes information with respect to stock options outstanding at January 31, 2009, based on Ciena’s closing stock price of $6.24 per share on the last trading day of Ciena’s first fiscal quarter of 2009 (shares and intrinsic value in thousands):

										Options Outstanding at January 31, 2009																Vested Options at January 31, 2009
														Weighted																Weighted
														Average																Average
														Remaining				Weighted												Remaining				Weighted
Range of										Number				Contractual				Average				Aggregate				Number				Contractual				Average				Aggregate
Exercise										of				Life				Exercise				Intrinsic				of				Life				Exercise				Intrinsic
Price										Shares				(Years)				Price				Value				Shares				(Years)				Price				Value
$	0.01			-		$	16.52				889				7.17			$	10.17			$	1,223				540				6.46			$	11.20			$	745
$	16.53			-		$	17.43				601				6.74				17.21				—				447				6.25				17.17				—
$	17.44			-		$	22.96				514				6.20				21.75				—				416				5.53				21.95				—
$	22.97			-		$	31.71				1,615				5.93				29.42				—				1,162				4.95				29.93				—
$	31.72			-		$	46.97				1,049				7.02				39.31				—				617				5.75				40.47				—
$	46.98			-		$	83.13				545				3.75				60.18				—				545				3.75				60.18				—
$	83.14			-		$	1,046.50				873				2.02				159.91				—				873				2.02				159.91				—
$	0.01			-		$	1,046.50				6,086				5.65			$	47.93			$	1,223				4,600				4.71			$	55.42			$	745

     Assumptions for Option-Based Awards

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

		Quarter Ended January 31,
		2008				2009
Expected volatility			53.0	%			65.0	%
Risk-free interest rate			3.1% - 3.6	%			1.7% - 2.2	%
Expected life (years)			5.1 - 5.3				5.2 - 5.3
Expected dividend yield			0.0	%			0.0	%

     Consistent with SFAS 123(R) and SAB 107, Ciena considered the implied volatility and historical volatility of its stock price in determining its expected volatility, and, finding both to be equally reliable, determined that a combination of both would result in the best estimate of expected volatility.

     The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of Ciena’s employee stock options.

     The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. As prescribed by SAB 107, Ciena’s expected term is based on specific exercise behavior of its historical grantees.

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

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

     Restricted Stock Units

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

     Ciena’s outstanding restricted stock units include “performance-accelerated” restricted stock units (PARS), which vest in full four years after the date of grant (assuming that the grantee is still employed by Ciena at that time). At the beginning of each of the first three fiscal years following the date of grant, the Compensation Committee establishes one-year performance targets which, if satisfied, provide for the acceleration of vesting of one-third of the award. As a result, the grantee has the opportunity, subject to satisfaction of performance conditions, to vest as to the entire award in three years. Ciena recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based expense over the performance period, using graded vesting, which considers each performance period or tranche separately, based upon Ciena’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, Ciena reassesses the probability of achieving the performance targets and the performance period required to meet those targets.

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

						Weighted
						Average Grant
		Restricted				Date Fair				Aggregate
		Stock Units				Value				Intrinsic
		Outstanding				Per Share				Value
Balance as of October 31, 2008			1,849			$	30.85			$	17,773
Granted			2,857
Vested			(162	)
Canceled or forfeited			(7	)
Balance as of January 31, 2009....			4,537			$	15.76			$	28,314

     The total fair value of restricted stock units that vested and were converted into common stock during the first three months fiscal 2008 and fiscal 2009 was $8.3 million and $1.2 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena during the first three months of fiscal 2008 and fiscal 2009 was $35.19 and $6.94, respectively.

     Assumptions for Restricted Stock Unit Awards

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

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

2003 Employee Stock Purchase Plan

     The ESPP is a non-compensatory plan under FAS 123(R) and issuances thereunder do not result in share-based compensation expense. The following table is a summary of ESPP activity and shares available for issuance for the periods indicated (shares in thousands):

		ESPP shares available for
		issuance
Balance as of October 31, 2008			3,488
Evergreen provision			83
Balance as of January 31, 2009			3,571

Share-Based Compensation Expense for Periods Reported

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

		Quarter ended January 31,
		2008				2009
Product costs		$	565			$	713
Service costs			246				397
Share-based compensation expense included in cost of sales			811				1,110
Research and development			1,177				2,566
Sales and marketing			2,464				2,703
General and administrative			2,209				2,419
Share-based compensation expense included in operating expense			5,850				7,688
Share-based compensation expense capitalized in inventory, net			220				(304	)
Total share-based compensation		$	6,881			$	8,494