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

Goodwill and Other Intangible Assets

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

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

Minority Equity Investments

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

Concentrations

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

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

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

Revenue Recognition

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

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

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

Warranty Accruals

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

Accounts Receivable, Net

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

Research and Development

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

Advertising Costs

     Ciena expenses all advertising costs as incurred.

Legal Costs

     Ciena expenses legal costs associated with litigation defense as incurred.

Share-Based Compensation Expense

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

     No tax benefits were attributed to the share-based compensation expense because a full valuation allowance was maintained for all net deferred tax assets.

Income Taxes

     Ciena adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes,” after the end of fiscal 2007. The adoption of FIN 48 resulted in Ciena’s recognition of a cumulative effect adjustment that was accounted for as an increase of $0.1 million to retained earnings, a decrease of $0.1 million to income taxes payable and the reclassification of $6.0 million from current income taxes payable to other long-term liabilities as of November 4, 2007. The total amount of unrecognized tax benefits as of the beginning of fiscal 2008 was $6.0 million, which includes $1.0 million of interest and some minor penalties. All of the unrecognized tax benefits, if recognized, would decrease the effective income tax rate. During the nine months ended July 31, 2008, there has been no significant change in the unrecognized tax benefits. Ciena has reviewed its uncertain income tax positions in accordance with FIN 48 and currently estimates no material changes in the unrecognized income tax benefits in the next twelve months.

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

     In the ordinary course of business, transactions occur for which the ultimate outcome may be uncertain. In addition, tax authorities periodically audit Ciena’s income tax returns. These audits examine significant tax filing positions, including the timing and amounts of deductions and the allocation of income tax expenses among tax jurisdictions. Ciena’s major tax jurisdictions include the United States and the United Kingdom, with open tax years beginning with fiscal year 2005 and 2002, respectively.

Loss Contingencies

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

Fair Value of Financial Instruments

     The carrying amounts of Ciena’s financial instruments, which include short-term and long-term investments in marketable debt securities, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities.

Foreign Currency Translation

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

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

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

Software Development Costs

     SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” requires the capitalization of certain software development costs incurred subsequent to the date technological feasibility is established and prior to the date the product is generally available for sale. The capitalized cost is then amortized straight-line over the estimated product life. Ciena defines technological feasibility as being attained at the time a working model is completed. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, Ciena has not capitalized any software development costs.

Segment Reporting

     SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for operating segments and requires certain disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Ciena reports its financial results as a single business segment.

Newly Issued Accounting Standards

     In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

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

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS 159 permits an entity to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Ciena is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.

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

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

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

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

     In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the accounting principles to be used. Any effect of applying the provisions of this statement will be reported as a change in accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error Corrections.” This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Ciena does not expect the adoption of this statement to have a material effect on its financial condition, results of operations and cash flows.

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

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

(3) BUSINESS COMBINATIONS

     On March 3, 2008, Ciena completed its acquisition of World Wide Packets, Inc. (“World Wide Packets” or “WWP”) pursuant to the terms of an Agreement and Plan of Merger dated January 22, 2008 (the “Merger Agreement”) by and among Ciena, World Wide Packets, Wolverine Acquisition Subsidiary, Inc., a wholly owned subsidiary of Ciena (“Merger Sub”), and Daniel Reiner, as shareholders’ representative. Pursuant to the Merger Agreement, on March 3, 2008, Merger Sub was merged with and into World Wide Packets, with World Wide Packets continuing as the surviving corporation and a wholly owned subsidiary of Ciena. World Wide Packets is a supplier of communications network equipment that enables the cost-effective delivery of a wide variety of carrier Ethernet-based services. Prior to the acquisition, World Wide Packets was a privately held company. Ciena’s results of operations for the nine months ended July 31, 2008 in this report include the operations of World Wide Packets beginning on March 3, 2008, the effective date of the acquisition.

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

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

		Amount
Cash		$	196,668
Acquisition-related costs			14,184
Value of common stock issued			62,359
Fair value of vested options assumed			9,912
Total purchase price		$	283,123

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

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

		Amount
Cash		$	836
Accounts receivable			2,052
Inventory			12,872
Equipment, furniture and fixtures			2,739
Other tangible assets			2,001
Developed technology			42,400
Covenants not to compete			3,200
Customer relationships, outstanding purchase orders and contracts			19,100
Goodwill			223,706
Accounts payable, accrued liabilities and deferred revenue			(13,420	)
Promissory notes and loans payable			(12,363	)
Total purchase price allocation		$	283,123

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

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

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

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

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

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Pro forma revenue		$	210,774			$	253,179			$	577,857			$	729,444
Pro forma net income		$	18,120			$	11,723			$	19,707			$	46,192
Pro forma basic net income per common share		$	0.21			$	0.13			$	0.22			$	0.52
Pro forma diluted net income per potential common share		$	0.19			$	0.12			$	0.22			$	0.46

(4) RESTRUCTURING COSTS

     Ciena has previously taken actions to align its workforce, facilities and operating costs with perceived market and business opportunities. Ciena historically has committed to a restructuring plan and has incurred the associated liability concurrently in accordance with the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The following table sets forth the activity and balances of the restructuring liability accounts for the 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

     The following table sets forth the activity and balances of the restructuring liability accounts for the nine months ended July 31, 2007 (in thousands):

										Consolidation
										of excess
		Workforce reduction								facilities								Total
Balance at October 31, 2006		$	—							$	35,634							$	35,634
Additional liability recorded			72		(a	)					—								72
Adjustment to previous estimates			—								(2,468	)	(b	)					(2,468	)
Cash payments			(72	)							(4,814	)							(4,886	)
Balance at July 31, 2007		$	—							$	28,352							$	28,352
Current restructuring liabilities		$	—							$	7,164							$	7,164
Non-current restructuring liabilities		$	—							$	21,188							$	21,188

(5) MARKETABLE DEBT SECURITIES

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

		July 31, 2008
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Corporate bonds		$	25,392			$	5			$	46			$	25,351
Asset backed obligations			19,121				62				8				19,175
Commercial paper			60,682				—				29				60,653
US government obligations			100,703				95				8				100,790
Certificate of deposits			7,000				4				—				7,004
		$	212,898			$	166			$	91			$	212,973
Included in short-term investments			155,786				84				52				155,818
Included in long-term investments			57,112				82				39				57,155
		$	212,898			$	166			$	91			$	212,973

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

     Estimated fair value of commercial paper at October 31, 2007 and July 31, 2008 includes investments in SIV Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007 and failed to make payment at maturity. Due to the mortgage-related assets that they hold, these entities have been exposed to adverse market conditions that have affected their collateral and their ability to access short-term funding. Based on Ciena’s assessment of fair value, as of October 31, 2007, Ciena recognized losses of $13.0 million related to these investments during the fourth quarter of fiscal 2007. Giving effect to these losses, Ciena’s investment portfolio at October 31, 2007 included an estimated fair value of $33.9 million in commercial paper issued by these entities. At July 31, 2008, based on the completed restructuring activities of these SIVs, the carrying value of the commercial paper issued was $8.4 million, with the reduction reflecting $20.4 million of cash proceeds and an additional $5.1 million recognized loss during the third quarter of fiscal 2008. Subsequent to the end of the third quarter of fiscal 2008, Ciena received additional cash proceeds totaling $8.2 million related to these SIVs.

     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, 2008 are temporary in nature because Ciena has the ability and intent to hold these investments until a recovery of fair value, which may be maturity. As of the dates indicated, gross unrealized losses were as follows (in thousands):

		July 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		$	46			$	17,509			$	—			$	—			$	46			$	17,509
Asset backed obligations			1				3,200				7				1,235				8				4,435
Commercial paper			60				170,358				—				—				60				170,358
US government obligations			8				32,761				—				—				8				32,761
Certificates of deposit			—				13,000				—				—				—				13,000
		$	115			$	236,828			$	7			$	1,235			$	122			$	238,063

		October 31, 2007
		Unrealized Losses Less								Unrealized Losses 12
		Than 12 Months								Months or Greater								Total
		Gross								Gross								Gross
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses				Fair Value
Corporate bonds		$	41			$	50,152			$	1			$	2,999			$	42			$	53,151
Asset backed obligations			7				6,140				37				22,923				44				29,063
		$	48			$	56,292			$	38			$	25,922			$	86			$	82,214

     The following table summarizes final legal maturities of debt investments at July 31, 2008 (in thousands):

		Amortized Cost				Estimated Fair Value
Less than one year		$	289,609			$	289,561
Due in 1-2 years			66,425				66,463
Due in 2-3 years			10,678				10,731
		$	366,712			$	366,755

(6) ACCOUNTS RECEIVABLE

     As of July 31, 2008, three customers accounted for 28.5%, 15.1% and 14.7% of net accounts receivable, respectively. As of October 31, 2007, one customer accounted for 40.1% of net accounts receivable.

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

(7) INVENTORIES

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

		October 31,				July 31,
		2007				2008
Raw materials		$	28,611			$	20,088
Work-in-process			4,123				2,257
Finished goods			96,054				106,918
			128,788				129,263
Provision for excess and obsolescence			(26,170	)			(22,920	)
		$	102,618			$	106,343

     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. During the first 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 for balance as of October 31, 2007		$	26,170
Provision for excess inventory			13,841
Actual inventory disposed			(17,091	)
Reserve balance as of July 31, 2008		$	22,920

     During the first nine months of fiscal 2007, Ciena recorded a provision for excess and obsolete inventory of $8.9 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
Balance as of October 31, 2006		$	22,326
Provision for excess inventory, net			8,860
Actual inventory disposed			(7,055	)
Balance as of July 31, 2007		$	24,131

(8) PREPAID EXPENSES AND OTHER

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

		October 31,				July 31,
		2007				2008
Interest receivable		$	4,981			$	1,191
Prepaid VAT and other taxes			18,092				17,072
Deferred deployment expense			6,237				6,050
Prepaid expenses			10,724				12,700
Restricted cash			3,994				248
Other non-trade receivables			3,789				1,363
		$	47,817			$	38,624

(9) EQUIPMENT, FURNITURE AND FIXTURES

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

		October 31,				July 31,
		2007				2008
Equipment, furniture and fixtures		$	269,534			$	287,189
Leasehold improvements			37,249				41,300
			306,783				328,489
Accumulated depreciation and amortization			(260,112	)			(269,766	)
		$	46,671			$	58,723

(10) OTHER INTANGIBLE ASSETS

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

		October 31,												July 31,
		2007												2008
		Gross				Accumulated				Net				Gross				Accumulated				Net
		Intangible				Amortization				Intangible				Intangible				Amortization				Intangible
Developed technology		$	145,073			$	(104,822	)		$	40,251			$	187,473			$	(123,563	)		$	63,910
Patents and licenses			47,370				(31,708	)			15,662				47,370				(36,391	)			10,979
Customer relationships, covenants not to compete, outstanding purchase orders and contracts			45,981				(34,750	)			11,231				68,281				(40,908	)			27,373
		$	238,424							$	67,144			$	303,124							$	102,262

     The aggregate amortization expense of other intangible assets was $7.3 million and $10.7 million for the quarters ended July 31, 2007 and 2008, respectively. The aggregate amortization expense of other intangible assets was $21.8 million and $27.9 million for the first nine months of fiscal 2007 and 2008, respectively. During fiscal 2008, developed technology increased by $42.4 million and customer relationships, covenants not to compete, outstanding purchase order and contracts increased by $22.3 million due to Ciena’s acquisition of World Wide Packets. See Note 3 above. Accumulated amortization at July 31, 2008 reflects a $1.6 million decrease due to the release of valuation allowance of deferred tax assets from prior acquisitions. Expected future amortization of other intangible assets for the fiscal years indicated is as follows (in thousands):

Period ended October 31,
2008 (remaining three months)		$	10,014
2009			31,228
2010			28,073
2011			13,852
2012			9,473
Thereafter			9,622
		$	102,262

(11) OTHER BALANCE SHEET DETAILS

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

		October 31,				July 31,
		2007				2008
Maintenance spares inventory, net		$	20,816			$	27,818
Deferred debt issuance costs			18,059				15,737
Investments in privately held companies			6,671				6,671
Restricted cash			19,499				21,825
Other			2,693				3,757
		$	67,738			$	75,808

     Deferred debt issuance costs are amortized using the straight line method which approximates the effect of the effective interest rate method. Amortization of debt issuance costs, which is included in interest expense, was $2.8 million and $2.3 million during the first nine months of fiscal 2007 and fiscal 2008, respectively.

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

		October 31,				July 31,
		2007				2008
Warranty		$	33,580			$	36,362
Accrued compensation, payroll related tax and benefits			32,053				34,236
Accrued interest payable			6,998				781
Other			18,291				19,498
		$	90,922			$	90,877

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

Nine months ended		Beginning												Balance at
July 31,		Balance				Provisions				Settlements				end of period
2007		$	31,751				8,910				(8,126	)			$  32,535
2008		$	33,580				11,234				(8,452	)			$  36,362

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

		October 31,				July 31,
		2007				2008
Products		$	13,208			$	12,441
Services			50,432				63,924
			63,640				76,365
Less current portion			(33,025	)			(37,896	)
Long-term deferred revenue		$	30,615			$	38,469

(12) CONVERTIBLE NOTES PAYABLE

Ciena 3.75% Convertible Notes, due February 1, 2008

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

0.25% Convertible Senior Notes due May 1, 2013

     On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggregate principal amount of $300.0 million. Interest is payable on May 1 and November 1 of each year. The notes are senior unsecured obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt.

     At the election of the holder, notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of $39.5255 per share. The notes may not be redeemed by Ciena prior to May 5, 2009. At any time on or after May 5, 2009, if the closing sale price of Ciena’s common stock for at least 20 trading days in any 30 consecutive trading day period ending on the date one day prior to the date of the notice of redemption exceeds 130% of the conversion price, Ciena may redeem the notes in whole or in part, at a redemption price in cash equal to the principal amount to be redeemed, plus accrued and unpaid interest.

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

     Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call spread option on its common stock that is intended to limit exposure to potential dilution from the conversion of the notes. See Note 14 below for a description of this call spread option.

     The fair value of the outstanding $300.0 million in aggregate principal amount of 0.25% convertible senior notes was $234.8 million, based on the quoted market price for the notes on the last trading day of Ciena’s third quarter of fiscal 2008.

0.875% Convertible Senior Notes due June 15, 2017

     On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and December 15 of each year. The notes are senior unsecured obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt.

     At the election of the holder, notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not redeemable by Ciena prior to maturity.

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

     Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call spread option on its common stock that is intended to limit exposure to potential dilution from conversion of the notes. See Note 14 below for a description of this call spread option.

     The fair value of the outstanding $500.0 million in aggregate principal amount of 0.875% convertible senior notes was $389.5 million, based on the quoted market price for the notes on the last trading day of Ciena’s third quarter of fiscal 2008.

(13) INCOME PER SHARE CALCULATION

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

Numerator

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Net income		$	28,312			$	11,723			$	52,378			$	64,290
Add: Interest expense for 0.25% convertible senior notes			469				467				1,408				1,408
Add: Interest expense for 0.875% convertible senior notes			783				1,388				783				4,123
Net income used to calculate Diluted EPS		$	29,564			$	13,578			$	54,569			$	69,821

Denominator

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Basic weighted average shares outstanding			85,651				90,216				85,268				88,871
Add: Shares underlying outstanding stock options, employees stock purchase plan options, warrants and restricted stock units			1,482				767				1,066				1,085
Add: Shares underlying 0.25% convertible senior notes			7,590				7,590				7,590				7,590
Add: Shares underlying 0.875% convertible senior notes			6,845				13,108				2,265				13,108
Dilutive weighted average shares outstanding			101,568				111,681				96,189				110,654

EPS

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Basic EPS		$	0.33			$	0.13			$	0.61			$	0.72
Diluted EPS		$	0.29			$	0.12			$	0.57			$	0.63

Explanation of Shares Excluded due to Anti-Dilutive Effect

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

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

Shares excluded from EPS Denominator due to anti-dilutive effect

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Shares underlying stock options, restricted stock units and warrants			3,087				5,484				4,114				4,816
3.75% convertible notes			742				—				742				243
Total excluded due to anti-dilutive effect			3,829				5,484				4,856				5,059

(14) STOCKHOLDERS’ EQUITY

Call Spread Option

     Ciena holds two call spread options on its common stock relating to the shares issuable upon conversion of two issues of its convertible notes. These call spread options are designed to mitigate exposure to potential dilution from the conversion of the notes. Ciena purchased a call spread option relating to the 0.25% Convertible Senior Notes due May 1, 2013 for $28.5 million during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the 0.875% Convertible Senior Notes due June 15, 2017 for $42.5 million during the third quarter of fiscal 2007. In each case, the call spread options were purchased at the time of the notes offering from an affiliate of the underwriter. The cost of each call spread option was recorded as a reduction in paid-in capital. For deductions associated with Ciena’s equity compensation, credits to paid-in capital will be recorded when those tax benefits are used to reduce taxes payable.

     Each call spread option is exercisable, upon maturity of the relevant issue of convertible notes, for such number of shares of Ciena common stock issuable upon conversion of that series of notes in full. Each call spread option has a “lower strike price” equal to the conversion price for the notes and a “higher strike price” that serves to cap the amount of dilution protection provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net share basis. The value of the consideration of a net share settlement will be equal to the value upon a net cash settlement and can range from $0, if the market price per share of Ciena common stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million (in the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or above the higher strike price. If the market price on the date of exercise is between the lower strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive the full number of shares underlying the call spread option by paying the aggregate option exercise price, which is equal to the original principal outstanding on that series of notes. Should there be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena will depend upon the existing overall market conditions, and on Ciena’s stock price, the volatility of Ciena’s stock and the remaining term of the call spread option. The number of shares subject to the call spread options and the lower and higher strike prices are subject to customary adjustments.

(15) SHARE-BASED COMPENSATION EXPENSE

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

Ciena Corporation 2008 Omnibus Incentive Plan

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

     The 2008 Plan authorizes the issuance of awards including stock options, restricted stock units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena. Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad discretion to establish the terms and conditions for awards under the 2008 Plan, including the number of shares, vesting conditions and the required service or performance criteria. Options and SARs have a maximum term of ten years and their exercise price may not be less than 100% of fair market value on the date of grant. Repricing of stock options and SARs is prohibited without shareholder approval. Each share subject to an award other than stock options or SARs will reduce the number of shares available for issuance under the 2008 Plan by 1.6 shares. Certain change in control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are continued or substituted for in connection with the transaction. As of July 31, 2008, there were 7.8 million shares authorized and available for issuance under the 2008 Plan.

     Stock Options

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

						Weighted
		Options				Average
		Outstanding				Exercise Price
Balance as of October 31, 2007			5,871				53.67
Granted			607				32.32
Assumed			934				7.50
Exercised			(617	)			7.46
Canceled			(331	)			55.99
Balance as of July 31, 2008			6,464			$	49.28

     The total intrinsic value of options exercised during the first nine months of fiscal 2007 and fiscal 2008, was $9.1 million and $14.2 million, respectively. The weighted average fair value of each stock option granted by Ciena in the first nine months of fiscal 2007 and 2008 was $16.31 and $16.24, respectively.

     The following table summarizes information with respect to stock options outstanding at July 31, 2008, based on Ciena’s closing stock price of $19.89 per share on the last trading day of Ciena’s third quarter of fiscal 2008 (shares and intrinsic value in thousands):

		Options Outstanding at July 31, 2008																Vested Options at July 31, 2008
						Weighted																Weighted
						Average																Average
						Remaining				Weighted												Remaining				Weighted
Range of		Number				Contractual				Average				Aggregate				Number				Contractual				Average				Aggregate
Exercise		of				Life				Exercise				Intrinsic				of				Life				Exercise				Intrinsic
Price		Shares				(Years)				Price				Value				Shares				(Years)				Price				Value
$       0.01 - $          16.52			868				7.19			$	9.65			$	8,893				462				6.69			$	10.77			$	4,215
$     16.53 - $          17.43			550				6.81				17.21				1,477				390				6.69				17.15				1,069
$     17.44 - $          22.96			524				6.58				21.91				41				429				5.98				21.98				35
$     22.97 - $          31.71			1,719				6.43				29.44				—				1,166				5.25				30.07				—
$     31.72 - $          46.97			1,127				7.37				39.38				—				594				5.63				40.69				—
$     46.98 - $          83.13			707				3.68				60.23				—				707				3.68				60.23				—
$     83.14 - $     1,046.50			969				2.51				156.50				—				969				2.51				156.50				—
$       0.01 - $     1,046.50			6,464				5.85			$	49.28			$	10,411				4,717				4.82			$	58.21			$	5,319

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

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

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Expected volatility			55.8	%			53.0	%			55.8	%			53.0	%
Risk-free interest rate			4.8% - 5.1	%			3.4% - 3.7	%			4.4% - 5.1	%			2.7% - 3.7	%
Expected life (years)			6.0 - 6.1				5.1 - 5.3				6.0 -6.1				5.1 - 5.3
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%

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

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

     The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. Because Ciena considered its options to be “plain vanilla,” it calculated the expected term using the simplified method as prescribed in SAB 107 for fiscal 2007. Under SAB 107, options are considered to be “plain vanilla” if they have the following basic characteristics: they are granted “at-the-money”; exercisability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; there is a limited exercise period following termination of service; and the options are non-transferable and non-hedgeable. Beginning in fiscal 2008, as prescribed by SAB 107, Ciena gathered more detailed historical information about specific exercise behavior of its grantees, which it used to determine the expected term.

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

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

     Restricted Stock Units

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

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

						Weighted
						Average
		Restricted				Grant Date				Aggregate
		Stock Units				Fair Value				Intrinsic
		Outstanding				Per Share				Value
Balance as of October 31, 2007			1,135			$	27.94			$	53,236
Granted			1,337
Vested			(424	)
Canceled or forfeited			(94	)
Balance as of July 31, 2008			1,954			$	31.33			$	38,871

     The total fair value of restricted stock units that vested and were converted into common stock during the first nine months of fiscal 2007 and fiscal 2008 was $4.5 million, and $13.6 million, respectively. The weighted average fair value of each restricted stock unit granted by Ciena in the first nine months of fiscal 2007 and 2008 was $27.86 and $33.37, respectively.

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

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

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

2003 Employee Stock Purchase Plan

     In March 2003, Ciena shareholders approved the 2003 Employee Stock Purchase Plan (the “ESPP”), which has a ten-year term. At the 2005 annual meeting, Ciena shareholders approved an amendment increasing the number of shares available to 3.6 million and adopting an “evergreen” provision. On December 31 of each year, the number of shares available under the ESPP will increase by up to 0.6 million shares, provided that the total number of shares available shall not exceed 3.6 million. Pursuant to the evergreen provision, the maximum number of shares that may be added to the ESPP during the remainder of its ten-year term is 2.9 million.

     Under the ESPP, eligible employees may enroll in an offer period during certain open enrollment periods. New offer periods begin March 16 and September 16 of each year.

     Prior to the offer period commencing September 15, 2006, (i) each offer period consisted of four six-month purchase periods during which employee payroll deductions were accumulated and used to purchase shares of common stock; and (ii) the purchase price of the shares was 15% less than the fair market value on either the first day of an offer period or the last day of a purchase period, whichever was lower. In addition, if the fair market value on the purchase date was less than the fair market value on the first day of an offer period, then participants automatically commenced a new offer period.

     On May 30, 2006, the Compensation Committee amended the ESPP, effective September 15, 2006, to shorten the offer period under the ESPP to six months. As a result of this change, the offer period and any purchase period will be the same six-month period. Under the amended ESPP, the applicable purchase price equals 95% of the fair market value of Ciena common stock on the last day of each purchase period. The following table is a summary of ESPP activity for the periods indicated (shares and fair value in thousands):

		ESPP shares available				Intrinisic value at
		for issuance				exercise date
Balance as of October 31, 2007			3,383
Evergreen provision			188
Issued March 15, 2008			(38	)			$  99
Balance as of July 31, 2008			3,533

     The amendments to the ESPP for offer periods on or after September 15, 2006 were intended to enable the ESPP to be considered a non-compensatory plan under FAS 123(R) for future offering periods. For offer periods that commenced prior to September 15, 2006, however, fair value is determined as of the grant date, using the graded vesting approach. Under the graded vesting approach, the 24-month ESPP offer period, which consists of four six-month purchase periods, is treated for valuation purpose as four separate option tranches with individual lives of six, 12, 18 and 24 months, each commencing on the initial grant date. Each tranche is expensed straight-line over its individual life. The final offer period prior to September 15, 2006 was completed during the second quarter of fiscal 2008.

Share-Based Compensation Recognized under SFAS 123(R)

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

		Quarter Ended July 31,								Nine Months Ended July 31,
		2007				2008				2007				2008
Product costs		$	131			$	1,042			$	714			$	2,349
Service costs			225				404				703				1,042
Stock-based compensation expense included in cost of sales			356				1,446				1,417				3,391
Research and development			985				2,198				2,813				5,661
Sales and marketing			1,898				2,930				4,804				8,416
General and administrative			1,724				2,343				4,616				6,785
Stock-based compensation expense included in operating expense			4,607				7,471				12,233				20,862
Stock-based compensation expense capitalized in inventory, net			358				(263	)			608				153
Total stock-based compensation		$	5,321			$	8,654			$	14,258			$	24,406