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 (Address of Principal Executive Offices)		21090 (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 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		Smaller reporting company o
			(do not check if smaller reporting company)

     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, 2010
common stock, $.01 par value		93,571,893

 

 

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, 2009 and July 31, 2010			3
Condensed Consolidated Balance Sheets at October 31, 2009 and July 31, 2010			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2009 and July 31, 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			53
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			54
Item 1A. Risk Factors			54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			66
Item 3. Defaults Upon Senior Securities			66
Item 4. Removed and Reserved			66
Item 5. Other Information			66
Item 6. Exhibits			67
Signatures			68
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION

		Quarter Ended July 31,								Nine Months Ended July 31,
		2009				2010				2009				2010
Revenue:
Products		$	139,903			$	312,378			$	398,469			$	667,852
Services			24,855				77,297				77,890				151,170
Total revenue			164,758				389,675				476,359				819,022
Cost of goods sold:
Products			72,842				201,559				214,628				396,449
Services			17,251				44,107				54,503				93,462
Total cost of goods sold			90,093				245,666				269,131				489,911
Gross profit			74,665				144,009				207,228				329,111
Operating expenses:
Research and development			44,442				100,869				140,624				222,044
Selling and marketing			31,468				52,127				98,582				131,692
General and administrative			11,524				32,649				35,724				66,915
Acquisition and integration costs			—				17,033				—				83,285
Amortization of intangible assets			6,224				38,727				18,852				61,829
Restructuring costs			3,941				2,157				10,416				3,985
Goodwill impairment			—				—				455,673				—
Total operating expenses			97,599				243,562				759,871				569,750
Loss from operations			(22,934	)			(99,553	)			(552,643	)			(240,639	)
Interest and other income (loss), net			999				(2,668	)			9,167				307
Interest expense			(1,856	)			(5,990	)			(5,552	)			(11,931	)
Loss on cost method investments			(2,193	)			—				(5,328	)			—
Loss before income taxes			(25,984	)			(108,211	)			(554,356	)			(252,263	)
Provision for income taxes			470				1,644				139				934
Net loss		$	(26,454	)		$	(109,855	)		$	(554,495	)		$	(253,197	)
Basic net loss per common share		$	(0.29	)		$	(1.18	)		$	(6.10	)		$	(2.73	)
Diluted net loss per potential common share		$	(0.29	)		$	(1.18	)		$	(6.10	)		$	(2.73	)
Weighted average basic common shares outstanding			91,364				92,906				90,970				92,851
Weighted average dilutive potential common shares outstanding			91,364				92,906				90,970				92,851

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

CIENA CORPORATION

		October 31,				July 31,
		2009				2010
ASSETS
Current assets:
Cash and cash equivalents		$	485,705			$	470,237
Short-term investments			563,183				184
Accounts receivable, net			118,251				260,277
Inventories			88,086				222,164
Prepaid expenses and other			50,537				118,571
Total current assets			1,305,762				1,071,433
Long-term investments			8,031				—
Equipment, furniture and fixtures, net			61,868				118,755
Goodwill			—				38,086
Other intangible assets, net			60,820				470,610
Other long-term assets			67,902				112,587
Total assets		$	1,504,383			$	1,811,471
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	53,104			$	118,972
Accrued liabilities			103,349				178,427
Restructuring liabilities			1,811				3,021
Income tax payable			—				1,306
Deferred revenue			40,565				58,655
Total current liabilities			198,829				360,381
Long-term deferred revenue			35,368				32,122
Long-term restructuring liabilities			7,794				5,995
Other long-term obligations			8,554				10,098
Convertible notes payable			798,000				1,174,580
Total liabilities			1,048,545				1,583,176
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; 92,038,360 and 93,567,775 shares issued and outstanding			920				936
Additional paid-in capital			5,665,028				5,692,387
Accumulated other comprehensive income (loss)			1,223				(498	)
Accumulated deficit			(5,211,333	)			(5,464,530	)
Total stockholders’ equity			455,838				228,295
Total liabilities and stockholders’ equity		$	1,504,383			$	1,811,471

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

CIENA CORPORATION

		Nine Months Ended July 31,
		2009				2010
Cash flows from operating activities:
Net loss		$	(554,495	)		$	(253,197	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of (discount) premium on marketable securities			(858	)			574
Loss on cost method investments			5,328				—
Gain on embedded redemption feature			—				(2,570	)
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements			16,270				28,146
Impairment of goodwill			455,673				—
Share-based compensation costs			26,075				26,451
Amortization of intangible assets			23,804				82,476
Provision for inventory excess and obsolescence			11,126				10,749
Provision for warranty			13,620				16,388
Other			1,529				1,955
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable			18,128				(134,844	)
Inventories			(7,274	)			(30,765	)
Prepaid expenses and other			(1,696	)			(29,528	)
Accounts payable, accruals and other obligations			(5,799	)			83,580
Income taxes payable			—				1,306
Deferred revenue			4,073				(3,957	)
Net cash provided by (used in) operating activities			5,504				(203,236	)
Cash flows from investing activities:
Payments for equipment, furniture, fixtures and intellectual property			(17,630	)			(34,646	)
Restricted cash			(1,914	)			(18,845	)
Purchase of available for sale securities			(926,621	)			(63,591	)
Proceeds from maturities of available for sale securities			321,554				454,141
Proceeds from sales of available for sale securities			523,137				179,380
Acquisition of business			—				(693,247	)
Net cash used in investing activities			(101,474	)			(176,808	)
Cash flows from financing activities:
Proceeds from issuance of 4.0% convertible notes payable, net			—				364,316
Proceeds from issuance of common stock and warrants			533				924
Net cash provided by financing activities			533				365,240
Effect of exchange rate changes on cash and cash equivalents			500				(664	)
Net decrease in cash and cash equivalents			(95,437	)			(14,804	)
Cash and cash equivalents at beginning of period			550,669				485,705
Cash and cash equivalents at end of period		$	455,732			$	470,237
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	4,748			$	4,748
Income taxes, net		$	250			$	2,037
Non-cash investing and financing activities
Purchase of equipment in accounts payable		$	1,205			$	4,421

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, 2009 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, 2009.

     On March 19, 2010, Ciena completed its acquisition of substantially all of the optical networking and Carrier Ethernet assets of Nortel’s Metro Ethernet Networks (“MEN Business”). Ciena’s results of operations for the third quarter include the results of the MEN Business for the entire period and the results of operations for the nine month period ended July 31, 2010 reflect the operations of the MEN Business beginning on the March 19, 2010 acquisition date. See Note 3 below.

     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 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.

     Ciena has certain minority equity investments in privately held technology companies that are classified as other assets. These investments are carried at cost because Ciena owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. These investments involve a high degree of risk as the markets for the technologies or products manufactured by these companies are usually early stage at the time of Ciena’s 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.

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.

Segment Reporting

     Effective upon the March 19, 2010 completion of the acquisition of the MEN Business, Ciena reorganized its internal organizational structure and the management of its business. Ciena’s chief operating decision maker, its chief executive officer, evaluates performance and allocates resources based on multiple factors, including segment profit (loss) information for the following product categories: (i) Packet-Optical Transport; (ii) Packet-Optical Switching; (iii) Carrier Ethernet Service Delivery; and (iv) Software and Services. Operating segments are defined as components of an enterprise: that engage in business activities which may earn revenue and incur expense; for which discrete financial information is available; and for which such information is evaluated regularly by the chief operating decision maker for purposes of allocating resources and assessing performance. Ciena considers the four product categories above to be its operating segments for reporting purposes. See Notes 3 and 20.

Goodwill

     Goodwill is the excess of the purchase price over the fair values assigned to the net assets acquired in a business combination. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the combination. Ciena has determined that its operating segments and reporting units for goodwill assignment are the same. This determination is based on the fact that components below Ciena’s operating segment level, such as individual product or service offerings, do not constitute a reporting unit because they do not constitute a business for which discrete financial information is available.

     Ciena tests 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. Prior to the reorganization of Ciena’s operations described above, Ciena tested its goodwill for impairment as a single reporting unit.

Long-lived Assets

     Ciena’s long-lived assets include: equipment, furniture and fixtures; intangible assets; and maintenance spares. Ciena tests long-lived assets for impairment whenever triggering events or changes in circumstances indicate that the assets’ carrying amount is not recoverable from its undiscounted cash flows. An impairment loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value. Ciena’s long-lived assets are assigned to reporting units which represent the lowest level for which cash flows can be 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.

     Qualifying internal use software and website development costs incurred during the application development stage that consist primarily of outside services and purchased software license costs, are capitalized and amortized straight-line over the estimated useful life.

     Intangible Assets

     Ciena has recorded finite-lived and indefinite lived intangible assets as a result of several acquisitions. Finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the expected economic lives of the respective assets, from nine months to seven years, which approximates the use of intangible assets.

     Indefinite-lived intangible assets are carried at cost and reflect in-process research and development assets acquired from the MEN Business. In-process research and development assets will be impaired, if abandoned, or amortized in future periods, depending upon the ability of Ciena to use the research and development in future periods. Future expenditures to complete the in-process research and development projects will be expensed as incurred.

     Maintenance Spares

     Maintenance spares are recorded at cost. Spares usage cost is computed using the straight-line method over useful lives of four years.

Concentrations

     Substantially all of Ciena’s cash and cash equivalents and short-term and long-term investments in marketable debt securities are maintained at two major U.S. financial institutions. The majority of Ciena’s cash equivalents consist of money market funds. 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 9 and 20 below.

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

Revenue Recognition

     Ciena recognizes revenue 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. Revenue for maintenance services is generally deferred and recognized ratably over the period during which the services are to be performed.

     Ciena applies the percentage of completion method to long-term arrangements where it is required to undertake significant production, customizations or modification engineering, and reasonable and reliable estimates of revenue and cost are available. Utilizing the percentage of completion method, Ciena recognizes revenue based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred. In instances that do not meet the percentage of completion method criteria, recognition of revenue is deferred until there are no uncertainties regarding customer acceptance.

     Some of Ciena’s communications networking equipment is integrated with software that is essential to the functionality of the equipment. Software 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 there are no uncertainties regarding customer acceptance.

     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 allocates 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 separates the 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 estimates for 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.

     During the first quarter of fiscal 2010, Ciena recorded an adjustment to reduce its warranty liability and cost of goods sold by $3.3 million, to correct an overstatement of warranty expenses related to prior periods. The adjustment related to an error in the methodology of computing the annual failure rate used to calculate the warranty accrual. There was no tax impact as a result of this adjustment. Ciena believes this adjustment is not material to its financial statements for prior annual or interim periods, the first nine months of fiscal 2010 or the expected annual results for fiscal 2010.

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 measures and recognizes 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 service-based vesting and the graded-vesting method, which considers each performance period or tranche separately, for all other awards. See Note 18 below.

Income Taxes

     Ciena accounts for income taxes using an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. In estimating future tax consequences, Ciena 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 accounting guidance on uncertainty related to income tax positions at the beginning of fiscal 2008. Ciena classifies interest and penalties related to uncertain tax positions as a component of income tax expense. All of the uncertain tax positions, if recognized, would decrease the effective income tax rate.

     In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax authorities periodically audit Ciena’s income tax returns. These audits examine significant tax filing positions, including the timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena’s major tax jurisdictions and the related open tax years are as follows: United States (2007), United Kingdom (2004), Canada (2005) and India (2007). However, limited adjustments can be made to Federal tax returns in earlier years in order to reduce net operating loss carryforwards.

     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. The fair value of investments in marketable debt securities is determined using quoted market prices for those securities or similar financial instruments. For information related to the fair value of Ciena’s convertible notes, see Note 8 below.

     Fair value for the measurement of financial assets and liabilities is defined 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. Ciena utilizes 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.

Restructuring

     From time to time, Ciena takes actions to align its workforce, facilities and operating costs with perceived market opportunities and business conditions. Ciena implements these restructuring plans and incurs the associated liability concurrently. Generally accepted accounting principles require that a liability for the cost associated with an exit or disposal activity be recognized in the period in which the liability is incurred, except for one-time employee termination benefits related to a service period of more than 60 days, which are accrued over the service period. See Note 6 below.

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. 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’s 4.0% convertible senior notes include a redemption feature that is accounted for as a separate embedded derivative. The embedded redemption feature is recorded at fair value on a recurring basis and these changes are included in interest and other income (expense), net on the Condensed Consolidated Statement of Operations.

     Occasionally, Ciena uses foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. Historically these derivatives, designated as cash flow hedges, had maturities of less than one year and permitted 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 15 below.

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

     Ciena calculates basic earnings per share (EPS) by dividing earnings attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS includes other potential dilutive common stock that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Ciena uses a dual presentation of basic and diluted EPS on the face of its income statement. A reconciliation of the numerator and denominator used for the basic and diluted EPS computations is set forth in Note 17.

Software Development Costs

     Generally accepted accounting principles require 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 life of the product. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the period between Ciena 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.

Newly Issued Accounting Standards

     In October 2009, the Financial Accounting Standards Board, (FASB) amended the accounting standards for revenue recognition with multiple deliverables. The amended guidance allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor-specific objective evidence or third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue recognition in accounting for multiple deliverable arrangements. The guidance is effective for fiscal years beginning on or after June 15, 2010 and early adoption is permitted. Ciena is currently evaluating the impact this new guidance could have on its financial condition, results of operations and cash flows.

     In October 2009, the FASB amended the accounting standards for revenue arrangements with software elements. The amended guidance modifies the scope of the software revenue recognition guidance to exclude tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010 and early adoption is permitted. This guidance must be adopted in the same period an entity adopts the amended revenue arrangements with multiple deliverables guidance described above. Ciena is currently evaluating the impact this new guidance could have on its financial condition, results of operations and cash flows.

(3) BUSINESS COMBINATIONS

Acquisition of MEN Business

     On March 19, 2010, Ciena completed its acquisition of the MEN Business. Ciena believes that this transaction strengthens its position as a leader in next-generation, converged optical Ethernet networking and will accelerate the execution of its corporate and research and development strategies. Ciena believes that the additional geographic reach, expanded customer relationships, and broader portfolio of complementary network solutions derived from the acquisition will enable Ciena to better compete with larger equipment vendors.

     In accordance with the agreements for the acquisition, the initial $773.8 million aggregate purchase price, which was payable in cash and convertible notes, was subsequently adjusted downward by $80.6 million based upon the amount of net working capital transferred to Ciena at closing. Prior to closing, Ciena elected to replace the $239.0 million in aggregate principal of convertible notes that were to be issued to Nortel as part of the aggregate purchase price with cash equivalent to 102% of the face amount of the notes replaced, or $243.8 million. Ciena completed a private placement of 4.0% Convertible Senior Notes due March 15, 2015 in aggregate principal amount of $375.0 million which funded this election and reduced the amount of cash on hand required to fund the aggregate purchase price. See Note 16 below. As a result, the aggregate purchase price was $693.2 million consisting entirely of cash.

     Given the structure of the transaction as an asset carve-out from Nortel, Ciena expects that the transaction will result in a costly and complex integration with a number of operational risks. Ciena expects to incur approximately $180 million in costs associated with equipment and information technology, transaction expense, severance expense and consulting and third party service fees associated with the integration, with the majority of these costs to be incurred in fiscal 2010. In addition to these costs, Ciena has incurred inventory obsolescence charges and may incur additional expenses related to, among other things, facilities restructuring. As a result, the expense that Ciena incurs and recognizes for financial statement purposes will be significantly higher than the estimated costs above. As of July 31, 2010, Ciena has incurred $83.3 million in transaction, consulting and third party service fees, $4.0 million in severance expense, and an additional $10.8 million, primarily related to purchases of capitalized information technology equipment. In addition to the estimated costs above, Ciena also expects to incur significant transition services expense. Ciena is currently relying upon an affiliate of Nortel to perform certain critical operational and business support functions during an interim integration period. Ciena can utilize certain of these support services for a period of up to 24 months following the acquisition of the MEN Business, 12 months in Europe, Middle East and Africa, (EMEA). The cost of these transition services is estimated to be approximately $94 million annually. The actual expense will depend upon the scope of the services that Ciena utilizes and the time within which Ciena is able to complete the planned transfer of these services to internal resources or other third party providers.

     During fiscal 2010, Ciena adopted the new FASB guidance on business combinations. The acquisition of the MEN Business has been accounted for under the acquisition method of accounting which requires the total purchase price to be allocated to the assets acquired and liabilities assumed based on their estimated fair values. The fair values assigned to the assets acquired and liabilities assumed are based on valuations using management’s best estimates and assumptions. The allocation of the purchase price as reflected in these consolidated financial statements is based on the best information available to management at the time these consolidated financial statements were issued and is preliminary pending the completion of the valuation analysis of selected assets and liabilities. During the measurement period (which is not to exceed one-year from the acquisition date), Ciena is required to retrospectively adjust the provisional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The following table summarizes the initial measurement allocation of the purchase price, measurement period adjustments and the current measurement allocation related to the MEN Business based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):

		Initial				Measurement				Current
		Measurement				Period				Measurement
		Allocation				Adjustment				Allocation
Unbilled receivables		$	7,454			$	(271	)		$	7,183
Inventories			114,169				(107	)			114,062
Prepaid expenses and other			32,517				—				32,517
Other long-term assets			21,821				—				21,821
Equipment, furniture and fixtures			45,351				—				45,351
Developed technology			218,774				—				218,774
In-process research and development			11,000				—				11,000
Customer relationships, outstanding purchase orders and contracts			257,964				2,283				260,247
Trade name			2,000				—				2,000
Goodwill			39,991				(1,905	)			38,086
Deferred revenue			(18,801	)			—				(18,801	)
Accrued liabilities			(36,349	)			—				(36,349	)
Other long-term obligations			(2,644	)			—				(2,644	)
Total purchase price allocation		$	693,247			$	—			$	693,247

     Any additional changes in the estimated fair value of the net assets during the remaining measurement period will change the amount of the purchase price allocable to goodwill and, if material, Ciena’s consolidated financial results will be adjusted retroactively. Ciena is currently not aware of any significant potential changes to the current purchase price allocation.

     Unbilled receivables represent unbilled claims for which Ciena will invoice customers upon its completion of the acquired projects.

     Under the acquisition method of accounting, Ciena revalued the acquired finished goods inventory to fair value, which was determined to be most appropriately recognized as the estimated selling price less the sum of (a) costs of disposal, and (b) a reasonable profit allowance for Ciena’s selling effort. This revaluation resulted in an increase in inventory carrying value of approximately $39.7 million for marketable inventory offset by a decrease of $2.5 million for unmarketable inventory.

     Prepaid expenses and other include product demonstration units used to support research and development projects and indemnification assets related to uncertain tax contingencies acquired and recorded as part of other long-term obligations. Other long-term assets represent spares used to support customer maintenance commitments.

     Developed technology represents purchased technology which has reached technological feasibility and for which development had been completed as of the date of the acquisition. Developed technology will be amortized on a straight line basis over its estimated useful lives of two to seven years.

     In-process research and development represents development projects that had not reached technological feasibility at the time of the acquisition. In-process research and development assets will be impaired, if abandoned, or amortized in future periods, depending upon the ability of Ciena to use the research and development in future periods. Future expenditures to complete the in-process research and development projects will be expensed as incurred.

     Customer relationships, outstanding purchase orders and contracts represent agreements with existing customers of the MEN Business. These intangible assets are expected to have estimated useful lives of nine months to seven years, with the exception of $14.2 million related to a contract asset for acquired in-process projects which will be billed in full by Ciena and recognized as a reduction in revenue within the next year. Trade name represents acquired product trade names which are expected to have a useful life of nine months.

     Goodwill represents the purchase price in excess of the amounts assigned to acquired tangible or intangible assets and assumed liabilities. Amounts allocated to goodwill are tax deductible in all relevant jurisdictions. The goodwill is attributable to the assigned workforce of the MEN Business and the synergies expected to arise as a result of the acquisition.

     Deferred revenue represents obligations assumed by Ciena to provide maintenance support services for which payment for such services was already made to Nortel.

     Accrued liabilities represent assumed warranty obligations, other customer contract obligations, and certain employee benefit plans. Other long-term obligations represent uncertain tax contingencies.

     The following unaudited pro forma financial information summarizes the results of operations for the periods indicated as if Ciena’s acquisition of the MEN Business had been completed as of the beginning of each of the periods presented. Revenue specific to the MEN Business since the March 19, 2010 acquisition date was $275.3 million. As Ciena has begun to integrate the combined operations, eliminating overlapping processes and expenses and integrating its products and sales efforts with those of the acquired MEN Business, it is impractical to determine the earnings specific to the MEN Business since the acquisition date.

     These pro forma amounts (in thousands) do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the periods presented or that may be obtained in the future.

		Quarter Ended July 31,								Nine Months Ended July 31,
		2009				2010				2009				2010
Pro forma revenue		$	406,758			$	393,843			$	1,260,112			$	1,174,719
Pro forma net loss		$	(127,845	)		$	(77,080	)		$	(859,305	)		$	(463,150	)

(4) GOODWILL

Goodwill

     As a result of its acquisition of the MEN Business, Ciena recorded goodwill of $38.1 million. This goodwill was assigned to the Packet-Optical Transport reporting unit as that unit is expected to benefit from synergies of the combination.

     The table below sets forth changes in the carrying amount of goodwill in each of our reporting units for the period indicated (in thousands):

										Carrier
		Packet-				Packet-				Ethernet				Software
		Optical				Optical				Service				and
		Transport				Switching				Delivery				Services				Total
Balance as of October 31, 2009		$	—			$	—			$	—			$	—			$	—
Acquired			38,086				—				—				—				38,086
Balance as of July 31, 2010		$	38,086			$	—			$	—			$	—			$	38,086

     The table below sets forth changes in the 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 Julyl 31, 2009		$	—

Goodwill Impairment

     Prior to the acquisition of the MEN Business, Ciena assessed its goodwill based upon a single reporting unit and tested its single reporting unit’s goodwill for impairment annually on 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.

(5) LONG-LIVED ASSET IMPAIRMENTS

     Due to the reorganization described in Note 2 above, Ciena performed an impairment analysis of its long-lived assets during the second quarter of fiscal 2010. Based on Ciena’s estimate of future, undiscounted cash flows by asset group, no impairment was required.

(6) RESTRUCTURING COSTS

     In April 2010, Ciena committed to certain restructuring actions and subsequently effected a headcount reduction of approximately 70 employees, principally affecting Ciena’s Global Product Group and Global Field Organization outside of the EMEA region. This action resulted in a restructuring charge of $1.8 million in the second quarter of fiscal 2010 and $0.3 million in the third quarter of fiscal 2010.

     In May 2010, following the end of its fiscal second quarter, Ciena informed employees of its proposal to reorganize and restructure portions of Ciena’s business and operations in the EMEA region, which is expected to involve the elimination of 120 to 140 roles with reductions expected to principally affect employees in Ciena’s Global Field Organization and Global Supply Chain organization. Execution of any specific reorganization is subject to local legal requirements, including notification and consultation processes with employees and employee representatives. Ciena estimates completing the reorganization by the first half of calendar year 2011. Ciena expects total restructuring costs related to this action to range from $8.0 million to $10.0 million. During the third quarter of fiscal 2010, Ciena recorded expenses of $1.9 million related to the reduction in head count of approximately 26 employees in the Global Field Organization.

     The following table sets forth the activity and balance of the restructuring liability accounts for the nine months ended July 31, 2010 (in thousands):

						Consolidation
		Workforce				of excess
		reduction				facilities				Total
Balance at October 31, 2009		$	170			$	9,435			$	9,605
Additional liability recorded			3,985				—				3,985
Cash payments			(2,476	)			(2,098	)			(4,574	)
Balance at July 31, 2010		$	1,679			$	7,337			$	9,016
Current restructuring liabilities		$	1,679			$	1,342			$	3,021
Non-current restructuring liabilities		$	—			$	5,995			$	5,995

     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		$	—			$	7,570			$	7,570

(7) MARKETABLE SECURITIES

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

		July 31, 2010
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Publicly traded equity securities		$	184			$	—			$	—			$	184
		$	184			$	—			$	—			$	184
Included in short-term investments		$	184				—				—			$	184
Included in long-term investments			—				—				—				—
		$	184			$	—			$	—			$	184

		October 31, 2009
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
U.S. government obligations		$	570,505			$	460			$	2			$	570,963
Publicly traded equity securities			251				—				—				251
		$	570,756			$	460			$	2			$	571,214
Included in short-term investments			562,781				404			$	2				563,183
Included in long-term investments			7,975				56				—				8,031
		$	570,756			$	460			$	2			$	571,214

     Gross unrealized losses related to marketable debt investments, included in short-term and long-term investments, were primarily due to changes in interest rates. Ciena’s management determined that the gross unrealized losses at October 31, 2009 were temporary in nature because Ciena had the ability and intent to hold these investments until a recovery of fair value, which may be maturity. There were no gross unrealized losses at July 31, 2010. As of October 31, 2009, gross unrealized losses were as follows (in thousands):

		October 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			$	37,744			$	—			$	—			$	2			$	37,744
		$	2			$	37,744			$	—			$	—			$	2			$	37,744

(8) FAIR VALUE MEASUREMENTS

     As of the date indicated, the following table summarizes the fair value of assets that are recorded at fair value on a recurring basis (in thousands):

		July 31, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Embedded redemption feature		$	—			$	—			$	4,280			$	4,280
Publicly traded equity securities			184				—				—				184
Total assets measured at fair value		$	184			$	—			$	4,280			$	4,464

     As of the date indicated, the assets and liabilities above were presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):

		July 31, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Short-term investments		$	184			$	—			$	—			$	184
Other long-term assets			—				—				4,280				4,280
Total assets measured at fair value		$	184			$	—			$	4,280			$	4,464

     Ciena’s Level 1 asset is a corporate equity security publicly traded on a major exchange that is valued using quoted prices in active markets.

     Ciena’s Level 3 asset reflects the embedded redemption feature contained within Ciena’s 4.0% convertible senior notes. See Note 16 below. The embedded redemption feature is bifurcated from Ciena’s 4.0% convertible senior notes using the “with-and-without” approach. As such, the total value of the embedded redemption feature is calculated as the difference between the value of the 4.0% convertible senior notes (the “Hybrid Instrument”) and the value of an identical instrument without the embedded redemption feature (the “Host Instrument”). Both the Host Instrument and the Hybrid Instrument are valued using a modified binomial model. The modified binomial model utilizes a risk free interest rate, an implied volatility of Ciena’s stock, the recovery rates of bonds, and the implied default intensity of the 4.0% convertible senior notes.

     As of the dates indicated, the following table sets forth, in thousands, the reconciliation of changes in Level 3 fair value measurements:

		Level 3
Balance at October 31, 2009		$	—
Issuances			1,710
Changes in unrealized gain (loss)			2,570
Transfers into Level 3			—
Transfers out of Level 3			—
Balance at July 31, 2010		$	4,280

Fair value of outstanding convertible notes

     At July 31, 2010, the fair value of the outstanding $500.0 million of 0.875% convertible senior notes, $375.0 million of 4.0% convertible senior notes and $298.0 million of 0.25% convertible senior notes was $337.5 million, $357.4 million and $264.9 million, respectively. Fair value for the 0.875% and the 0.25% convertible senior notes is based on the quoted market price for the notes on the date above. Due to the lack of trading activity, fair value of the 4.0% convertible senior notes is based on a modified binomial model as described above.

(9) ACCOUNTS RECEIVABLE

     As of October 31, 2009, one customer accounted for 10.7% of net accounts receivable, and as of July 31, 2010, no customers accounted for greater than 10.0% 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, 2009 and July 31, 2010, allowance for doubtful accounts was $0.1 million.

(10) INVENTORIES

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

		October 31,				July 31,
		2009				2010
Raw materials		$	19,694			$	26,606
Work-in-process			1,480				6,021
Finished goods			90,914				220,044
			112,088				252,671
Provision for excess and obsolescence			(24,002	)			(30,507	)
		$	88,086			$	222,164

     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 2010, Ciena recorded a provision for excess and obsolescence of $10.7 million, primarily due to product rationalization decisions in connection with the acquisition of the MEN Business. Deductions from the provision for excess and obsolete inventory 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, 2009		$	24,002
Provision for excess for obsolescence			10,749
Actual inventory disposed			(4,244	)
Reserve balance as of July 31, 2010		$	30,507

     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 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 and obsolescence			11,126
Actual inventory disposed			(12,837	)
Reserve balance as of July 31, 2009		$	21,546

(11) PREPAID EXPENSES AND OTHER

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

		October 31,				July 31,
		2009				2010
Interest receivable		$	993			$	—
Prepaid VAT and other taxes			14,527				43,845
Deferred deployment expense			4,242				6,797
Product demonstration equipment, net			—				28,573
Prepaid expenses			8,869				16,480
Capitalized acquisition costs			12,473				—
Restricted cash			7,477				14,943
Other non-trade receivables			1,956				7,933
		$	50,537			$	118,571

     Prepaid expenses and other as of July 31, 2010 include $28.6 million related to product demonstration equipment, net acquired as part of the MEN Business. Depreciation of product demonstration equipment was $2.3 million for the first nine months of fiscal 2010. Capitalized acquisition costs at October 31, 2009 include direct costs related to Ciena’s then pending acquisition of the MEN Business. In the first quarter of fiscal 2010, Ciena adopted newly issued accounting guidance related to business combinations, which required the full amount of these capitalized acquisition costs to be expensed in the Condensed Consolidated Statement of Operations.

(12) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				July 31,
		2009				2010
Equipment, furniture and fixtures		$	293,093			$	353,752
Leasehold improvements			45,761				48,907
			338,854				402,659
Accumulated depreciation and amortization			(276,986	)			(283,904	)
		$	61,868			$	118,755

     Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements was $16.3 million and $25.8 million for the first nine months of fiscal 2009 and 2010, respectively.

(13) OTHER INTANGIBLE ASSETS

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

		October 31,												July 31,
		2009												2010
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Finite-lived intangibles:
Developed technology		$	185,833			$	(147,504	)		$	38,329			$	406,833			$	(173,694	)		$	233,139
Patents and licenses			47,370				(42,811	)			4,559				45,388				(44,868	)			520
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			60,981				(43,049	)			17,932				323,228				(97,277	)			225,951
Total finite-lived intangibles			294,184				(233,364	)			60,820				775,449				(315,839	)			459,610
Indefinite-lived intangibles:
In-process research and development			—				—				—				11,000				—				11,000
Total indefinite-lived intangibles			—				—				—				11,000				—				11,000
Total other intangible assets		$	294,184			$	(233,364	)		$	60,820			$	786,449			$	(315,839	)		$	470,610

     The amortization expense of finite-lived other intangible assets was $23.8 million and $72.6 million for the first nine months of fiscal 2009 and 2010, respectively. In addition, during the first nine months of fiscal 2010, revenue was reduced by $9.9 million related to the amortization of contract assets from the acquisition of the MEN Business. In-process research and development assets are impaired, if abandoned, or amortized in future periods, depending upon the ability of Ciena to use the research and development in future periods. See Note 3 above for information pertaining to newly acquired intangible assets related to the MEN Business. Expected future amortization of finite-lived other intangible assets for the fiscal years indicated is as follows (in thousands):

Period ended October 31,
2010 (remaining three months)		$	47,661
2011			91,373
2012			71,993
2013			69,573
2014			55,415
Thereafter			123,595
		$	459,610

(14) OTHER BALANCE SHEET DETAILS

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

		October 31,				July 31,
		2009				2010
Maintenance spares inventory, net		$	31,994			$	53,237
Restricted cash			18,792				30,172
Deferred debt issuance costs, net			12,832				20,904
Embedded redemption feature			—				4,280
Investments in privately held companies			907				907
Other			3,377				3,087
		$	67,902			$	112,587

     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 $1.7 million and $2.6 million during the first nine months of fiscal 2009 and fiscal 2010, respectively.

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

		October 31,				July 31,
		2009				2010
Warranty		$	40,196			$	64,510
Compensation, payroll related tax and benefits			20,025				29,906
Vacation			11,508				17,706
Interest payable			2,045				6,370
Other			29,575				59,935
		$	103,349			$	178,427

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

																		Balance at
Nine months ended		Beginning																end of
July 31,		Balance				Acquired				Provisions				Settlements				period
2009		$	37,258				—				13,620				(11,498	)		$	39,380
2010		$	40,196				26,000				16,388				(18,074	)		$	64,510

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

		October 31,				July 31,
		2009				2010
Products		$	11,998			$	15,132
Services			63,935				75,645
			75,933				90,777
Less current portion			(40,565	)			(58,655	)
Long-term deferred revenue		$	35,368			$	32,122

(15) FOREIGN CURRENCY FORWARD CONTRACTS

     Ciena has previously used, and may in the future use, 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. 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. As of October 31, 2009 and July 31, 2010, there were no foreign currency forward contracts outstanding and Ciena did not enter into any foreign currency forward contracts during the first nine months of fiscal 2010.

     Ciena’s foreign currency forward contracts are classified as follows (in thousands):

		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		2009				2010				2009				2010
Research and development		$	(283	)		$	—			$	21			$	—
Selling and marketing			(692	)			—				46				—
		$	(975	)		$	—			$	67			$	—

		Recognized in Other								Recognized in Other Comprehensive
		Comprehensive Income (Loss)								Income (Loss)
		Quarter Ended July 31,								Nine Months Ended July 31,
Line Item in Condensed Consolidated Balance Sheet		2009				2010				2009				2010
Accumulated other comprehensive income (loss)		$	2,904			$	—			$	1,420			$	—
		$	2,904			$	—			$	1,420			$	—

		Ineffective Portion								Ineffective Portion
Line Item in Condensed Consolidated Statement of		Quarter Ended July 31,								Nine Months Ended July 31,
Operations		2009				2010				2009				2010
Interest and other income, net		$	—			$	—			$	—			$	—
		$	—			$	—			$	—			$	—

(16) CONVERTIBLE NOTES PAYABLE

     Ciena 4.0% Convertible Senior Notes, due March 15, 2015

     On March 15, 2010, Ciena completed a private placement of 4.0% convertible senior notes due March 15, 2015, in aggregate principal amount of $375.0 million (the “Notes”). Interest is payable on the Notes on March 15 and September 15 of each year, beginning on September 15, 2010. The Notes are senior unsecured obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt.

     At the election of the holder, the Notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 49.0557 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $20.38 per share. The Notes may be redeemed by Ciena on or after March 15, 2013 if the closing sale price of Ciena’s common stock for at least 20 trading days in any 30 consecutive trading day period ending on the date one day prior to the date of the notice of redemption exceeds 150% of the conversion price. Ciena may redeem the Notes in whole or in part, at a redemption price in cash equal to the principal amount to be redeemed, plus accrued and unpaid interest, including any additional interest to, but excluding, the redemption date, plus a “make-whole premium” payment. The make whole premium payment will be made in cash and equal the present value of the remaining interest payments, to maturity, computed using a discount rate equal to 2.75%. The make-whole premium is paid to holders whether or not they convert the Notes following Ciena’s issuance of a redemption notice. For accounting purposes, this redemption feature is an embedded derivative that is not clearly and closely related to the Notes. Consequently, it was initially bifurcated from the indenture and separately recorded at its fair value as an asset with subsequent changes in fair value recorded through earnings. As of July 31, 2010, the fair value of the embedded redemption feature was $4.3 million and is included in other long-term assets on the Condensed Consolidated Balance Sheet. Since inception on March 15, 2010, the changes in fair value of the embedded redemption feature in the amount of $2.6 million were reflected as interest and other income (loss), net on the Condensed Consolidated Statement of Operations.

     The shares of common stock issuable upon conversion of the Notes have not been registered for resale on a shelf registration statement. In some instances, Ciena’s failure to timely file periodic reports with the SEC or remove restrictive legends on the Notes may require it to pay additional interest on the Notes; which will accrue at the rate of 0.50% per annum of the principal amount of Notes outstanding for each day such failure to file or to remove the restrictive legend has occurred and is continuing.

     If Ciena undergoes a “fundamental change” (as that term is defined in the indenture governing the Notes to include certain change in control transactions), holders of Notes will have the right, subject to certain exemptions, to require Ciena to purchase for cash any or all of their Notes at a price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to convert his or her Notes in connection with a specified fundamental change, in certain circumstances, Ciena will be required to increase the applicable conversion rate, depending on the price paid per share for Ciena common stock and the effective date of the fundamental change transaction.

     The indenture governing the Notes provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the Notes may declare the principal of, accrued interest on, and premium, if any, on all the Notes immediately due and payable.

     The net proceeds from the offering of the Notes were $364.3 million after deducting the placement agents’ fees and other fees and expenses. Ciena used $243.8 million of this amount to fund its payment election to replace its contractual obligation to issue convertible notes to Nortel as part of the aggregate purchase price for the acquisition of the MEN Business. The remaining proceeds were used to reduce the cash on hand required to fund the aggregate purchase price of the MEN Business. See Note 3 above.

(17) 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 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 Ciena’s outstanding convertible notes.

		Quarter Ended July 31,								Nine Months Ended July 31,
Numerator		2009				2010				2009				2010
Net loss		$	(26,454	)		$	(109,855	)		$	(554,495	)		$	(253,197	)
Add: Interest expense for 0.250% convertible senior notes			—				—				—				—
Add: Interest expense for 4.000% convertible senior notes			—				—				—				—
Add: Interest expense for 0.875% convertible senior notes			—				—				—				—
Net loss used to calculate diluted EPS		$	(26,454	)		$	(109,855	)		$	(554,495	)		$	(253,197	)

		Quarter Ended July 31,								Nine Months Ended July 31,
Denominator		2009				2010				2009				2010
Basic weighted average shares outstanding			91,364				92,906				90,970				92,851
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			—				—				—				—
Add: Shares underlying 0.250% convertible senior notes			—				—				—				—
Add: Shares underlying 4.000% convertible senior notes			—				—				—				—
Add: Shares underlying 0.875% convertible senior notes			—				—				—				—
Dilutive weighted average shares outstanding			91,364				92,906				90,970				92,851

		Quarter Ended July 31,								Nine Months Ended July 31,
EPS		2009				2010				2009				2010
Basic EPS		$	(0.29	)		$	(1.18	)		$	(6.10	)		$	(2.73	)
Diluted EPS		$	(0.29	)		$	(1.18	)		$	(6.10	)		$	(2.73	)

Explanation of Shares Excluded due to Anti-Dilutive Effect

     For the quarters and nine months ended July 31, 2009 and July 31, 2010, the weighted average number of shares underlying outstanding stock options, employee stock purchase plan options, restricted stock units, and warrants set forth in the table below are 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 outstanding convertible senior notes, are considered anti-dilutive 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,
Shares excluded from EPS Denominator due to anti-dilutive effect		2009				2010				2009				2010
Shares underlying stock options, restricted stock units and warrants			8,249				7,171				8,161				8,171
0.25% convertible senior notes			7,539				7,539				7,539				7,539
4.0% convertible senior notes			—				18,396				—				9,333
0.875% convertible senior notes			13,108				13,108				13,108				13,108
Total excluded due to anti-dilutive effect			28,896				46,214				28,808				38,151

(18) SHARE-BASED COMPENSATION EXPENSE

     Ciena grants 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. In connection with its acquisition of the MEN Business, Ciena also adopted the 2010 Inducement Equity Award Plan, pursuant to which it has made awards to eligible persons as described below.

2008 Plan

     Ciena has previously granted stock options and restricted stock units under its 2008 Plan. Pursuant to Board and stockholder approval, effective April 14, 2010, Ciena amended its 2008 Plan to (i) increase the number of shares available for issuance by five million shares; and (ii) reduce from 1.6 to 1.31 the fungible share ratio used for counting full value awards, such as restricted stock units, against the shares remaining available under the 2008 Plan. As of July 31, 2010, there were approximately 5.8 million shares authorized and remaining available for issuance under the 2008 Plan.

2010 Inducement Equity Award Plan

     On December 8, 2009, the Compensation Committee of the Board of Directors approved the 2010 Inducement Equity Award Plan (the “2010 Plan”). The 2010 Plan is intended to enhance Ciena’s ability to attract and retain certain key employees transferred to Ciena in connection with its acquisition of the MEN Business. The 2010 Plan authorizes the issuance of restricted stock or restricted stock units representing up to 2.25 million shares of Ciena common stock. Upon the March 19, 2011 termination of the 2010 Plan, any shares then remaining available shall cease to be available for issuance under the 2010 Plan or any other existing Ciena equity incentive plan. As of July 31, 2010, there were approximately 0.7 million shares authorized and available for issuance under the 2010 Plan.

     Stock Options

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

		Shares
		Underlying				Weighted
		Options				Average
		Outstanding				Exercise Price
Balance as of October 31, 2009			5,538			$	45.80
Granted			84				12.40
Exercised			(90	)			5.09
Canceled			(427	)			85.01
Balance as of July 31, 2010			5,105			$	42.68

     The total intrinsic value of options exercised during the first nine months of fiscal 2009 and fiscal 2010, was $0.5 million and $0.8 million, respectively. The weighted average fair values of each stock option granted by Ciena during the first nine months of fiscal 2009 and fiscal 2010 were $4.66 and $6.95, respectively.

     The following table summarizes information with respect to stock options outstanding at July 31, 2010, based on Ciena’s closing stock price of $13.09 per share on the last trading day of Ciena’s third fiscal quarter of 2010 (shares and intrinsic value in thousands):

									Options Outstanding at July 31, 2010																Vested Options at July 31, 2010
													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				876				6.44			$	11.10			$	2,910				633				5.53			$	11.48			$	2,177
$	16.53		–		$	17.43				518				5.23				17.21				—				483				5.02				17.21				—
$	17.44		–		$	22.96				435				4.66				21.75				—				401				4.41				21.85				—
$	22.97		–		$	31.71				1,438				4.45				29.43				—				1,313				4.18				29.54				—
$	31.72		–		$	46.90				878				5.74				39.42				—				697				5.32				39.87				—
$	46.91		–		$	73.78				439				2.33				59.62				—				439				2.33				59.62				—
$	73.79		–		$	1,046.50				521				1.13				166.31				—				521				1.13				166.31				—
$	0.01		–		$	1,046.50				5,105				4.59			$	42.68			$	2,910				4,487				4.12			$	45.41			$	2,177