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

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

Commission file number: 0-21969

Ciena Corporation

(Exact name of registrant as specified in its charter)

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

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

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

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o 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 August 28, 2009
common stock, $.01 par value		91,534,298

 

 

CIENA CORPORATION

INDEX

FORM 10-Q

		PAGE
		NUMBER
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended July 31, 2008 and July 31, 2009			3
Condensed Consolidated Balance Sheets at October 31, 2008 and July 31, 2009			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2008 and July 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			46
Item 4. Controls and Procedures			47
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 3. Defaults Upon Senior Securities			58
Item 4. Submission of Matters to a Vote of Security Holders			58
Item 5. Other Information			58
Item 6. Exhibits			58
Signatures			59

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

		Quarter Ended July 31,								Nine Months Ended July 31,
		2008				2009				2008				2009
Revenues:
Products		$	223,661			$	139,903			$	641,632			$	398,469
Services			29,518				24,855				81,162				77,890
Total revenue			253,179				164,758				722,794				476,359
Cost of goods sold:
Products			107,953				72,842				295,381				214,628
Services			19,595				17,251				57,617				54,503
Total cost of goods sold			127,548				90,093				352,998				269,131
Gross profit			125,631				74,665				369,796				207,228
Operating expenses:
Research and development			47,809				44,442				127,881				140,624
Selling and marketing			39,440				31,468				111,639				98,582
General and administrative			14,758				11,524				54,036				35,724
Amortization of intangible assets			8,671				6,224				23,901				18,852
Restructuring cost			—				3,941				—				10,416
Goodwill impairment			—				—				—				455,673
Total operating expenses			110,678				97,599				317,457				759,871
Income (loss) from operations			14,953				(22,934	)			52,339				(552,643	)
Interest and other income, net			5,342				999				32,911				9,167
Interest expense			(1,855	)			(1,856	)			(11,074	)			(5,552	)
Realized loss due to impairment of marketable debt investments			(5,114	)			—				(5,114	)			—
Loss on cost method investments			—				(2,193	)			—				(5,328	)
Income (loss) before income taxes			13,326				(25,984	)			69,062				(554,356	)
Provision for income taxes			1,603				470				4,772				139
Net income (loss)		$	11,723			$	(26,454	)		$	64,290			$	(554,495	)
Basic net income (loss) per common share		$	0.13			$	(0.29	)		$	0.72			$	(6.10	)
Diluted net income (loss) per potential common share		$	0.12			$	(0.29	)		$	0.63			$	(6.10	)
Weighted average basic common shares outstanding			90,216				91,364				88,871				90,970
Weighted average dilutive potential common shares outstanding			111,681				91,364				110,654				90,970

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

CIENA CORPORATION

		October 31,				July 31,
		2008				2009
ASSETS
Current assets:
Cash and cash equivalents		$	550,669			$	455,732
Short-term investments			366,336				607,094
Accounts receivable, net			138,441				120,271
Inventories			93,452				89,600
Prepaid expenses and other			35,888				44,325
Total current assets			1,184,786				1,317,022
Long-term investments			156,171				—
Equipment, furniture and fixtures, net			59,967				60,608
Goodwill			455,673				—
Other intangible assets, net			92,249				68,445
Other long-term assets			75,748				65,151
Total assets		$	2,024,594			$	1,511,226
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	44,761			$	52,337
Accrued liabilities			96,143				89,571
Restructuring liabilities			1,668				1,917
Deferred revenue			36,767				43,625
Total current liabilities			179,339				187,450
Long-term deferred revenue			37,660				34,875
Long-term restructuring liabilities			2,557				7,570
Other long-term obligations			8,089				9,207
Convertible notes payable			798,000				798,000
Total liabilities			1,025,645				1,037,102
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 91,522,101 shares issued and outstanding			905				915
Additional paid-in capital			5,629,498				5,656,096
Accumulated other comprehensive income (loss)			(1,275	)			1,787
Accumulated deficit			(4,630,179	)			(5,184,674	)
Total stockholders’ equity			998,949				474,124
Total liabilities and stockholders’ equity		$	2,024,594			$	1,511,226

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

CIENA CORPORATION

		Nine Months Ended July 31,
		2008				2009
Cash flows from operating activities:
Net income (loss)		$	64,290			$	(554,495	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of discount on marketable securities			(1,827	)			(858	)
Realized loss due to impairment of marketable debt investments			5,114				—
Loss on cost method investments			—				5,328
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements			13,345				16,270
Goodwill Impairment			—				455,673
Share-based compensation costs			24,406				26,075
Amortization of intangible assets			27,942				23,804
Deferred tax provision			1,640				—
Provision for inventory excess and obsolescence			13,841				11,126
Provision for warranty			11,234				13,620
Other			3,510				1,529
Changes in assets and liabilities:
Accounts receivable			(32,070	)			18,128
Inventories			(4,694	)			(7,274	)
Prepaid expenses and other			(616	)			(1,696	)
Accounts payable, accruals and other obligations			(7,927	)			(5,799	)
Income taxes payable			(5,515	)			—
Deferred revenue			9,554				4,073
Net cash provided by operating activities			122,227				5,504
Cash flows from investing activities:
Payments for equipment, furniture, fixtures and intellectual property			(22,947	)			(17,630	)
Restricted cash			1,420				(1,914	)
Purchase of available for sale securities			(180,613	)			(926,621	)
Proceeds from maturities of available for sale securities			820,177				321,554
Proceeds from sale of available for sale securities			—				523,137
Acquisition of business, net of cash acquired			(210,016	)			—
Net cash provided by (used in) investing activities			408,021				(101,474	)
Cash flows from financing activities:
Repayment of 3.75% convertible notes payable			(542,262	)			—
Repayment of indebtedness of acquired business			(12,363	)			—
Proceeds from issuance of common stock and warrants			5,246				533
Net cash provided by (used in) financing activities			(549,379	)			533
Effect of exchange rate changes on cash and cash equivalents			173				500
Net decrease in cash and cash equivalents			(19,131	)			(95,437	)
Cash and cash equivalents at beginning of period			892,061				550,669
Cash and cash equivalents at end of period		$	873,103			$	455,732
Supplemental disclosure of cash flow information
Cash paid (refunded) during the period for:
Interest		$	14,969			$	4,748
Income taxes, net		$	2,673			$	250
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	1,717			$	1,205
Value of common stock issued in acquisition		$	62,359			$	—
Fair value of vested options assumed in acquisition		$	9,912			$	—

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

CIENA CORPORATION

(1) INTERIM FINANCIAL STATEMENTS

     The interim financial statements included herein for Ciena Corporation (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The October 31, 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.

     Ciena performed an evaluation of events that have occurred subsequent to the end of its fiscal period through the date that the condensed consolidated financial statements were issued. As of September 3, 2009, the date of the filing of this Form 10-Q, there have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements.

(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 generally represent investments in marketable debt securities. These investments 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 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 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

     Historically, 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. As of July 31, 2009 Ciena had no goodwill remaining on its balance sheet. See Note 4 below.

     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 the 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. See Note 7 below.

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 8 and 18 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 adversely affect future results. Ciena relies on a small number of third party manufacturers, principally in China and Thailand, to perform the majority of the manufacturing for its products. Ciena is therefore exposed to risks related to the business and financial position of its manufacturers, as well as risks related to their business continuity and disaster recovery plans, that may adversely affect access to continued manufacturing capability.

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 16 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 increased by $0.6 million during the third quarter of fiscal 2009 to $6.3 million, which includes $1.3 million of interest and 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 7 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, 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 associated with the ineffectiveness of the hedging instrument is reported in interest and other income, net. See Note 14 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. See Note 15 below.

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 June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement 162.” SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative accounting principles to be applied to financial statements of nongovernmental entities in conformity with U.S. GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Ciena will adopt this statement in its fourth quarter of fiscal 2009.

     In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion.” FSP 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. FSP 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 believes the adoption of this statement will not have a material effect on its financial condition, results of operations and cash flows.

     In April 2008, the FASB issued FSP 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 FAS 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 February 2008, the FASB issued FSP FAS 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 FSP FAS 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. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active, and provides guidance on the key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. 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 believes the adoption of this statement will not 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.

(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				Nine Months Ended
		July 31,				July 31,
		2008				2008
Pro forma revenue		$	253,179			$	729,444
Pro forma net income		$	11,723			$	46,192
Pro forma basic net income per common share		$	0.13			$	0.52
Pro forma diluted net income per potential common share		$	0.12			$	0.46

(4) GOODWILL IMPAIRMENT

     Ciena tests its single reporting unit’s goodwill for impairment on an annual basis, which Ciena has determined to be the last business day of fiscal September each year. 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. Based on a combination of factors, including macroeconomic conditions and a sustained decline in Ciena’s common stock price and market capitalization below net book value, Ciena conducted an interim impairment assessment of goodwill during the second quarter of fiscal 2009. Ciena performed the step one fair value comparison, and its market capitalization was $721.8 million and its carrying value, including goodwill, was $949.0 million. Ciena applied a 25% control premium to its market capitalization to determine a fair value of $902.2 million. Because step one indicated that Ciena’s fair value was less than its carrying value, Ciena performed the step two analysis. Under the step two analysis, the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of

purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. The implied fair value of the reporting unit’s goodwill was determined to be $0, and, as a result, Ciena recorded a goodwill impairment of $455.7 million, representing the full carrying value of the goodwill. The table below sets forth changes in carrying amount of goodwill for the period indicated (in thousands):

		Total
Balance as of October 31, 2008		$	455,673
Impairment loss			(455,673	)
Balance as of July 31, 2009		$	—

(5) 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.”

     On March 2, 2009, Ciena committed to certain restructuring actions, including the closure of its Acton, MA facility and a headcount reduction of approximately 200 employees, representing 9% of its global workforce. Headcount reductions were implemented across Ciena’s organizations and geographies, with the timing and scope of such reductions varying by country based on local legal requirements. These headcount reductions were completed during the third fiscal quarter of 2009. Restructuring charges during the third quarter of fiscal 2009 included $0.5 million of severance and other employee-related costs and $3.4 million related to the Acton, MA facility closure.

     Restructuring charges during the second quarter of fiscal 2009 include $3.5 million of severance and other employee-related costs associated with the action above and $2.9 million associated with previously restructured facilities.

     During the first quarter of fiscal 2009, Ciena recorded a restructuring charge of $0.1 million related to one-time termination benefits.

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

						Consolidation
		Workforce				of excess
		reduction				facilities				Total
Balance at October 31, 2008		$	982			$	3,243			$	4,225
Additional liability recorded			4,098				6,318				10,416
Cash payments			(4,822	)			(332	)			(5,154	)
Balance at July 31, 2009		$	258			$	9,229			$	9,487
Current restructuring liabilities		$	258			$	1,659			$	1,917
Non-current restructuring liabilities		$	0			$	7,570			$	7,570

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

		Consolidation
		of excess
		facilities
Balance at October 31, 2007		$	4,688
Cash payments			(651	)
Balance at July 31, 2008		$	4,037
Current restructuring liabilities		$	687
Non-current restructuring liabilities		$	3,350

(6) MARKETABLE SECURITIES

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

		July 31, 2009
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
U.S. government obligations		$	606,423			$	466			$	2			$	606,887
Publicly traded equity securities			207				—				—				207
		$	606,630			$	466			$	2			$	607,094
Included in short-term investments			606,630				466				2			$	607,094
Included in long-term investments			—				—				—				—
		$	606,630			$	466			$	2			$	607,094

		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 July 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):

		July 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
U.S. government obligations		$	2			$	46,312			$	—			$	—			$	2			$	46,312
		$	2			$	46,312			$	—			$	—			$	2			$	46,312

		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 July 31, 2009 (in thousands):

		Amortized				Estimated
		Cost				Fair Value
Less than one year		$	606,423			$	606,887
Due in 1-2 years			—				—
Due in 2-3 years			—				—
		$	606,423			$	606,887

(7) 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 or similar 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 table summarizes the fair value of assets that are recorded at fair value on a recurring basis (in thousands):

		July 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
U.S. government obligations		$	—			$	606,887			$	—			$	606,887
Publicly traded equity securities			207				—				—				207
Foreign currency forward contracts			—				1,487				—				1,487
Total assets measured at fair value		$	207			$	608,374			$	—			$	608,581

     Ciena’s Level 1 assets include corporate equity securities publicly traded on major exchanges that are valued using quoted prices in active markets. Ciena’s Level 2 investments include U.S. government obligations. These 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. 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.

     As of July 31, 2009, Ciena did not hold financial assets and liabilities recorded at fair value based on Level 3 inputs.

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

		July 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	—			$	—			$	—			$	—
Short-term investments			207				606,887				—				607,094
Prepaid expenses and other			—				1,487				—				1,487
Total assets measured at fair value		$	207			$	608,374			$	—			$	608,581

     During the third quarter of fiscal 2009, a private technology company in which Ciena holds a minority equity investment completed a round of equity financing in which Ciena did not participate. This event required Ciena to perform an impairment analysis and measure the investment at fair value. In determining its fair value, Ciena utilized Level 3 inputs

including the actual recapitalization resulting from the completion of the equity financing. Based on Ciena’s ownership interest and the value of its investment following the financing, Ciena recorded a non-cash loss on cost method investments of $2.2 million.

     During the second quarter of fiscal 2009, this same private technology company had merged with another private technology 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 3 inputs including the recapitalization of the combined company and the terms of the proposed equity financing described above. As a result, Ciena recorded a non-cash loss on cost method investments of $2.5 million.

     During the first quarter of fiscal 2009, a separate 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 acquirer’s common stock. As a result, Ciena recorded a non-cash loss on cost method investments of $0.6 million.

     At July 31, 2009, the fair value of the outstanding $500.0 million of 0.875% convertible senior notes and $298.0 million in 0.25% convertible senior notes was $276.7 million and $214.4 million, respectively. Fair value is based on the quoted market price for the notes on the dates above.

(8) ACCOUNTS RECEIVABLE

     As of October 31, 2008 three customers accounted for 59.0% of net accounts receivable and as of July 31, 2009 two customers accounted for 31.6% of net accounts receivable.

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

(9) INVENTORIES

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

		October 31,				July 31,
		2008				2009
Raw materials		$	19,044			$	20,202
Work-in-process			1,702				755
Finished goods			95,963				90,189
			116,709				111,146
Provision for excess and obsolescence			(23,257	)			(21,546	)
		$	93,452			$	89,600

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory in an amount 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 nine months of fiscal 2009, Ciena recorded a provision for excess and obsolete inventory of $11.1 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 balance as of October 31, 2008		$	23,257
Provision for excess for obsolescence			11,126
Actual inventory disposed			(12,837	)
Reserve balance as of July 31, 2009		$	21,546

     During the first nine months of fiscal 2008, Ciena recorded a provision for excess and obsolete inventory of $13.8 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 balance as of October 31, 2007		$	26,170
Provision for excess and obsolescence			13,841
Actual inventory disposed			(17,091	)
Reserve balance as of July 31, 2008		$	22,920

(10) PREPAID EXPENSES AND OTHER

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

		October 31,				July 31,
		2008				2009
Interest receivable		$	2,082			$	1,012
Prepaid VAT and other taxes			15,160				13,249
Deferred deployment expense			4,481				3,598
Prepaid expenses			10,557				15,868
Restricted cash			1,717				7,593
Derivative Assets			—				1,487
Other non-trade receivables			1,891				1,518
		$	35,888			$	44,325

(11) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				July 31,
		2008				2009
Equipment, furniture and fixtures		$	286,940			$	288,765
Leasehold improvements			40,574				44,334
			327,514				333,099
Accumulated depreciation and amortization			(267,547	)			(272,491	)
		$	59,967			$	60,608

(12) OTHER INTANGIBLE ASSETS

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

		October 31,												July 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			$	(142,691	)		$	43,142
Patents and licenses			47,370				(37,952	)			9,418				47,370				(41,829	)			5,541
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			68,281				(43,028	)			25,253				68,281				(48,519	)			19,762
		$	301,484			$	(209,235	)		$	92,249			$	301,484			$	(233,039	)		$	68,445

     The aggregate amortization expense of other intangible assets was $27.9 million and $23.8 million for the first nine 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 three months)		$	7,625
2010			27,872
2011			13,852
2012			9,473
2013			7,217
Thereafter			2,406
		$	68,445

(13) OTHER BALANCE SHEET DETAILS

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

		October 31,				July 31,
		2008				2009
Maintenance spares inventory, net		$	30,038			$	31,694
Deferred debt issuance costs, net			15,127				13,406
Investments in privately held companies			6,671				907
Restricted cash			20,436				16,474
Other			3,476				2,670
		$	75,748			$	65,151

     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 $2.3 million and $1.7 million during the first nine months of fiscal 2008 and fiscal 2009, respectively.

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

		October 31,				July 31,
		2008				2009
Warranty		$	37,258			$	39,380
Compensation, payroll related tax and benefits			35,200				26,058
Interest payable			1,683				765
Other			22,002				23,368
		$	96,143			$	89,571

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

		Beginning												Balance at end
Nine Months Ended July 31,		Balance				Provisions				Settlements				of period
2008		$	33,580			$	11,234			$	(8,452	)		$	36,362
2009		$	37,258			$	13,620			$	(11,498	)		$	39,380

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

		October 31,				July 31,
		2008				2009
Products		$	13,061			$	14,629
Services			61,366				63,871
			74,427				78,500
Less current portion			(36,767	)			(43,625	)
Long-term deferred revenue		$	37,660			$	34,875

(14) 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 ineffective portion of the hedging instruments in interest and other income, net.

     Ciena’s foreign currency forward contracts are classified as follows:

		Reclassified to Condensed Consolidated Statement of Operations
		(Effective Portion)
Line Item in Condensed Consolidated Statement of		Quarter Ended July 31,								Nine Months Ended July 31,
Operations		2008				2009				2008				2009
Research and development		$	—			$	(283	)		$	—			$	21
Selling and marketing			—				(692	)			—				46
		$	—			$	(975	)		$	—			$	67

		Recognized in Other Comprehensive Income (Loss)
Line Item in Condensed Consolidated Balance		Quarter Ended July 31,								Nine Months Ended July 31,
Sheet		2008				2009				2008				2009
Accumulated other comprehensive income (loss)		$	—			$	2,904			$	—			$	1,420
		$	—			$	2,904			$	—			$	1,420

		Ineffective Portion
Line Item in Condensed Consolidated Statement of		Quarter Ended July 31,								Nine Months Ended July 31,
Operations		2008				2009				2008				2009
Other income, net		$	—			$	—			$	—			$	—
		$	—			$	—			$	—			$	—

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

Derivatives Designated as Cash																																		Total
Flow Hedging Instruments		Weighted Average Contract																Derivative Asset								Derivative Liability								Derivative Asset
under SFAS 133		Exchange Rate								Notional Amount								Fair Value								Fair Value								Fair Value
		October 31,				July 31,				October 31,				July 31,				October 31,				July 31,				October 31,				July 31,				October 31,				July 31,
		2008				2009				2008				2009				2008				2009				2008				2009				2008				2009
USD Functional Currency
Receive EUR / Pay USD			—				1.3909			$	—			$	10,840			$	—			$	268			$	—			$	—			$	—			$	268
Receive INR / Pay USD			—				0.0205			$	—			$	4,071			$	—			$	28			$	—			$	—			$	—			$	28
Receive CAD / Pay USD			—				0.8258			$	—			$	3,800			$	—			$	464			$	—			$	—			$	—			$	464
EUR Functional Currency
Receive GBP / Pay EUR			—				1.0820			€	—			€	6,243			$	—			$	727	(1)		$	—			$	—			$	—			$	727	(1)
Total Fair Value																		$	—			$	1,487	(2)		$	—			$	—			$	—			$	1,487	(2)

(15) 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.

		Quarter Ended July 31,								Nine Months Ended July 31,
		2008				2009				2008				2009
Numerator
Net income (loss)		$	11,723			$	(26,454	)		$	64,290			$	(554,495	)
Add: Interest expense for 0.25% convertible senior notes			467				—				1,408				—
Add: Interest expense for 0.875% convertible senior notes			1,388				—				4,123				—
Net income (loss) used to calculate Diluted EPS		$	13,578			$	(26,454	)		$	69,821			$	(554,495	)

		Quarter Ended July 31,								Nine Months Ended July 31,
		2008				2009				2008				2009
Denominator
Basic weighted average shares outstanding			90,216				91,364				88,871				90,970
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			767				—				1,085				—
Add: Shares underlying 0.25% convertible senior notes			7,590				—				7,590				—
Add: Shares underlying 0.875% convertible senior notes			13,108				—				13,108				—
Dilutive weighted average shares outstanding			111,681				91,364				110,654				90,970

		Quarter Ended July 31,								Nine Months Ended July 31,
		2008				2009				2008				2009
EPS
Basic EPS		$	0.13			$	(0.29	)		$	0.72			$	(6.10	)
Diluted EPS		$	0.12			$	(0.29	)		$	0.63			$	(6.10	)

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the quarter and nine months ended July 31, 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, for the nine months ended July 31, 2008, the weighted average number of shares underlying Ciena’s previously outstanding 3.75% convertible notes, which were repaid at maturity on February 1, 2008, is 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 quarter and nine months ended July 31, 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):

		Quarter Ended July 31,								Nine Months Ended July 31,
		2008				2009				2008				2009
Shares Excluded from EPS Denominator due to Anti-dilutive Effect
Shares underlying stock options, restricted stock units and warrants			5,484				8,249				4,816				8,161
3.75% convertible notes			—				—				243				—
0.25% convertible senior notes			—				7,539				—				7,539
0.875% convertible senior notes			—				13,108				—				13,108
Total excluded due to anti-dilutive effect			5,484				28,896				5,059				28,808

(16) 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 July 31, 2009, there were 3.0 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			212				8.16
Exercised			(86	)			1.94
Canceled			(673	)			53.06
Balance as of July 31, 2009			5,852			$	47.57

     The total intrinsic value of options exercised during the first nine months of fiscal 2008 and fiscal 2009, was $14.2 million and $0.5 million, respectively. The weighted average fair values of each stock option granted by Ciena during the first nine months of fiscal 2008 and fiscal 2009 were $16.24 and $4.66, respectively.

     The following table summarizes information with respect to stock options outstanding at July 31, 2009, based on Ciena’s closing stock price of $11.16 per share on the last trading day of Ciena’s third fiscal quarter of 2009 (shares and intrinsic value in thousands):

		Options Outstanding at July 31, 2009																Vested Options at July 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			937				7.05			$	10.33			$	2,926				631				6.10			$	11.54			$	1,816
$16.53 — $     17.43			566				6.24				17.21				—				472				5.81				17.20				—
$17.44 — $     22.96			478				5.61				21.76				—				412				5.13				21.94				—
$22.97 — $     31.71			1,551				5.40				29.45				—				1,238				4.76				29.77				—
$31.72 — $     46.97			964				6.59				39.38				—				648				5.74				40.13				—
$46.98 — $     73.78			528				3.30				60.11				—				527				3.30				60.11				—
$73.79 — $1,046.50			828				1.58				160.86				—				828				1.58				160.86				—
$  0.01 — $1,046.50			5,852				5.23			$	47.57			$	2,926				4,756				4.49			$	53.03			$	1,816