UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended October 31, 2003

OR

For the transition period from .......................to................................

CIENA CORPORATION

(410) 865-8500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

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 x NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO o

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $2,287,132,422, based on the closing price of the Common Stock on the Nasdaq Stock Market on May 2, 2003.

The number of shares of Registrant’s Common Stock, par value $0.01 outstanding as of December 9, 2003 was 473,795,871.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2004 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.

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PART I

     The information in this Form 10-K contains certain forward-looking statements, including statements related to markets for the Company’s products and trends in its business that involve risks and uncertainties. The Company’s actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors” and “Business” as well as those discussed elsewhere in this Form 10-K.

Item 1. Business

GENERAL

Overview

     CIENA is a leading global provider of innovative network solutions to telecommunications service providers and enterprises worldwide. Our customers include long distance carriers, local exchange carriers, cable operators, Internet service providers, wireless and wholesale carriers, resellers, governments, large businesses and non-profit institutions.

     CIENA was incorporated in Delaware in November 1992, and we completed our initial public offering on February 7, 1997. CIENA’s principal executive offices are located at 1201 Winterson Road, Linthicum, Maryland 21090. Our telephone number is (410) 865-8500, and our web site address is www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available free of charge on our web site as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission.

     In fiscal 2001, CIENA’s annual revenue reached $1.6 billion, based largely on the success of a single product line, long-distance optical transport. In early 2001, the telecommunications industry began a severe decline, which has affected almost all of its participants, including equipment suppliers like CIENA. This decline caused the market for networking equipment to shrink substantially, with a resulting adverse impact on our revenue and profitability. In response, we embarked upon a strategy designed to increase our addressable market through a combination of internal development, acquisitions and strategic alliances. Since 2001, we have entered new markets by expanding our network solution offerings and worked to increase our market share by adding new features to our existing products. We also have taken steps to expand our sales channels beyond direct sales to service providers, developing a growing number of partnerships and other strategic relationships that target enterprise and government customers. We plan to continue this strategy, with particular emphasis on offering products to enable delivery of data communications services, because we expect a large portion of capital spending to occur in this area over the next few years. In general, our intent is to continue to evolve from a vendor of optical networking equipment into a strategic provider of networking solutions.

     During fiscal 2003, as part of our efforts to implement our strategy, we completed the acquisitions of WaveSmith Networks, Inc. and Akara Corporation. WaveSmith was a privately held corporation offering a multi-service switching product designed to be deployed at the edge of carrier networks. Akara was a privately held corporation providing SONET/SDH-based extended storage solutions.

     CIENA had revenue of $283 million for its fiscal year ended October 31, 2003, a decrease of 22% when compared with fiscal 2002 revenue of $361 million. CIENA recorded a net loss of $387 million in fiscal 2003 compared with a net loss of $1.6 billion for fiscal 2002. For the fiscal year ended October 31, 2003, CIENA recorded revenue from sales to a total of 110 customers. This represents an increase of more than 42% over 2002’s customer base of 77. During fiscal 2003, AT&T and Qwest each represented more than 10% of CIENA’s total revenue.

     Over the last two years, in parallel with the steps to increase our addressable market, we have also executed a program to reduce and restructure our costs, aligning them better with our market opportunities and changing product mix. Since the fourth quarter of fiscal 2001, we have reduced our quarterly research and development, selling and marketing, and general and administrative expenses (exclusive of deferred stock compensation) by 37%, from $127.2 million to $79.9 million. Consistent with our overall strategy, we plan to reduce these expenses further in fiscal 2004, in order to strike an appropriate balance between ongoing strategic investment in our business and careful expense control and prudent cash management.

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     The matters discussed in this section should be read in conjunction with the Consolidated Financial Statements found under Part II, Item 8 of this Annual Report on Form 10-K.

INDUSTRY BACKGROUND

General

     Deregulation in the United States and privatization in many other countries during the 1990’s began a transition from a telecommunications industry characterized by a small number of heavily regulated large service providers to one in which numerous new competitors began to emerge. Rapid traffic growth and readily available capital further fueled the growth in the number of service providers, as emerging carriers built networks and fought to take market share from the incumbent carriers. The rapid adoption of the Internet prompted service providers and enterprises to construct large-scale data networks as overlays to existing legacy voice networks. During this time, CIENA’s revenue grew to $1.6 billion in fiscal 2001, predominantly from the sale of a single product category, long-distance optical transport equipment.

     Beginning in late 2000, capital markets tightened. Service providers responded by curtailing network build-outs and dramatically reducing their overall capital spending, significantly affecting the revenue and profitability of equipment providers like CIENA. In addition, many carriers found that they had built networks in anticipation of demand that failed to materialize, and the industry, as a whole, faced a market in which there was significant over capacity. Some carriers, with inadequate revenue and no access to additional capital, failed. Others reorganized or are still in the process of working through restructurings, leading to a climate of uncertainty.

     After several years of significantly lower capital spending, most service providers’ operating costs remain high while their revenue is growing slowly, if at all. In the United States, the incumbent local exchange carriers (ILECs) are losing revenue to wireless and cable substitution, and interexchange carriers (IXCs) are losing long-distance revenue to ILECs and wireless carriers. Overseas, incumbent carriers, mostly former post, telephone and telegraph enterprise (PTTs), are experiencing intense price pressure from new players in the their respective markets. As a result of this environment, we expect most service providers to strive to hold aggregate capital spending flat for the next several years and focus on reducing overall network ownership costs and on generating new, higher margin data services.

The Data Challenge

     Currently, the major challenge service providers face is evolving their networks to process efficiently and deliver profitably a growing range of data services. The networks of most ILECs, IXCs and PTTs were designed to carry voice traffic and to deliver voice services. As the demand for data services grew, these carriers built separate data networks and operated them concurrently with their existing voice networks. Revenue from data services continues to grow, but in most cases not nearly as fast as data traffic. It is estimated that in 1999 data services represented 13% of network traffic and accounted for 13% of revenue. In contrast, analysts estimate data services will represent 54% of network traffic in 2004 but will generate only 16% of revenue. Moreover, data services are, in general, less profitable than traditional voice services.

     With data surpassing voice as the dominant network traffic but lagging in terms of profitability, carriers are looking for more cost-effective and efficient ways to deliver the range of voice and data services that their customers are demanding. Most have concluded that the only way to offer advanced voice, data, video and other services profitably is to consolidate their separate voice and data networks onto a single converged network, one that is capable of delivering multiple services over a single infrastructure.

     While this vision of eventual network convergence is widely shared, there are divergent perceptions regarding how it will come about. Some equipment vendors envision that the converged network will be based on a completely new network infrastructure. We believe, however, that the transition to a converged all-service network will be an evolutionary process, one in which carriers will leverage their existing network investment. The majority of our strategic initiatives, partnerships and investments are intended to capitalize on this evolution.

STRATEGY

     In fiscal 2001, nearly 80% of CIENA’s revenue came from a single product category, long-haul optical transport.

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Since then, through internal development, acquisition and partnerships, we have significantly diversified our product portfolio and with it, our customer base. Our strategy is based on leveraging our key strengths to capitalize on service providers’ focus on operational savings and on their move toward converged voice and data networks. We see these strengths as:

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A solid base of major customers;

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A position as an industry technology leader; and

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Our experience in successfully introducing economically-driven network innovation.

     Since the decline in the telecommunications equipment market began, our strategy has been to enhance our competitive position by continuing to invest in our business. This strategy entails taking steps to:

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Expand our addressable market by adding new data-focused products to our portfolio through internal development, acquisition and partnerships.

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Increase our market share within our existing markets by enhancing the features and functions of current products and focusing on product cost reductions.

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Expand our customer base by directing increased sales efforts toward incumbent carriers, developing new sales channels and increasing our sales efforts with enterprises and government customers.

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Increase sales to existing customers by leveraging our new features, products and partnerships to establish CIENA as a strategic and attractive supplier.

     We believe restoring sustained profitability to CIENA requires simultaneous revenue growth and an internal transformation of our business and processes. Our efforts toward this transformation are well underway and will continue. They include:

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Balancing continued strategic investment with careful cost control and prudent cash management;

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Closely aligning investment with opportunity;

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Reducing costs through outsourcing;

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Improving gross margin by adding products with higher software content to the product portfolio;

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Expanding our service offerings and delivering them more profitably;

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Managing our cash prudently; and

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Modifying our business processes to match the demands of our evolving customer base and product portfolio.

CIENA’S SOLUTIONS

     CIENA’s solutions harness innovation to deliver improved network economics. Our intelligent networking solutions are designed to enable service providers to transition from inefficient, legacy, voice-centric networks to more efficient, data-friendly networks. CIENA’s systems and their intelligent networking software address the network scalability and capital spending challenges and the escalating operational costs faced by service providers.

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CIENA’s equipment can replace multiple legacy network elements with fewer, more intelligent network elements, thereby simplifying the network and lowering carriers’ initial capital costs and ongoing operating expenses.

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The software functionality of CIENA’s equipment creates a network environment in which distributed intelligence – intelligence at the network element level – takes the place of centralized network intelligence. As a result, CIENA networks can “think” for themselves, making dynamic decisions without human intervention thereby facilitating provisioning and protection capabilities and lowering associated operating costs.

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CIENA’s equipment is designed to reduce network operating costs by enabling carriers to manage network traffic and network bandwidth more efficiently.

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CIENA’s equipment is designed to enable carriers to shorten the time it takes to provision services, in some cases from months to nearly real-time, thereby accelerating revenue generation.

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In addition to capital and operational cost savings, CIENA’s equipment and network management software is designed to enable carriers to offer new, revenue-generating and service-differentiating services.

     Our networking product portfolio, which is targeted at the critical areas of our customers’ networks, includes the following solutions:

Core Networking

     CIENA’s suite of core networking systems helps service providers extract maximum value from their current SONET/SDH network architectures, while minimizing the risk and cost of integrating new services. Our solutions offer the switching functionality and long-haul transport capabilities service providers need to enable the creation of new carrier-class data services.

     Core Transport

     CIENA’s core transport solutions provide a flexible platform with a menu of options that allows service providers to cost-effectively implement long-haul and ultra long-haul dense wavelength division multiplexing (DWDM) applications within a single platform. The core transport family features the following products:

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CoreStream™ Long-Haul Optical Transmission System

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MultiWave Sentry® 4000 Transport System

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MultiWave Sentry® 1600 Transport System

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CoreStream™ System Optical Add/Drop Multiplexers (OADMs)

     Core Switching

     CIENA’s core switching solutions support differentiable carrier service offerings by combining, in a single combined switching and transport platform, many different protection options and flexible bandwidth management capabilities. The core switching family features the CoreDirector® family of intelligent optical core switches.

Metropolitan Networking

     CIENA’s suite of metropolitan networking systems helps service providers and enterprises collapse and streamline multiple layers of the network to deliver efficient networking across the metropolitan area for data voice and video services.

     Metropolitan Transport

     CIENA’s metropolitan transport solutions target both service provider and enterprise requirements.

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ONLINE Metro™ Multiservice DWDM Transport Platform provides customers a variety of managed services over a single optical infrastructure

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ONLINE Edge™ Multiservice CWDM Platform provides a platform to offer high-bandwidth services over a single optical infrastructure

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CN 2000™ Storage Extension Platform Customer premise device for extending data and storage applications over distance to meet business continuance/disaster recovery goals

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MultiWave Metro® Transmission System DWDM optical transport system designed for use in metropolitan ring applications

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MultiWave Metro One™ Transmission System Part of the MultiWave Metro™ family of DWDM optical networking systems designed for customer premise applications

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     Metropolitan Switching

     CIENA’s metropolitan switching solution, the MetroDirector K2™ Multiservice Platform, provides a platform to aggregate, groom and add or drop services to maximize bandwidth efficiency throughout a carrier’s metro network - from access to core. The MetroDirector K2 offers a comprehensive package of options to support TDM, ATM, and Ethernet switching capabilities, which help enterprise and service providers generate revenue from traditional private line services. It also enables new revenue streams from emerging switched data services.

Multiservice Networking

     CIENA delivers market-leading platforms for metropolitan network multiservice aggregation. CIENA’s DN multiservice edge switching platform enhances bandwidth efficiency, provisioning, and scalability by converging traditional and emerging data services such as ATM, DSL, Frame Relay, TDM/CES, and IP/MPLS in the network core and at the edge. The platform also offers a safe migration path to IP/MPLS, while simultaneously supporting existing legacy services.

LightWorks ON-Center® Management Suite

     CIENA’s next-generation intelligent optical network management system allows service providers to rapidly provision and continuously monitor new revenue generating optical services, while increasing the efficiency of existing or new networks. The management suite consists of an integrated network manager, a service layer management tool, element management systems for each product and planning tools.

Partnerships

     In addition to those products developed internally or added through acquisition, CIENA has executed reseller agreements with both Laurel Networks and Luminous Networks. Under the agreement with Laurel, which is exclusive as to certain designated customers, CIENA markets, sells and supports Laurel Networks’ ST200™ Service Edge Router to service providers worldwide. Under the agreement with Luminous, CIENA markets, sells and supports Luminous Networks’ entire PacketWave™ family of products.

Services

     CIENA provides a comprehensive portfolio of service and support offerings for its products. Our offerings include:

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Deployment services including network design, product installation, network integration testing and acceptance testing;

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Maintenance services including parts exchange, engineering dispatch, advanced technical support and hardware and software warranty extensions; and

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Training and documentation services including product training, service partner training and documentation services.

PRODUCT DEVELOPMENT

     We believe that to be successful, we must continue to enhance our existing products, maintain our technological competitiveness and develop new products that meet our customers’ evolving needs. As a result, CIENA has continued to pursue strategic investment in our products and their feature sets despite the downturn in the communications industry. Research and development expenses (exclusive of stock compensation cost of $12.8, $15.7 and $17.8 million) were $199.7 million, $239.6 million and $235.8 million for fiscal 2003, 2002 and 2001, respectively. For more information regarding our research and development expenses, see Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

     We plan to continue to make investments in research and development on enhancements of our existing products that we believe will enable service providers and enterprises to increase revenue or improve operating costs. We also have engineering efforts underway focused on cost reductions for our products. In addition, we plan to continue to invest in the development of new products, especially products that operate at the edge of the network and products that enable sophisticated services beyond transport and switching.

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     Our product development process is driven by market demand and a close collaboration among our marketing, sales and product development organizations. We also incorporate feedback from our customers in the product development process. In some cases, we will work with and invest in partners to develop new or modify existing products. In addition, we participate in industry and standards organizations where appropriate and incorporate information from these contacts throughout the product development process.

MARKETING AND DISTRIBUTION

     We are focused on selling our innovative network solutions by building long-term relationships with service providers, enterprises, governments and other customers through our direct sales efforts and channel partnerships. We maintain a direct sales presence in locations throughout the United States, Latin America, Canada, Europe and Asia. Through these offices we sell and support our network solutions to service provider, enterprise and government customers. We also maintain a channel program with a dedicated team that works with resellers, systems integrators and service providers to sell and market our solutions to service providers, enterprises and governments.

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

MANUFACTURING

     CIENA relies on contract manufacturers to assemble and test most of its products. We work closely with these manufacturers to manage quality, cost and delivery times. We continue to perform much of the assembly and testing of our core transport products, but outsource all of the printed circuit board assembly and some of the optical assembly and module functional testing. We manufacture in-house all the in-fiber Bragg gratings used in our core transport products. All products undergo a final system test performed by us in our Maryland facility. We will continue to evaluate the extent to which third party manufacturers can do even more of our manufacturing and testing on a reliable and cost-effective basis.

COMPETITION

     Competition in the telecommunications equipment industry is intense, and became increasingly so as the market for communications networking equipment declined. CIENA’s competition is dominated by a small number of very large, usually multi-national, vertically integrated companies. Each of which has substantially greater financial, technical and marketing resources, and greater manufacturing capacity as well as better established relationships with the incumbent carriers than CIENA. Included among CIENA’s competitors are: Alcatel, Cisco Systems, Inc. (“Cisco”), Fujitsu Group (“Fujitsu”), Hitachi Ltd. (“Hitachi”), Huawei Technologies Co. Ltd (“Huawei”), Lucent Technologies Inc. (“Lucent”), Marconi Corporation (“Marconi”), NEC Corporation (“NEC”), Nortel Networks (“Nortel”), Siemens AG (“Siemens”), Telefon AB LM Ericsson (“Ericsson”), and Tellabs, Inc. (“Tellabs”). There are also several smaller, but established companies, such as ADVA AG Optical Networking, and Sycamore Networks, Inc., that offer one or more products that compete directly or indirectly with our offerings. In addition, there are a variety of earlier-stage companies with products targeted at the communications networking market in some stage of development or deployment, most of them employing advanced technology that could offer advantages over products offered by CIENA.

PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS

     As of November 30, 2003, CIENA had received 154 United States patents and had pending 260 U.S. patent applications. We also have a number of foreign patents and patent applications. Of the United States patents that have been issued to CIENA, the earliest any will expire is 2015. In addition, CIENA has licensed patents from third parties. CIENA also licenses from third parties certain software components for its network management products. These licenses are perpetual but will generally terminate after an uncured breach of the agreement by CIENA. CIENA also relies on contractual rights, trade secrets and copyrights to establish and protect its proprietary rights in its products.

     CIENA enforces its intellectual property rights vigorously against infringement or misappropriation. CIENA’s practice is to require its employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements with CIENA. These agreements acknowledge CIENA’s exclusive ownership of all intellectual property developed by the individual during the course of his or her work with CIENA, and require that all proprietary information disclosed to the individual will remain confidential. CIENA’s employees generally also sign agreements not to compete, in jurisdictions where these agreements are enforceable, with CIENA for a period of twelve months following any termination of employment.

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     We are currently engaged in two patent lawsuits. See Item 3. “Legal Proceedings.” In addition, parties who claim that we may be infringing one or more of their patents approach us from time to time demanding that we take a license from them. We are currently engaged in several discussions regarding such assertions. As part of a settlement of a suit brought by Nortel, we have agreed to attempt to negotiate a patent cross-license agreement with it.

EMPLOYEES

     As of October 31, 2003, CIENA and its subsidiaries employed 1,816 persons, of whom 787 were primarily engaged in research and development activities, 265 in manufacturing, 198 in installation services and customer support, 354 in sales and marketing related activities, and 212 in administration. None of CIENA’s employees are currently represented by a labor union. CIENA considers its relations with its employees to be good.

DIRECTORS AND EXECUTIVE OFFICERS

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

(1)		The Company’s Directors hold staggered terms of office, expiring as follows: Ms. O’Brien and Messrs Cash and Smith in 2005; Ms. Fitt and Messrs. Dillon and Nettles in 2004; Messrs. Bradley, Davis and Taylor in 2006
(2)		Member of the Compensation Committee
(3)		Member of the Audit Committee
(4)		Member of the Governance and Nominations Committee

     Patrick H. Nettles, Ph.D. has served as Executive Chairman of the Board of Directors since May 2001. From October 2000 to May 2001, Dr. Nettles was Chairman of the Board and Chief Executive Officer, and he was President, Chief Executive Officer and Director from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the California Institute of Technology and also serves on the Advisory Board to the President at Georgia Institute of Technology. Dr. Nettles also serves on the board of directors of Axcelis Technologies, Inc.

     Gary B. Smith has served as Chief Executive Officer since May 2001; President, Chief Operating Officer and Director since October 2000; and Senior Vice President, Chief Operating Officer from August 1999 to October 2000. Mr. Smith served as Senior Vice President, Worldwide Sales from September 1998 to August 1999, and was previously Vice President of International Sales since joining the Company in November 1997. He currently serves on the board of directors for the American Electronics Association and as a commissioner for Global Information Infrastructure Commission.

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     Stephen B. Alexander has served as Senior Vice President and Chief Technology Officer of CIENA since January 2000. He served as CIENA’s Vice President and Chief Technology Officer from September 1998 to January 2000.

     Steve W. Chaddick was appointed CIENA’s Chief Strategy Officer in May 2001, in addition to his existing responsibilities as Senior Vice President, Systems and Technology, a role he has held since February 2000. Between July 1999 and February 2000, Mr. Chaddick served as President of CIENA’s Core Switching Division. From August 1998 to July 1999, he served as the Company’s Senior Vice President, Strategy and Corporate Development.

     Joseph R. Chinnici has served as CIENA’s Senior Vice President, Finance and Chief Financial Officer since August 1997. From May 1995 to August 1997, Mr. Chinnici served as the Company’s Vice President, Finance and Chief Financial Officer. Mr. Chinnici joined CIENA in September 1994 as its Controller. Mr. Chinnici serves on the board of directors for Guilford Pharmaceuticals Inc.

     James F. Collier III has served as Senior Vice President, Corporate Development since June 2003. He served as CIENA’s Vice President, North American Sales between May 2002 and May 2003. Prior to joining CIENA, Mr. Collier was employed by Nortel as Vice President of Major Accounts between April 2001 and April 2002 and Vice President of Business Management, Wireless Networks Division from January 1997 to April 2001.

     Nicholas S. Jeffery has served as Senior Vice President, Worldwide Sales since November 2003. He served as CIENA’s Vice President, International Sales from September 2003 to November 2003 and Managing Director and Vice President, Europe, Middle East and Africa from June  2003 to September 23. Prior to joining CIENA, Mr. Jeffery founded and was director of Microfone UK Ltd., a reseller of voice services, from January  2003 to June 2003. Mr. Jeffery remains a director of Microfone. From April 2002 to January 2003, Mr. Jeffery was the Chief Executive Officer of the Markets Group of Cable & Wireless Global. Prior to holding this position, Mr. Jeffery served in a variety of other senior sales and management positions with Cable & Wireless Global and other Cable & Wireless Group Companies.

     Jesús León has served as Senior Vice President, Chief Development Officer since August 2002. Mr. León served as Senior Vice President, Metro Transport and Metro Switching from August 2001 to August 2002, Senior Vice President, Metro Transport from May 2001 to August 2001, Senior Vice President, Products and Technology between March 1999 and May 2001, and Vice President, Products and Technology between September 1998 and March 1999.

     Edward A. Ogonek has served as Senior Vice President, General Manager of Metro and Enterprise Solutions since November 2003. He served as Senior Vice President, General Manager of Enterprise Solutions for CIENA between August 2003 and November 2003. From November 2000 until he joined CIENA, Mr. Ogonek served as President and Chief Executive Officer of Akara Corporation, which was acquired by CIENA in August 2003. Before joining Akara, Mr. Ogonek was employed by Alcatel, serving as Senior Vice President and General Manager, Edge Data Networks from May 2000 to November 2000. From May 1997 to May 2000, Mr. Ogonek served in a variety of senior management positions with Newbridge Networks and Alcatel.

     Robert A. O’Neil has served as Senior Vice President, General Manager of Data Networking since November 2003. He served as Vice President of Data Networking for CIENA between June 2003 and November 2003. From November 2002 until he joined CIENA, Mr. O’Neil served as Vice President of Sales of WaveSmith Networks, which was acquired by CIENA in June 2003. From January 2001 to November 2002, Mr. O’Neil was a Venture Partner of Bessemer Venture Partners, a venture capital firm. From April 1998 to December 2002, Mr. O’Neil served as the Vice President of Sales, Network Access Division of Nortel.

     Arthur Smith has served as Senior Vice President, Global Operations since September 2003. Previously, Dr. Smith served as Senior Vice President, Worldwide Customer Services and Support from June 2002 to September 2003 and as Senior Vice President, Core Transport Division from May 2001 through June 2002. Prior to May 2001, he held engineering management positions in CIENA’s Transport Division since joining the company in May 1997.

     Russell B. Stevenson, Jr. has served as Senior Vice President, General Counsel and Secretary since joining CIENA in August 2001. From March 2000 to August 2001, he was Executive Vice President, General Counsel and Secretary of ARBROS Communications, Inc., an integrated communications provider. From 1996 to 2000, Mr. Stevenson was Executive Vice President and General Counsel of CyberCash, Inc.

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     Andrew C. Petrik has served as Vice President, Controller and Treasurer of CIENA since August 1997.

     Stephen P. Bradley, Ph.D. has served as Director of the Company since April 1998. Professor Bradley is the William Ziegler Professor of Business Administration and the Chairman of the Program for Management Development at the Harvard Business School. A member of the Harvard faculty since 1968, Professor Bradley is also Chairman of Harvard’s Executive Program in Competition and Strategy.

     Harvey B. Cash has served as Director of the Company since April 1994. Mr. Cash is a general partner of InterWest Partners, a venture capital firm in Menlo Park, California that he joined in 1985. Mr. Cash serves on the board of directors of i2 Technologies Inc., Silicon Laboratories, Inc., Microtune, Inc., Liberté Investors Inc., and Airspan Networks, Inc. In addition, he is a member of the boards of several private corporations.

     Don H. Davis, Jr. has served as Director of the Company since March 2002. Mr. Davis has been Chairman and CEO of Rockwell Automation, Inc. since 1998. (Rockwell International Corporation changed its name to Rockwell Automation, Inc. on June 29, 2001.) He previously served as Executive Vice President and Chief Operating Officer with responsibility for Rockwell International’s automation and former semiconductor systems and automotive components businesses. In addition to the Rockwell Automation board, Mr. Davis serves on the boards of Illinois Tool Works, Inc. and Apogent Technologies Inc. He is also a member of the Business Council, the Business Roundtable, and The Conference Board. He is also a past chairman of the Board of Governors of the National Electrical Manufacturers Association, Washington, DC.

     John R. Dillon has served as Director of the Company since October 1999. Mr. Dillon has served in a variety of positions at The Coca-Cola Company, Scientific-Atlanta, Inc. and Fuqua National. Mr. Dillon joined Cox Enterprises in 1980 and, until his retirement in 1996, served as Senior Vice President, Chief Financial Officer and director.

     Lawton W. Fitt has served as Director of the Company since November 2000. Ms. Fitt was appointed Secretary (Chief Executive) of the Royal Academy of Arts in London in October 2002. Responsible for the day to day operation of the Royal Academy, she is the first woman and the first American to have been appointed Secretary in the Academy’s history. Prior to her appointment, Ms. Fitt was an investment banker with Goldman Sachs & Co. from 1979 to October 2002, where she was a partner from 1994 and a managing director from 1996 to October 2002. Ms. Fitt is a trustee of the Darden School Foundation.

     Judith M. O’Brien has served as Director of the Company since July 2000. Since February 2001, Ms. O’Brien has been a Managing Director at INCUBIC L.L.C., a venture capital firm in Mountain View, California. From 1984 until 2001, she was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate finance, mergers and acquisitions and general corporate matters.

     Gerald H. Taylor has served as Director of the Company since January 2000. Mr. Taylor serves as a Managing Member of MortonsGroup, LLC and serves on the board of directors of Lafarge North America Inc. From 1996 to 1998, Mr. Taylor was Chief Executive Officer of MCI Communications Corporation.

TRADEMARKS

     “CIENA,” “MultiWave” and “MultiWave Sentry” are registered trademarks of CIENA. “CoreDirector,” “CoreDirector CI,” “CoreStream,” “Fastmesh,” “Fastpath,” “Flexible Concatenation,” “JEM,” “LightWorks,” “LightWorks OS,” “LightWorks ONCenter,” “LightWorks Toolkit,” “MultiWave CoreDirector,” “MultiWave CoreStream,” “MultiWave Metro,” “MultiWave Metro One,” “ONCenter,” “OSRP,” “SmartSpan,” “SmartSupport,” “SmartTools,” “VLSR,” “ONLINE,” “OPTX,” and “ONWAVE” are trademarks of CIENA under federal and state law.

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Item 2. Properties

     As of October 31, 2003, all of CIENA’s properties are leased. CIENA’s principal executive offices are located in Linthicum, Maryland. We lease nine facilities related to ongoing operations, including the five buildings located at various sites near Linthicum, Maryland, one as an engineering facility, three as manufacturing facilities, and one as an administrative and sales facility. The Company also has engineering and/or service facilities located in Alpharetta, Georgia; San Jose, California; Durham, North Carolina, Acton, Massachusetts, and Ottawa, Ontario. The Company also leases various small offices in the United States and abroad to support its sales and services. We believe the facilities we are now using are adequate and suitable for business requirements.

     CIENA leases a number of properties that we no longer occupy. As part of its restructuring costs, CIENA provides for the estimated cost of the net lease expense for these facilities. The cost is based on the future minimum lease payments under contractual obligations offset by estimated future sublease payments. As of October 31, 2003, CIENA’s accrued restructuring liability related to these properties was $63.7 million. If actual market conditions are less favorable than those projected by management, additional restructuring costs associated with these facilities may be required. For additional information regarding the Company’s lease obligations, See Item 8. “Financial Statements and Supplementary Data.”

Item 3. Legal Proceedings

     On October 3, 2000, Stanford University and Litton Systems filed a complaint in the United States District Court for the Central District of California alleging that optical fiber amplifiers incorporated into CIENA’s products infringe U.S. Patent No. 4,859,016 (the “‘016 Patent”). The complaint seeks injunctive relief, royalties and damages. We believe that we have valid defenses to the lawsuit and intend to defend it vigorously. On October 10, 2003, the court stayed the case pending final resolution of matters before the U.S. Patent and Trademark Office (the “PTO”), including a request for and disposition of a reexamination of the ‘016 Patent. On October 16, 2003, the PTO granted reexamination of the ‘016 Patent, thus resulting in a continuation of the stay of the case.

     On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned subsidiary of CIENA, filed a complaint in the United States District Court for the District of Delaware requesting damages and injunctive relief against Corvis Corporation (“Corvis”). The suit charged Corvis with infringing four patents relating to CIENA’s optical networking communication systems and technology. A jury trial to determine whether Corvis is infringing these patents commenced on February 10, 2003. On February 24, 2003, the jury decided that Corvis was infringing one of the patents and not infringing two others. The jury was deadlocked with respect to infringement on the fourth patent. This trial was immediately followed by a trial on Corvis’ affirmative defenses based on the validity of two of the patents. On February 28, 2003, the jury in this trial determined that the patents were valid. In April 2003, following a third trial, another jury decided that Corvis had infringed the fourth patent on which the previous jury had deadlocked. Based on these favorable verdicts collectively holding that Corvis is infringing two valid CIENA patents, CIENA has moved for an injunction to prohibit the sale by Corvis of the infringing products. The court has not yet ruled on this motion.

     As a result of the merger with ONI Systems Corp. (“ONI”), we became a defendant in a securities class action lawsuit. Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York. These complaints name ONI, Hugh C. Martin, ONI’s former chairman, president and chief executive officer; Chris A. Davis, ONI’s former executive vice president, chief financial officer and administrative officer; and certain underwriters of ONI’s initial public offering as defendants. The complaints were consolidated into a single action, and a consolidated amended complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the underwriter defendants violated the securities laws by failing to disclose alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the initial public offering’s registration statement and by engaging in manipulative practices to artificially inflate the price of our common stock after the initial public offering. The amended complaint also alleges that ONI and the named former officers violated the securities laws on the basis of an alleged failure to disclose the underwriters’ alleged compensation arrangements and manipulative practices. No specific amount of damages has been claimed. Similar complaints have been filed against more than 300 other issuers that have had initial public offerings since 1998, and all of these actions have been included in a single coordinated proceeding. Mr. Martin and Ms. Davis have been dismissed from the action without prejudice pursuant to a tolling agreement. In July 2002, ONI and other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied as to ONI on February 19, 2003. CIENA has participated, together with the other issuer defendants in these cases, in mediated settlement negotiations that have led to a preliminary agreement among the plaintiffs, the issuer defendants and their insurers. The settlement, which is subject to court approval, would result in the dismissal of the plaintiffs’ cases against the issuers. CIENA has agreed in principle to the terms of this settlement. Draft settlement documents were circulated for preliminary review in October 2003.

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     As a result of the merger with ONI, we also became a defendant in two substantially identical purported class actions on behalf of ONI security holders originally brought against ONI and members of its board of directors. The complaints allege that the director defendants breached their fiduciary duties to ONI in approving the merger with CIENA and seek declaratory, injunctive and other relief permitted by equity. The plaintiffs failed to obtain an injunction against completion of the merger. The first of these cases was filed on February 20, 2002, in the Superior Court of the State of California, County of San Mateo, and is encaptioned K.W. Sams, On Behalf of Himself and All Others Similarly Situated v. ONI Systems Corporation, et al. The second case was brought on March 19, 2002, in the Superior Court of the State of California, County of Santa Clara, and is encaptioned Steven Myeary, On Behalf of Himself and All Others Similarly Situated v. ONI Systems Corporation. On April 14, 2003, the plaintiffs in these cases filed a consolidated amended complaint and named four additional defendants: CIENA Corporation, James F. Jordan, Kleiner Perkins Caufield & Byers and Mohr Davidow Ventures. CIENA and the other defendants subsequently filed a demurrer and served a motion for sanctions on plaintiffs based on factual inaccuracies in the consolidated amended complaint. In response, the plaintiffs filed a corrected consolidated amended complaint, the demurrer to which is scheduled to be heard by the court in December 2003. We believe that these lawsuits are without merit and will continue to defend them vigorously.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2003.

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PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

     CIENA’s Common Stock is traded on the NASDAQ National Market under the symbol CIEN. The following table sets forth for the fiscal periods indicated the high and low sales prices of the Common Stock, as reported on the NASDAQ National Market.

     The market price of CIENA’s Common Stock has fluctuated significantly and may be subject to significant fluctuations in the future. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     As of December 9, 2003, there were approximately 2,473 holders of record of CIENA’s Common Stock and 473,795,871 shares of Common Stock outstanding.

     CIENA has never paid cash dividends on its capital stock. If and when we return to profitability, we intend to retain earnings for use in our business, and we do not anticipate paying any cash dividends in the foreseeable future.

     On August 29, 2003, we issued 2,343,015 shares of CIENA common stock to stockholders of Akara Corporation as partial consideration for all outstanding shares of Akara. Our issuance of these shares was exempt from registration pursuant to Rule 506 promulgated under the Securities Act of 1933, and/or Section 4(2) of the Securities Act.

Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included in Item 8. “Financial Statements and Supplementary Data.” CIENA has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of October in each year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31. Fiscal 1999, 2000, 2002 and 2003 comprised 52 weeks and fiscal 2001 comprised 53 weeks.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and the Company’s consolidated financial statements and notes thereto included elsewhere in this report on Form 10-K.

Overview

     CIENA is a leading global provider of innovative network solutions to service providers and enterprises worldwide. Our customers include long-distance carriers, local exchange carriers, cable operators, Internet service providers, wireless and wholesale carriers, resellers, governments, large businesses and non-profit institutions.

     For several years, the market for our equipment was influenced by the entry of a substantial number of new companies into the communications services business. In the United States, this was largely due to changes in the regulatory environment, in particular those brought about by the Telecommunications Act of 1996. These new companies raised billions of dollars in capital, much of which they invested in capital improvements, causing acceleration in the growth of the market for telecommunications equipment.

     The last three years have seen a reversal of this trend, including the failure of a large number of the new entrants and a sharp contraction of the availability of capital to the industry. Several of the more established carriers also have experienced significant financial distress. These developments have caused a substantial reduction in demand for telecommunications equipment, including our products. This industry trend was compounded by the slowing not only of the United States economy, but the economies in virtually all of the countries in which we are marketing our products. The combination of factors caused our customers to become more conservative in their capital investment plans and more uncertain about their future purchases. As a consequence, we are facing a market that is both reduced in size and more difficult to predict and plan for.

     These trends have had a number of significant effects on our business during fiscal 2003 and 2002, including the reduction of revenue by $1,320.1 million since fiscal 2001, the incurrence of $286.5 million of costs related to obsolete inventory and excess purchase commitments during fiscal 2002, restructuring charges of $31.2 million and $225.4 million during fiscal 2003 and 2002, respectively, goodwill and intangible asset impairment charges of $29.6 million and $557.3 million during fiscal 2003 and 2002, respectively, provisions for bad debt expense of $14.8 million during fiscal 2002, $4.8 million and $15.7 million in losses on equity investments during fiscal 2003 and 2002, respectively, and a net income tax charge of approximately $110.7 million during fiscal 2002 to establish a valuation allowance against our deferred tax assets. Our net losses of $386.5 million and $1,597.5 million, in fiscal 2003 and 2002, respectively, were primarily attributable to the factors listed above.

     In response to the deterioration of our market, we have, since 2001, entered new markets by expanding our network solution offerings and worked to increase our market share by adding new features to our existing products. We also have taken steps to expand our sales channels beyond direct sales to service providers to include partnerships and other strategic relationships targeting enterprise and government customers. We plan to continue to pursue this strategy by adding new products and features to our portfolio, primarily targeting delivery of data communications services because we expect a large portion of carrier spending to occur in this area over the next few years.

     As part of our efforts to implement our strategy, during fiscal 2003, we completed the acquisitions of WaveSmith Networks, Inc. and Akara Corporation. WaveSmith was a privately held corporation offering a multi-service switching product designed to be deployed at the edge of carrier networks. Akara was a privately held corporation providing SONET/SDH-based extended storage solutions.

     As of October 31, 2003, CIENA and its subsidiaries employed approximately 1,816 persons, which was a net reduction of 302 persons from the approximate 2,118 employed on October 31, 2002.

Critical Accounting Policies and Estimates

     The preparation of consolidated financial statements requires CIENA to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, CIENA re-evaluates its estimates, including those related to bad debts, inventories, investments, intangible assets, goodwill, income taxes, warranty obligations, restructuring, contingencies and litigation. CIENA bases its estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Among other things, these estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. CIENA believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

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Revenue Recognition

     CIENA recognizes product revenue in accordance with the terms of the contract of sale and where collection is reasonably assured. For transactions in which sales are not complete until the customer has accepted the product, revenue is not recognized until the terms of acceptance are satisfied. Revenue for installation services is recognized as the services are performed unless the terms of the supply contract combine product acceptance with installation, in which case, revenue from installation services is recognized when the terms of acceptance are satisfied and installation is completed. Amounts received in excess of revenue recognized are included as deferred revenue in the balance sheet. For transactions involving the sale of software, revenue is recognized in accordance with Statement of Position No. 97-2 (“SOP 97-2”), “Software Revenue Recognition,” including deferral of revenue recognition in instances where vendor specific objective evidence for undelivered elements is not determinable. For distributor sales where risks of ownership have not transferred, CIENA recognizes revenue when the product is shipped through to the end user.

Allowances for Doubtful Accounts

     CIENA maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of CIENA’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of October 31, 2003, our accounts receivable balance, net of allowances for doubtful accounts of $1.5 million, was $43.6 million, which included three customers that accounted for 23.6%, 12.5%, and 10.1% of the net trade accounts receivable.

Warranties

     CIENA provides for the estimated cost of product warranties at the time revenue is recognized. CIENA engages in extensive product quality programs and processes including actively monitoring and evaluating the quality of its component suppliers and third party contractors. CIENA’s warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from CIENA’s estimates, revisions to the estimated warranty liability would be required.

Reserve for Inventory Obsolescence

     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 fiscal year ended October 31, 2003, CIENA recorded a benefit for inventory reserves of $5.3 million primarily related to the realization of sales from previously reserved excess inventory. If actual market conditions differ from those CIENA has projected, CIENA may be required to take additional inventory write-downs or to record additional benefits.

Restructuring

     As part of its restructuring costs, CIENA provides for the estimated cost of the net lease expense for facilities that are no longer being utilized. The provision is equal to the future minimum lease payments under contractual obligations offset by estimated future sublease payments. As of the end of fiscal 2003, CIENA’s accrued restructuring liability related to net consolidation of excess facilities is $63.7 million. If actual market conditions are less favorable than those CIENA has projected, CIENA may be required to recognize additional restructuring costs associated with these facilities.

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Minority Investments

     CIENA holds minority interests in several companies having operations or technology in areas within its strategic focus. As of October 31, 2003, $21.3 million of these investments are included in other long-term assets. CIENA records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. During fiscal 2003, CIENA record a charge of $4.8 million associated with the impairment of one of these investments. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Impairment of Goodwill and Other Long-Lived Assets

     Effective November 1, 2001, CIENA adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and ceased to amortize goodwill. As of October 31, 2003, CIENA’s assets include $336.0 million related to goodwill. SFAS 142 requires that we cease to amortize goodwill and to test it for impairment on an annual basis, and between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of CIENA below its carrying value. Since no event occurred or circumstances changed during fiscal 2003 that would, more likely than not, reduce the fair value of CIENA below its carrying value, no impairment was recorded in fiscal 2003. If actual market conditions are less favorable than those we have projected or if an event occurs or circumstances change that would, more likely than not, reduce the fair value of CIENA below its carrying value, we may be required to recognize additional goodwill impairment charges.

     As part of CIENA’s review of financial results for fiscal 2003, CIENA performed an assessment of the carrying value of the Company’s long-lived assets, including other intangible assets. The assessment was performed pursuant to Statement Financial Accounting Standards No. 144 “Accounting for the Impairment or disposal of Long-Lived Assets” (SFAS 144). As a result, CIENA recorded a charge of $29.6 million during fiscal 2003, related to the impairment of MetroDirector K2 technology acquired in the Cyras transaction. This charge was based on the amount by which the carrying amount of the developed technology exceeded its fair value. Fair value was determined based on discounted future cash flows derived from the developed technology, which had separately identifiable cash flows. The assumptions supporting the estimated future cash flows, including the discount rate reflect management’s best estimates. If actual market conditions are less favorable than those we have projected or if an event occurs or circumstances change that would, more likely than not, reduce the fair value of our long-lived assets below their carrying value, we may be required to recognize additional impairment charges.

Deferred Tax Valuation Allowance

     As of October 31, 2003, CIENA has recorded a valuation allowance of $894.2 million against our gross deferred tax assets of $894.2 million. We calculated the valuation allowance in accordance with the provisions of Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS 109”) which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Positive evidence, such as operating results during the most recent three-year period, is given more weight when due to our current lack of visibility, there is a greater degree of uncertainty that the level of future profitability needed to record the deferred assets will be achieved. Our results over the most recent three-year period were heavily affected by our recent deliberate and planned business restructuring activities. Our cumulative loss in the most recent three-year period represents sufficient negative evidence to require a valuation allowance under the provisions of SFAS 109. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

Accounting for Stock Options

     In October 1995, the Financial Accounting Standards Board issued SFAS 123, “Accounting for Stock-Based Compensation”. SFAS 123 allows companies to account for stock-based compensation either under the new provisions of SFAS 123 or using the intrinsic value method provided by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted.

     In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002.

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     We have elected to continue to account for stock-based compensation in accordance with the provisions of APB 25 as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” (“FIN 44”) and present the pro forma disclosures required by SFAS 123 as amended by SFAS 148.

Results of Operations

Fiscal Years Ended 2003, 2002 and 2001

     Revenue. We recognized $283.1 million, $361.2 million, and $1,603.2 million in revenue for fiscal 2003, 2002, and 2001, respectively. The decrease in revenue of $78.1 million, or 21.6% from fiscal 2002 to 2003 was primarily a result of the continued decline in demand for our core networking products. The decrease in revenue of $1,242.0 million, or 77.5% from fiscal 2001 to 2002 was due to the reduction in demand for core networking products. CIENA’s revenue derived from products and services is as follows (in thousands):

     We had sales to 110 customers in fiscal 2003, as compared to 77 customers in fiscal 2002 and 53 customers in fiscal 2001. During the following fiscal years, customers who each accounted for at least 10% of our revenue during the respective periods are as follows (in thousands):

* — Denotes % of total revenue

n/a — Denotes revenue recognized less than 10% for the period

     During the following fiscal years CIENA’s geographic distribution of revenue is as follows (in thousands):

     Gross Profit (Loss). Cost of goods sold consists of component costs, direct compensation costs, warranty and other contractual obligations, royalties, license fees, direct technical support costs, cost of excess and obsolete inventory and overhead related to manufacturing, technical support and engineering, furnishing and installation (“EF&I”) operations. Gross profit (loss) was $73.0 million, ($234.9) million, and $698.7 million for fiscal 2003, 2002, and 2001, respectively. The $307.9 million increase in fiscal 2003 compared to fiscal 2002 was primarily the result of a $291.8 million decrease in inventory obsolescence cost. The $933.6 million decrease in gross profit in fiscal 2002 compared to fiscal 2001 was the result of decreased revenue and an increase in excess and obsolete inventory charges. This increase in excess and obsolete inventory charges was a result of the decline in capital spending by our customers and a decline in forecasted revenue of existing products and accordingly, we recorded a provision for inventory, including purchase commitments, of approximately $286.5 million in fiscal 2002.

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     Gross profit (loss), as a percentage of total revenue, was 25.8%, (65.0%) and 43.6% for fiscal 2003, 2002 and 2001, respectively. The increase from fiscal 2002 to fiscal 2003 was largely attributable to decreases in inventory obsolescence costs, increases in manufacturing efficiencies, higher margin product mix and improvements in margin from installation and technical support services. The decrease from fiscal 2001 compared to fiscal 2002 was largely attributable to increases in inventory obsolescence costs, lower manufacturing volumes resulting in reduced manufacturing efficiencies, and changes in product mix resulting in sales of higher proportion of revenue from lower margin installation and tech support services.

     Gross profit on products, as a percentage of product revenue, was 34.0%, 25.0% and 52.5% for fiscal 2003, 2002 and 2001, respectively. The improvement from fiscal 2002 to fiscal 2003 was largely attributable to increases in manufacturing efficiencies and higher margin product mix. The reduction from fiscal 2001 to fiscal 2002 was primarily attributable to lower manufacturing volumes resulting in reduced manufacturing efficiencies.

     Gross loss on services, as a percentage of services revenue, was 33.3%, 43.0% and 36.6% for fiscal 2003, 2002 and 2001, respectively. The improvement from fiscal 2002 to fiscal 2003 was largely attributable to reductions in services overhead costs. The reduction from fiscal 2001 to fiscal 2002 was primarily the result of increased technical support costs.

     Research and Development Expenses. Research and development expenses (exclusive of stock compensation costs of $12.8, $15.7 and $17.8 million) were $199.7 million, $239.6 million and $235.8 million for fiscal 2003, 2002 and 2001, respectively. During fiscal 2003, 2002 and 2001, research and development expenses were 70.5%, 66.3% and 14.7% of revenue, respectively. The $39.9 million, or 16.7% decrease, from fiscal 2002 to fiscal 2003 was the result of decreased employee related expenses, prototype costs, consulting expenses, and depreciation expense. The $3.8 million, or 1.6% increase, from fiscal 2001 to fiscal 2002 was primarily related to increases in depreciation expense that were partially offset by reductions in prototype parts and employee related costs. CIENA has expensed research and development costs as incurred.

     Selling and Marketing Expenses. Selling and marketing expenses (exclusive of stock compensation of $2.7, $3.6 and $8.4 million) were $103.2 million, $130.3 million and $146.9 million for fiscal 2003, 2002 and 2001, respectively. During fiscal 2003, 2002 and 2001, selling and marketing expenses were 36.5%, 36.1% and 9.2% of revenue, respectively. The $27.1 million, or 20.8% decrease, from fiscal 2002 to fiscal 2003 was the result of reduced levels of sales staff, advertising costs, outside consultants, facility costs and depreciation expense. The $16.6 million, or 11.3% decrease, from fiscal 2002 to 2001 was primarily the result of decreases in staffing levels, commissions earned, trade show participation and promotional costs.

     General and Administrative Expenses. General and administrative expenses (exclusive of stock compensation of $1.2, $1.1 and $15.2 million) were $38.5 million, $52.6 million and $57.9 million for fiscal 2003, 2002 and 2001, respectively. During fiscal 2003, 2002 and 2001 general and administrative expenses were 13.6%, 14.6% and 3.6% of revenue, respectively. The $14.1 million, or 26.8% decrease, from fiscal 2002 to fiscal 2003 was primarily the result of decreases in staffing levels, outside consultants and facility costs. Fiscal 2003 general and administrative expenses also include costs of $2.5 million related to the settlement of litigation with Nortel. The $5.3 million, or 9.2% decrease, from fiscal 2001 to 2002 was primarily due to decreases in employee-related costs. Fiscal 2002 general and administrative expenses also include costs of $1.8 million related to the settlement of litigation with Pirelli.

     Deferred Stock Compensation Costs. The cumulative deferred stock compensation costs related to research and development, selling and marketing and general and administrative employees assumed as part of our merger and acquisition activity were $16.8 million, $20.3 million and $41.4 million during fiscal 2003, 2002 and 2001 respectively. As part of our acquisition of WaveSmith, ONI, and Cyras we recorded $7.4 million, $8.8 million and $98.5 million of deferred stock compensation relating to the unvested stock options and restricted stock assumed on the acquisition, respectively. Deferred stock compensation is presented as a reduction of stockholders’ equity and is amortized over the remaining vesting period of the applicable options. As of October 31, 2003, the balance of deferred stock compensation was $9.7 million.

     Amortization of Goodwill. Amortization of goodwill was $0.0, $0.0, and $177.8 million for fiscal 2003, 2002 and 2001, respectively. The Company adopted SFAS 142 effective November 1, 2001 and upon adoption ceased to amortize goodwill.

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     Amortization of Intangible Assets. Amortization of intangible assets (exclusive of $3.3 million, $0.0 and $0.0 included in costs of goods sold related to certain technology licenses) was $17.9 million, $9.0 million and $4.4 million for fiscal 2003, 2002 and 2001, respectively. In purchasing companies, we have acquired intangible assets such as certain developed technology, patents and covenants not to compete. As part of our acquisition of Akara, WaveSmith, ONI, and Cyras we recorded $14.5 million, $59.7 million, $15.1 million and $47.7 million worth of intangibles, respectively. The various intangible assets will be amortized over periods ranging from 2 months to eight years.

     In-Process Research and Development. In-process research and development was $2.8 million, $0.0 and $45.9 million for fiscal 2003, 2002 and 2001, respectively. In connection with our fiscal 2003 acquisitions of Akara and WaveSmith, we recorded charges of $1.3 million and $1.5 million, respectively, related to in-process research and development. This generally represents the estimated value of purchased in-process technology that had not yet reached technological feasibility and had no alternative future use at the time of the acquisitions. In connection with our March 2001 acquisition of Cyras, we recorded a $45.9 million charge for in-process research and development. This represents the estimated value of purchased in-process technology related to Cyras’ K2 product development that had not yet reached technological feasibility and had no alternative future use at the time of the acquisition. The amount of the purchase prices for Akara, WaveSmith and Cyras allocated to in-process research and development was determined using the discounted cash flow method. This method consisted of estimating future net cash flows attributable to the in-process technology for a discrete projection period and discounting the net cash flows back to their present value.

     Restructuring Costs. During fiscal 2003, we recorded a restructuring charge of $32.0 million associated with workforce reductions and the write-down of certain property and equipment. This was offset by a credit of $0.8 million related to the adjustment of previously estimated restructuring charges. The restructuring charge included $12.2 million associated with work force reductions, $2.3 million primarily related to lease terminations and non-cancelable lease costs and a $17.5 million write-down related to property and equipment consisting primarily of leasehold improvements, production equipment and research test equipment. See Note 3.

     During fiscal 2002, we incurred $225.4 million in restructuring charges associated with our ongoing efforts to align our operations with the current telecommunications industry environment. The restructuring charges included $32.9 million related to work force reductions of approximately 1,946 employees, $70.3 million primarily related to lease terminations and non-cancelable lease costs and an $122.2 million write-down related to property and equipment consisting primarily of leasehold improvements, production equipment and research test equipment.

     During fiscal 2001, we recorded $15.4 million in restructuring charges related to the consolidation of excess facilities. The consolidation included the closure of certain manufacturing warehouse facilities and the consolidation of certain operational centers related to business activities that have been restructured. The charges included $7.0 million primarily related to lease terminations and non-cancelable lease costs and also included an $8.4 million write-down related to property and equipment consisting primarily of leasehold improvements and production equipment.

     We expect to incur additional restructuring charges over the next several quarters as a result of our ongoing program to restructure our business.

     Goodwill and Other Intangible Impairment. Goodwill and other intangible impairment was $29.6 million, $557.3 million and $1.7 billion for fiscal 2003, 2002 and 2001, respectively. During fiscal 2003, we recorded a charge of $29.6 million related to the impairment of MetroDirector K2 technology acquired in the Cyras transaction. This charge was determined in accordance with SFAS 144, which requires CIENA to perform an assessment on the carrying value of its developed technology intangible assets.

     In fiscal 2002 and 2001 we recorded charges of $557.3 million and $1.7 billion, respectively. The fiscal 2002 charge was determined in accordance with SFAS 142, which requires annual testing to determine and measure goodwill impairment on a reporting unit basis. The fiscal 2001 charge was determined in accordance with SFAS 121, which required CIENA to perform an assessment of the carrying value of its long-lived assets including significant amounts of goodwill and other intangible assets.

     Provision for Doubtful Accounts. CIENA performs ongoing credit evaluations of its customers and generally does not require collateral or other forms of security from its customers. CIENA maintains an allowance for potential losses when a particular problem with the collectibility of a receivable is identified. Provision for doubtful accounts expenses were $0.0, $14.8 million and ($6.6) million for fiscal 2003, 2002 and 2001, respectively. In fiscal 2001, we received payment for $15.4 million of the gross outstanding accounts receivable balance due from iaxis Limited primarily through our sales agreement with Dynegy. Accordingly, we recognized a reduction of $6.6 million in the provision for doubtful accounts during fiscal 2001. We recorded a provision for doubtful accounts of approximately $14.8 million during fiscal 2002. This provision related to the estimated losses of $18.1 million from three customers, each of whom filed for bankruptcy protection during fiscal 2002, offset by $3.3 million of the gross outstanding accounts receivable balance due from iaxis Limited through our sales agreement with Dynegy. CIENA did not record any additional provision for doubtful accounts during fiscal 2003.

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     Interest and Other Income, Net. Interest and other income, net were $43.0 million, $61.1 million and $63.6 million for fiscal 2003, 2002 and 2001, respectively. Interest and other income, net, consists of interest income earned on our cash, cash equivalents and available-for-sale short and long-term investments. The $18.1 million decrease from fiscal 2002 to fiscal 2003 was attributable to the impact of lower average interest rates and lower average cash and invested balances. The $2.5 million decrease from fiscal 2001 to fiscal 2002 was attributable to the impact of lower average interest rates.

     Interest Expense. Interest expenses were $36.3 million, $45.3 million and $30.6 million for fiscal 2003, 2002 and 2001, respectively. The $9.0 million, or 19.9% decrease, from fiscal 2002 to fiscal 2003 was attributable to the decrease in our debt obligations. The $14.7 million, or 48.0% increase, from fiscal 2001 to fiscal 2002 was attributable to the acquisition of debt obligations related to ONI.

     Loss on Equity Investments, Net. The $4.8 million loss on equity investments in fiscal 2003 related to the decline in value of non-public equity investments that were determined to be other than temporary. Loss on equity investments, net was $15.7 million for fiscal 2002. We realized a loss of $1.9 million from the sale of a public equity investment and a loss of $16.6 million from a decline in the fair value of a certain equity investments that were determined to be other than temporary. On November 16, 2001, CIENA sold 80.1% of its ownership in ATI International Investments, Inc., the parent company of ATI Telecom International Ltd. (“Alta”), which resulted in a gain of $2.8 million. CIENA retains a 19.9% ownership in ATI International Investments, Inc.

     Loss on Extinguishment of Debt. Losses on extinguishment of debt were $20.6 million, $2.7 million and $0.0 for fiscal 2003, 2002 and 2001, respectively. On June 21, 2002, we assumed the outstanding ONI 5.00% convertible subordinated notes, due October 15, 2005, in an aggregate principal amount of $300 million. The notes were initially recorded at a value of $218.0 million based upon the present value of the outstanding notes at the time of the acquisition. We are accreting the difference between $218.0 million and $300.0 million over the remaining period to October 15, 2005, such that the carrying value of the outstanding notes equals the principal value at the time the notes become due. During fiscal 2003, we conducted a tender offer for the ONI notes, which resulted in our purchasing $154.7 in principal amount of notes for $140.3 million. Since the notes had an accreted value of $119.7 million, the purchase resulted in a non-cash loss of $20.6 million. During fiscal 2002, we purchased on the open market $97.1 million in principal amount of notes for $75.2 million. Since the notes had an accreted value of $72.5 million, the purchase resulted in a non-cash loss of $2.7 million.

     Provision for Income Taxes. Our income tax expenses were 0.3%, 7.4% and 5.1% of pre-tax loss for fiscal 2003, 2002 and 2001, respectively. The income tax provision for fiscal 2003 was $1.3 million. This provision was primarily attributable to foreign taxes related to our foreign operations. We did not record a tax benefit for our domestic losses during fiscal 2003. We intend to maintain a valuation allowance against our deferred tax assets until sufficient positive evidences exists to support its reversal. The income tax provision for 2002 was $110.7 million. Our income tax provision for 2002 differed from the expected statutory benefit of 35% primarily due to the establishment of a valuation allowance against our deferred tax assets and the non-deductibility of the goodwill impairment. The income tax provision for 2001 differed from the expected 35% benefit primarily due to the non-deductibility of the goodwill impairment, and in-process research and development.

     Net Loss. Our net losses were $386.5 million, $1,597.5 million and $1,794.1 million for fiscal 2003, 2002 and 2001, respectively.

Liquidity and Capital Resources

     At October 31, 2003, our principal source of liquidity was cash and cash equivalents, short-term investments and long-term investments. We had $309.7 million in cash and cash equivalents, $796.8 million in short-term investments and $519.7 million in long-term investments.

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     Our operating activities consumed net cash of $241.2 million and $28.0 million in fiscal 2003 and 2002, respectively and provided net cash of $163.2 million in fiscal 2001. Cash used in operating activities during fiscal 2003 was primarily attributable to the net loss, the reduction in accrued liabilities and an increase in accounts receivable. This was offset by the non-cash charges for early extinguishment of debt, restructuring charges and related asset write-downs, depreciation, amortization and impairment of intangibles. Cash used in operating activities during fiscal 2002 was primarily attributable to the net loss, offset by non-cash charges related to goodwill impairment, amortization of other intangibles, deferred stock compensation and debt issuance costs, non-cash portion of restructuring charges, depreciation expense, provision for inventory excess and obsolescence, decrease in deferred income tax asset and decrease in accounts receivable. Cash provided by operating activities during fiscal 2001 was primarily attributable to decreases in accounts receivable and inventories offset by non-cash charges related to goodwill impairment, amortization of other intangibles, deferred stock compensation and debt issuance costs, non-cash portion of restructuring charges, depreciation expense, provision for inventory excess and obsolescence, and increases in deferred revenue and other obligations.

     Our investment activities provided net cash of $302.6 million and $239.1 million in fiscal 2003 and 2002 respectively, and used net cash of $1,490.6 million in fiscal 2001. Investment activities included the net redemption of $364.8 million and $26.0 million of short and long-term investments during fiscal 2003 and 2002, respectively and the net purchase of $1,293.2 million of short and long-term investments during fiscal 2001. Investment activities also included approximately $15.0 million, $10.0 million and $13.0 million of equity investments in private companies, accounted for under the cost method, during fiscal 2003, 2002 and 2001, respectively. Also included in investment activities were additions to capital equipment and leasehold improvements in fiscal 2003, 2002, and 2001 of $29.5 million, $66.3 million and $238.5 million, respectively. The capital equipment expenditures were primarily for customer demonstration systems, test systems, manufacturing equipment, computer equipment and leasehold improvements. In fiscal 2003 we used cash of $26.7 million, net of expenditures, in connection with our acquisition of Akara and WaveSmith. In fiscal 2002, we acquired cash of $286.9 million, net of expenditures, in connection with our acquisition of ONI. In fiscal 2001, we acquired cash of $54.1 million, net of expenditures, in connection with our acquisition of Cyras.

     Our financing activities used net cash of $128.9 million and $231.8 million in fiscal 2003 and 2002, respectively and provided net cash of $1,582.2 million in fiscal 2001. During fiscal 2003 the primary use was related to the purchase of $154.7 million of the remaining $202.9 million outstanding ONI convertible subordinated notes. We paid $139.2 million for the notes and fees of $1.1 million related to the purchase. Also, during fiscal 2003, we received $13.8 million from the exercise of stock options and $1.9 million from the repayment of notes receivable from stockholders. The primary use of cash during fiscal 2002 related to the redemption of all outstanding Cyras Systems LLC 4.5% convertible subordinated notes for $178.4 million and the purchase of ONI 5.0% convertible subordinated notes with a cumulative accreted book value of $72.5 million. Also during fiscal 2002, we received $15.1 million from the exercise of stock options and the sale of stock through our employee stock purchase plan and $5.0 million from the repayment of notes receivable from stockholders. During fiscal 2001, we completed a public offering of 11,000,000 shares of common stock at a price of $83.50 per share less underwriters’ discounts and commissions. Concurrent with the offering of common stock, we completed a public offering of 3.75% convertible notes with an aggregate principal amount of $690 million. Net proceeds from these offerings were approximately $1,547.8 million, after deducting underwriting discounts, commissions and offering expenses. During fiscal 2001, we also received $31.9 million from the exercise of stock options and the sale of stock through our employee stock purchase plan and $4.6 million for the repayment of notes receivable from stockholders.

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     The following is a summary of our future minimum payments under contractual obligations as of October 31, 2003 (in thousands):

(1)

The terms of our convertible notes with a principal value of $690.0 million include interest at 3.75% payable on a semi-annual basis on February 1 and August 1 of each year; the notes are due February 1, 2008. The terms of the ONI convertible subordinated notes with a principal value of $48.3 million include interest at 5.00% payable on a semi-annual basis on April 15 and October 15 of each year; the notes are due October 15, 2005.

(2)

On November 18, 2003, CIENA announced a full redemption of all of the outstanding ONI 5.00% convertible subordinated notes due October 15, 2005. The principal amount of the notes outstanding is $48.3 million. On the redemption date of December 19, 2003, CIENA will pay holders 102% of the outstanding principal amount of the notes plus accrued interest.

(3)

Purchase commitments related to amounts we are obligated to pay to our contract manufacturers and component suppliers for inventory.

     Some of our commercial commitments, including some of the future minimum payments set forth above, are secured by standby letters of credit. The following is a summary of our commercial commitments secured by standby letters of credit by commitment expiration date as of October 31, 2003 (in thousands):

     CIENA does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities (SPEs) and structured finance entities.

     Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term investments, and cash generated from operations will satisfy our working capital needs, capital expenditures, investment requirements, full redemption of the ONI 5% convertible subordinated notes, and other liquidity requirements associated with our existing operations through at least the next 12 months.

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Effects of Recent Accounting Pronouncements

     In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year end. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this standard did not have a material impact on CIENA’s financial statements.

     In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements entered into in fiscal periods beginning after June 15, 2003.

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company believes that the adoption of this standard will have no material impact on its financial statements.

     In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The Company does not expect that the adoption of this standard will have a material effect on its financial position or results of operations.

     In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The FASB has defined implementation of SFAS 150 indefinitely for certain non-controlling interests, the provisions of which are currently not applicable to the Company. The Company does not expect that the adoption of this standard will have a material effect on its financial position or results of operations.

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Quarterly Results of Operations

     The tables below (in thousands, except per share data) set forth the operating results and percentage of revenue represented by certain items in CIENA’s statements of operations for each of the eight quarters in the period ended October 31, 2003. This information is unaudited, but in our opinion reflects all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period.