UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

For the fiscal year ended October 31, 2006

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

For the transition period from                      to                     

Ciena Corporation

(Exact name of registrant as specified in its charter)

Delaware		23-2725311
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)
1201 Winterson Road, Linthicum, MD		21090-2205
(Address of principal executive offices)		(Zip Code)

(410) 865-8500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $.01 par value		The NASDAQ Stock Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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

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

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was $2,035,851,758, based on the closing price of the Common Stock on the NASDAQ Global Select Market on April 28, 2006.

The number of shares of Registrant’s Common Stock outstanding as of December 15, 2006 was 84,939,780.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of the Form 10-K incorporates by reference certain portions of the Registrant’s proxy statement for its 2007 Annual Meeting of Shareholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.

 

 

PART I

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

Item 1. Business

Overview

     Ciena Corporation is a supplier of communications networking equipment, software and services that support the delivery and transport of voice, video and data services. Our products are used in communications networks operated by telecommunications service providers, cable operators, governments and enterprises across the globe. We specialize in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling integrated service offerings, our optical, data and broadband access platforms create business and operational value for our customers.

     During the past several years, we have taken a number of significant steps to position Ciena to take advantage of market opportunities we see arising from increased demand for a broader mix of high-bandwidth services and new communications applications. Consumer demand for high-speed voice, video and data services and enterprise demand for reliable and secure connectivity are driving network transition to more efficient, simplified network infrastructures, better suited to handle higher bandwidth, multiservice traffic. To pursue these opportunities, we have expanded our product portfolio and enhanced product functionality through internal development, acquisition and partnerships. We have sought to build upon our historical expertise in core optical networking by adding complementary products in the metro and access portions of communications networks. This strategy has enabled us to increase penetration of our historical telecommunications service provider customers with additional products, and allowed us to broaden our addressable markets to include customers in the cable, government and enterprise markets.

Financial Overview – Fiscal 2006

     We had revenue of $564.1 million for our fiscal year ended October 31, 2006, an increase of 32.0% from fiscal 2005 revenue of $427.3 million. We manage our business in one operating segment. The matters discussed in this “Business” section should be read in conjunction with the Consolidated Financial Statements found under Item 8 of Part II of this annual report, which includes additional financial information about our total assets, revenue, measures of profits and loss and financial information about geographic areas.

Corporate Information and Access to SEC Reports

     Ciena Corporation was incorporated in Delaware in November 1992, and completed its initial public offering on February 7, 1997. Our 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 the Investor Relations page of our web site as soon as reasonably practicable after we file these reports with the Securities and Exchange Commission. Information contained on our web site is not a part of this annual report.

Industry Background

     The markets for communications networking equipment have been subject to dynamic changes in recent years, affecting the revenue and profitability of equipment providers like Ciena. Following a period of expansive growth, the telecommunications market was significantly affected by a tightening of capital markets that began in late 2000. Aggressive network builds by communications service providers in anticipation of rapid traffic growth resulted in overcapacity. In response, communications service providers curtailed network build-outs and dramatically reduced their overall capital spending. As a result, Ciena experienced significant revenue declines from 2001 to 2003.

     At the same time, a number of competitive threats emerged dramatically affecting communications service providers. Service providers faced new competitors, new technologies and intense price competition. In North America, the entry of the regional bell operating companies into the long-distance market led to deteriorating business models and uncertain futures for traditional long-distance carriers. At the same time, wireless displacement of traditional voice revenue and increased availability of broadband access from cable operators threatened the business model of the regional bell operating companies. Similar trends were also occurring outside of the United States, with increasing competition among traditional voice, wireless and satellite carriers to provide similar or overlapping services.

     As competition among communications service providers increased, the needs of some of their largest customers were changing. Increased reliance on information technology combined with world events, such as natural disasters and security issues, brought concerns of network reliability and business continuity to the forefront. In addition, competition among communications networking equipment providers and reduced demand for their products provided opportunities to purchase communications equipment and services at reduced costs. As a result, many large enterprises and government agencies decided to build their own, secure private networks, some on a global scale.

Industry Trends

     While the industry dynamics and market forces described above have had a significant effect on the competitive landscape and business prospects of our customers and our competitors alike, overall traffic on service provider networks has continued to grow. Expanding consumer and enterprise reliance upon voice, video and data communications has increased demand for network bandwidth, absorbing previous excess capacity. In addition, communications service providers have sought to augment or replace traditional revenue by offering a broader mix of new revenue-generating services. As a result of improving conditions in the markets where we sell our communications network equipment and our efforts to restructure our operations in recent years, we were able to improve our financial performance and grow our revenue from $298.7 million in fiscal 2004, to $427.3 million in fiscal 2005 and $564.1 million in fiscal 2006. We believe the current industry trends below are driving growth of our business and demand for our products:

	•		End user demand for a single service provider, capable of delivering multiple voice, video and data services;
	•		Network operators’ transition toward simplified, converged network infrastructures capable of more efficiently and cost-effectively supporting a broader mix of high-bandwidth traffic;
	•		Growth in broadband applications and service “bundles” driving higher capacity requirements and fueling bandwidth demand in legacy and existing network infrastructures; and
	•		Enterprises and governments building and operating their own communication networks.

Consolidation

     In addition to the trends highlighted above, our customer base has undergone a period of increased consolidation, particularly among telecommunications service providers. In the United States, SBC acquired AT&T in November 2005. In December 2006, the combined company, known as AT&T, acquired BellSouth. In January 2006, Verizon acquired MCI. We have seen similar trends abroad with increased consolidation activity in recent years involving international carriers. Mergers of large carriers are likely to have a major impact in shaping the future of the telecommunications industry. These mergers also have the effect of further reducing the number of potential communications service provider customers seeking to purchase networking equipment from vendors, thereby concentrating customer purchasing power.

     We have also seen consolidation among our competitors. In November 2006, Alcatel completed its acquisition of Lucent. In June 2006, Nokia and Siemens agreed to combine their communications service provider businesses to create a new joint venture, and in January 2006, Ericsson completed its acquisition of certain key assets of Marconi Corporation plc’s telecommunications business. These mergers may adversely affect our competitive position by causing our competitors to grow larger, thereby increasing their resources.

Strategy

     Growing demand for a broader offering of higher bandwidth services, and the desire among service providers to provide these services through cost-effective and efficient networks are driving the shift from legacy networks that support distinct voice, video or data services, to converged, multiservice communications networks. While the belief that disparate communications networks will converge into simplified, multiservice infrastructures is widely shared, there are differing views regarding how this convergence will be achieved. Some 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 service providers will seek to maximize the value of their existing network investment.

     In response to these market dynamics, we introduced the FlexSelect™ Architecture, our standards-based, service-oriented network architecture that facilitates our customers’ transition to next-generation networks. Our FlexSelect™ Architecture combines programmable hardware with service-oriented management functionality, automating delivery and management of a broad mix of services including SONET/SDH, Ethernet, storage and video. The products and features we have introduced under our FlexSelect™ Architecture enable enhanced network flexibility, adaptability and management. This allows the delivery of a broader mix of services and the addition of new services through networks that are more cost-effective to deploy, scale and manage. Our FlexSelect™ Architecture enables the transition of legacy network infrastructures to an on-demand, service-selectable network that enables cost-effective delivery of services, while preserving the value of customer investment in legacy and existing architectures.

     We are pursuing the following strategic initiatives, relationships and investments to implement the network vision behind our FlexSelect™ Architecture and capitalize on our customers’ transition to higher capacity, converged network infrastructures:

•

Establish technology leadership in the transition from legacy network infrastructures to Ethernet-based infrastructures. Through our research and development investments, we seek to enable our customers to transition their traditional circuit-switched networks to support a broader mix of higher bandwidth services, while maximizing the value of their existing network investment. Through these investments, we seek to provide customers a cost-effective means to support new applications and deliver service bundles over a single network infrastructure. Our current research and development initiatives include:

	o		Adding advanced Ethernet capabilities across our product portfolio;
	o		Enabling broadband and Ethernet access through various means, including copper and fiber access lines; and
	o		Implementing our FlexSelect™ Architecture by focusing on cross-product integration and driving a common set of features and network management functionality across our portfolio.

•

Expand our market opportunity. Through expansion of our geographic reach and our addressable markets, we seek to grow and diversify our customer base. Through this expansion we seek to further penetrate customer segments beyond telecommunication service providers; including cable, government, and enterprise. Our current sales and marketing initiatives include:

	o		Increasing our use of channel partners to expand our geographic reach and penetrate additional market segments;
	o		Increasing market awareness and acceptance of our Ethernet products and technologies;
	o		Leveraging our incumbency to sell our expanded product portfolio to current customers; and
	o		Pursuing technology partnerships to offer products that complement our existing product portfolio.

In addition to the strategic initiatives above, we are also taking steps to improve the efficiency of our operations:

•

Improve our cost base and promote operational efficiencies. Through our efforts to consolidate our use of component suppliers and contract manufacturers, and align our resources with market opportunities, we were able to improve gross margin and reduce operating expense during fiscal 2006. We also undertook initiatives to improve our operating efficiency, particularly in research and development. We seek to drive further operational efficiencies and improve our cost base. Our current operational initiatives include:

	o		Achieving further product cost reductions by emphasizing global sourcing of components and manufacturing resources;
	o		Maximizing effectiveness of our research and development resources through the restructuring of our development resources along technology sets, rather than product or location;
	o		Continuing to grow our development facility in India; and
	o		Streamlining internal processes and structures to drive increased productivity and cost savings from our existing infrastructure.

Customers and Markets

     Our customer base and the markets in which we sell our equipment, software and services have expanded in recent years

as new markets for communications networking equipment have emerged and our product portfolio has grown. The networking equipment needs of our customers vary; often depending upon their size, location, the make up of their end users and the applications that they support. During fiscal 2006, Sprint, Verizon and AT&T, each represented more than 10% of our total revenue and 40.2% in the aggregate. Revenue from customers within the United States was approximately 75.1% of total revenue in fiscal 2006 and 79.8% in fiscal 2005. Information regarding 10% customers over our last three fiscal years can be found in Note 19 to the Consolidated Financial Statements in Item 8 of Part II of this annual report. We sell our products and services through our direct sales force and third party channel partners in the following markets:

Telecommunications Service Providers

     Our telecommunications service provider customers include regional, national and international telecommunications carriers, both wireline and wireless. Telecommunications service providers, our historical customer base and largest contributor to revenue, are under increasing competitive pressure, primarily from non-traditional competitors that offer overlapping or similar services. Our products, software and services enable telecommunications service providers to transition their legacy or existing network infrastructures to deliver a broader mix of higher bandwidth consumer and enterprise services. We provide products that enable telecommunications service providers to support consumer demand for video delivery, broadband data and wireless broadband services, while continuing to support legacy voice services. Our products also enable telecommunications carriers to support private line networks and applications for enterprise users, including demand for inter-site connectivity, storage and Ethernet services.

Cable Operators/ Multiservice Operators (MSOs)

     Our customers include leading cable and multiservice operators in the U.S. and internationally. Our cable and multiservice operator customers rely upon us for carrier-grade, optical Ethernet transport and switching equipment. Our communications networking platforms allow our cable operator customers to integrate voice, video and data applications over a converged infrastructure. This enables our customers to grow bandwidth capacity and lower the operational expense of supporting disparate networks. By enabling this network convergence, cable operators can expand their end user offerings to include high-value service bundles. Our products support key cable applications including broadcast video, voice over IP, video on demand, broadband data services and services for enterprises.

Enterprise

     Our enterprise customers include large, multi-site commercial organizations, including end users in the healthcare, financial and retail industries. We offer equipment, software and services focused on key enterprise applications including data center connectivity, wide area network consolidation, and storage extension for business continuance and disaster recovery. Our products enable inter-site connectivity between data centers, sales offices, manufacturing plants, and research and development centers, using an owned or leased private fiber network, or a carrier-provided service. Our products also enable our enterprise customers to prevent unexpected system downtime and ensure the safety, security and availability of their data.

Government

     Our government customers include federal and state agencies in the U.S. and international government bodies. Our customers also include domestic and international research and education institutions. Our products, software and services enable these customers to improve network performance, security, reliability and flexibility. Our products also enable government agencies and research and education institutions to take on the challenge of building their own, secure private networks.

Product Portfolio

     Our product portfolio includes a range of communications networking equipment that is located from the core of communications networks to the edge, where end users gain access to voice, video and data communications. Our products include:

	•		Optical Networking Products
	•		Broadband Networking Products
	•		Data Networking Products
	•		Network and Services Management Software

Optical Networking Products

     Our optical networking product portfolio includes metro transport and switching products, core transport and switching products and multiservice optical access products.

     Metro Transport & Switching. Our metro transport and switching products enable service providers to increase the efficiency of their metropolitan communications networks, allowing them to service more customers, more cost effectively. Our products accomplish this by more efficiently using fiber optic networks and enabling communications networks to increase fiber optic capacity. Our metro transport and switching products also enable service providers to transition and converge their metropolitan communications infrastructures to support multiple service traffic types on a cost-effective basis. Our metro transport and switching products include:

	•		CN 4200™ FlexSelect™ Advanced Services Platform Family
	•		ONLINE Metro™ Multiservice DWDM Platform
	•		CN 3600™ Intelligent Optical Multiservice Switch

     Core Transport and Switching. New high-bandwidth service bundles at the network edge are creating increased demand on the core networks maintained by telecommunications service providers, cable operators, government agencies and enterprises. Our core transport products scale optical bandwidth and increase capacity to cost-effectively support high-bandwidth applications and traffic. Our core transport and switching products enable our customers to transition and converge their existing network infrastructures and deploy multiservice networks that can support emerging data and video services. By converging disparate service networks to a multiservice network, our core transport and switching products enable service providers to reduce network capital costs and operational costs through equipment reductions, process automation and network simplification. These products include:

	•		CoreStream® Agility Optical Transport System
	•		CoreDirector® Multiservice Switch

     Multiservice Optical Access. Our multiservice optical access products support storage extension, interconnection of data centers and aggregation of enterprise data services. These products also enable our customers to transition their networks to provide cost-effective Ethernet services. Our multiservice optical access products enable customers to maximize network efficiency associated with transporting, storing, retrieving and sharing data. These products act as on and off ramps, connecting geographically-dispersed enterprise locations over privately owned or leased networks, as well as networks maintained by service providers. Our multiservice optical access products also address business continuity and disaster recovery needs of enterprises, ensuring the safety, security and availability of their data. These products include:

	•		CN 2000® Storage and LAN Extension Platform
	•		CN 2200™ Managed Optical Ethernet Multiplexer
	•		CN 2300™ Managed Optical Services Multiplexer
	•		CN 2600™ Multiservice Edge Aggregator

Broadband Networking Products

     Our broadband networking products allow telecommunications service providers to transition their legacy voice networks to support next-generation services such as Internet-based (IP) telephony, video services and DSL. These products, which enable telecommunications service providers to offer broadband services over existing copper and fiber access lines, facilitate broader service offerings to compete with cable operators. These products enable telecommunications service providers to leverage their investment in existing or legacy voice network equipment to provide the broadband services sought by end users, while maximizing the use of their existing network. Our broadband networking products include:

	•		CNX-5™ Broadband DSL System
	•		CNX-5Plus™ Modular Broadband Loop Carrier

Data Networking Products

     Our data networking offering includes our multiservice edge switching and routing products. These products enable

telecommunications service providers and multiservice operators to transition their communications networks from legacy technologies, such as ATM and Frame Relay, to next-generation technologies, such as Ethernet and IP/MPLS. These technologies more cost-effectively support the delivery of multiple service types, including voice, video and data services, from service providers to end users. Our data networking products enhance bandwidth efficiency, provisioning, and scalability, by converging traditional and emerging data services in carrier metropolitan networks. These products include our:

	•		DN 7000® Series Multiservice Edge Switching and Aggregation Platform
	•		CN 4350™ Ethernet Services Provisioning Switch

Network and Service Management Software

     We offer integrated network and service management software products across our product lines. Our ON-Center^® Network & Service Management Suite is designed to increase network automation and simplify network management and operation. Our network and service management products are also designed to facilitate rapid and simplified provisioning of new or modified service connections and the efficient allocation of bandwidth required to deliver such services. By increasing network automation, minimizing network downtime, and monitoring network performance and service metrics, our network and service management software enables customers to improve the cost effectiveness of their network operations.

Global Network Services

     To complement our product portfolio, we offer a broad range of consulting and support services. We provide these services through our own internal Global Network Service resources and through service partners. Our service offering includes:

	•		Network analysis, planning and design;
	•		Operations and network management;
	•		Network optimization and tuning;
	•		Deployment, product installation, testing and commissioning;
	•		Program or project management for complex, end-to-end communications network projects, including the deployment of multi-vendor/multi-technology solutions;
	•		Maintenance and support services, including, managed services for helpdesk and technical assistance, spares and logistics management, software updates, engineering dispatch, advanced technical support, and hardware and software warranty extensions; and
	•		Product training, service partner certification and documentation services.

Product Development

     The industry in which we compete is subject to rapid technological developments, evolving standards and protocols and shifts in customer demand. To remain competitive, we must continue to introduce new products and enhance existing products by adding new features and functionality. As the markets in which we sell our products and the technologies that support these products have evolved, our research and development strategy has been to pursue technology and product convergence. This convergence allows us to consolidate multiple technologies and functionalities on a single platform, ultimately creating more robust and cost-effective products. Over the last year, we have reorganized our development efforts along technology skill sets that are applicable across multiple products. Prior to this change, our development resources were structured along specific product lines. We believe that this change will help drive the development of a common set of features across our portfolio and allow us to offer a more integrated product portfolio to our customers.

     Our product development investments are driven by market demand and involve close collaboration among our marketing, sales and product development organizations. We also incorporate feedback from customers in our product development process. In some cases, we work with and make strategic investments in technology partners to develop new or modify existing products. In addition, we participate in industry and standards organizations where appropriate and incorporate information from these affiliations throughout the product development process. We continually review our existing products and development projects to determine their fit within our portfolio. We assess the market demand and growth opportunities, as well as the costs and resources necessary to support and enhance our products. During 2006, our

product development initiatives focused on adding advanced Ethernet capabilities across our product portfolio and implementing our FlexSelect™ Architecture.

     Our research and development expense (including stock compensation cost of $5.1 million, $4.4 million and $6.5 million, respectively) were $111.1 million, $137.2 million and $205.4 million for fiscal 2006, 2005 and 2004, respectively. For more information regarding our research and development expenses, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sales and Marketing

     We sell our communications networking equipment, software and services through our direct sales efforts and channel relationships. In addition to securing new customers, our sales strategy has focused on building long-term relationships with existing customers that allow us to leverage our incumbency by extending existing platforms and selling additional products to support new applications.

     We maintain a direct sales presence in locations throughout North America, Europe and Asia. Through these offices we sell and support our product and service offerings into each of our customer markets. In support of our sales efforts, we engage in marketing activities intended to position and promote our brand, and our product, software and service offering.

     We also maintain a channel program that works with resellers, systems integrators and service providers to market and sell our products, software and services. Our third party channel sales and other distribution arrangements enable us to leverage our direct sales resources and reach additional geographic regions and customer segments, including government and enterprise customers. Our channel sales strategy also enables us to couple our products with complementary technologies sold by our channel partners. We believe this channel strategy affords us expanded market opportunities and reduces the financial risk of entering new markets and pursuing new customer segments.

Manufacturing

     We rely on contract manufacturers to perform the majority of the manufacturing operations for our products and components, and are increasingly utilizing overseas suppliers in lower cost regions such as Asia. We believe that using contract manufacturers allows us to conserve capital, operate without dedicating significant resources to manufacturing and utilize a direct order fulfillment model for certain products. Direct order fulfillment allows us to rely on our contract manufacturers to perform final system integration and test, prior to direct shipment of products from their facilities to our customers. For certain product lines, we continue to perform a significant portion of the module assembly, final system integration and testing. We work closely with our contract manufacturers to manage material, quality, cost and delivery times and we continually evaluate their services to ensure performance on a reliable and cost-effective basis. In recent years we have consolidated our base of suppliers and increasingly utilized a global sourcing strategy in an effort to reduce product costs. We utilize an operations center in Shenzhen, China to address materials sourcing, manufacturing resources and management of our contract manufacturers in Asia.

     Our products include some components that are proprietary in nature and only available from a single source, as well as some components that are generally available from a number of suppliers. In some cases, significant time would be required to establish relationships with alternate suppliers or providers of proprietary components. We do not have long-term contracts with any contract manufacturers that guarantee supply of components or their manufacturing services and our contract manufacturers are not obligated to accept our purchase orders for components. If we encounter difficulty continuing our relationship with a supplier, or if a supplier is unable to meet our needs, we may encounter manufacturing delays that could adversely affect our business. In an effort to limit our exposure to such delays and to satisfy customer needs for shorter delivery terms, we rely upon a build-to-forecast model across our product portfolio.

Competition

     Competition is intense among providers of communications networking equipment, software and services, particularly for sales to telecommunications service providers, which have undergone a period of consolidation in recent years. The markets for our products, software and services are characterized by rapidly changing and converging technologies. Competition in these markets is based on any one or a combination of the following factors: price, functionality, manufacturing capability, installation, services, existing business and customer relationships, scalability and the ability of products and services to meet customers’ immediate and future network requirements. Competition is dominated by a small number of very large, multi- national, vertically integrated companies. Each of these competitors has substantially greater

financial, technical, operational and marketing resources than Ciena. Merger activity in recent years among some of our larger competitors may intensify their advantages and affect the competitive landscape. Our industry has also experienced increased competition from low-cost producers in Asia, which can give rise to pricing pressure. Our competitors include Alcatel-Lucent, Cisco, Ericsson, Fujitsu, Huawei, Nortel, Siemens, Tellabs, and ZTE.

     There are also several smaller, but established, companies 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. These competitors, particularly those that are privately-held, often employ aggressive competitive and business tactics as they seek to gain entry with certain customers or markets. Due to these practices and the narrower focus of their development efforts, which may allow introduction of products more quickly, these competitors may be more attractive to customers.

Patents, Trademarks and Other Intellectual Property Rights

     We seek to establish and maintain proprietary rights in our technology, products and software through the use of patents, copyrights, trademarks, and trade secret laws. We have a significant number of trademarks and patents in the United States and foreign countries where we do business. We also rely on contractual rights to establish proprietary rights in our products and protect trade secrets and confidential information. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements with us. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individual during the course of the employee’s work with us. The agreements also require that each person maintain the confidentiality of all proprietary information disclosed to them.

     There can be no assurance that our proprietary rights will not be challenged, invalidated or infringed upon. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps that we are taking will detect or prevent unauthorized use, particularly as we expand our operations and product development into countries that may not provide the same level of intellectual property protection as the United States. In recent years, we have filed suit to enforce our intellectual property rights and have been subject to several claims related to patent infringement. In some cases, these claims have required us to pay the patent holders substantial sums or enter into license agreements requiring ongoing royalty payments. We believe that the frequency of patent infringement claims is increasing as patent holders use such claims as a competitive tactic and source of additional revenue. Such actions can be costly and may require us to take patent licenses or to redesign or stop selling products that allegedly infringe patents belonging to others.

     Our network and service management software and other products incorporate software and components licensed from third parties. We may be required to license additional technology from third parties in order to develop new products or product enhancements. There can be no assurance that the necessary licenses would be available on acceptable commercial terms. Failure to obtain such licenses or other rights could affect our development efforts and harm our business, financial condition and operating results.

Employees

     As of October 31, 2006, we had 1,485 employees. We consider the relationships with our employees to be good. We are not a party to any collective bargaining agreement.

Directors and Executive Officers

     The table below sets forth certain information concerning our directors and executive officers:

Name		Age				Position
Patrick H. Nettles, Ph.D. (1)			63			Executive Chairman of the Board of Directors
Gary B. Smith (1)			46			President, Chief Executive Officer and Director
Stephen B. Alexander			47			Senior Vice President, Products & Technology and Chief Technology Officer
Michael G. Aquino			50			Senior Vice President, World Wide Sales
Joseph R. Chinnici			52			Senior Vice President, Finance and Chief Financial Officer
Andrew C. Petrik			43			Vice President, Controller and Treasurer
Arthur D. Smith, Ph.D.			40			Chief Operating Officer
Russell B. Stevenson, Jr.			65			Senior Vice President, General Counsel and Secretary
Stephen P. Bradley, Ph.D. (1)(3)(4)			65			Director
Harvey B. Cash (1)(2)(4)			68			Director
Bruce L. Claflin (1)(3)			55			Director
Lawton W. Fitt (1)(3)			53			Director
Judith M. O’Brien (1)(2)(4)			56			Director
Michael J. Rowny (1)(3)			56			Director
Gerald H. Taylor (1)(2)			65			Director

     Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and 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 of Ciena, and he was President and Chief Executive Officer from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the California Institute of Technology and serves on the board of directors of Axcelis Technologies, Inc. and The Progressive Corporation. Dr. Nettles also serves on the board of directors of Carrius Technologies, Inc., a privately held company.

     Gary B. Smith has served as President and Chief Executive Officer since May 2001 and has served on Ciena’s Board of Directors since October 2000. Mr. Smith serves on the board of directors for CommVault Systems, Inc. and the American Electronics Association. Mr. Smith also serves as a member of the Global Information Infrastructure Commission.

     Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since September 1998 and as a Senior Vice President of Ciena since January 2000. Mr. Alexander currently serves as Senior Vice President of Products & Technology, a position he has held since October 2005. During 2004 and 2005, Mr. Alexander served as General Manager of Products & Technology and General Manager of Transport and Switching and Data Networking. Mr. Alexander serves on the Federal Communications Commission Technology Advisory Council.

     Michael G. Aquino has served as Ciena’s Senior Vice President, Worldwide Sales since April 2006. Mr. Aquino joined Ciena in June 2002 and has previously held positions as Ciena’s Vice President of Americas, with responsibility for sales activities in the region, and Vice President of Government Solutions, where he focused on supporting Ciena’s relationships with the U.S. and Canadian government. Prior to joining Ciena, from August 2001 to May 2002, Mr. Aquino served as Vice President, Eastern Americas Sales for ONI Systems, which was acquired by Ciena in 2002.

     Joseph R. Chinnici joined Ciena in 1994 and has served as Ciena’s Senior Vice President, Finance and Chief Financial Officer since August 1997. Mr. Chinnici serves on the board of directors for Brix Networks, Inc. and Sourcefire, Inc., both privately held companies.

     Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller and Treasurer of Ciena since August 1997.

     Arthur D. Smith, Ph.D. joined Ciena in May 1997 and has served as Chief Operating Officer since October 2005. Dr. Smith served as Senior Vice President, Global Operations from September 2003 to October 2005. 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.

     Russell B. Stevenson, Jr. has served as Senior Vice President, General Counsel and Secretary since joining Ciena in August 2001.

     Stephen P. Bradley, Ph.D. has served as a Director of Ciena since April 1998. Professor Bradley is the William Ziegler Professor of Business Administration and teaches Competitive and Corporate Strategy in the Advanced Management Program 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: Building and Sustaining Competitive Advantage. Professor Bradley serves on the board of directors of the Risk Management Foundation of the Harvard Medical Institutions and i2 Technologies, Inc.

     Harvey B. Cash has served as a Director of Ciena 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 First Acceptance Corp., i2 Technologies, Inc., Silicon Laboratories, Inc., Argonaut Group, Inc. and Staktek Holdings, Inc. Mr. Cash also serves on the board of directors of Voyence Inc., a privately held company.

     Bruce L. Claflin has served as a director of Ciena since August 2006. Mr. Claflin served as president and Chief Executive Officer of 3Com Corporation, from January 2001 until his retirement in February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998. Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he held various sales, marketing and management positions, including general manager of IBM PC Company’s worldwide research and development, product and brand management, as well as president of IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro Devices (AMD).

     Lawton W. Fitt has served as a Director of Ciena since November 2000. Since October 2006, Ms. Fitt has served as a senior advisor to GSC Group, Inc., an alternative asset investment management firm. From October 2002 to March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner from 1994, and a managing director from 1996 to October 2002. Ms. Fitt is a director of Reuters PLC and Citizens Communications Company.

     Judith M. O’Brien has served as a Director of Ciena since July 2000. Since November 2006, Ms. O’Brien has served as executive vice president of Obopay, Inc., a provider of a comprehensive U.S. mobile payment service. From February 2001 until October 2006, Ms. O’Brien served as a Managing Director at Incubic Venture Fund, a venture capital firm. From February 1984 until February 2001, Ms. O’Brien was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate finance, mergers and acquisitions and general corporate matters. Ms. O’Brien serves on the board of directors of Adaptec, Inc. Ms. O’Brien also serves on the board of directors of AviaraDx, Inc., GeoVector Corporation, Grandis Inc., Mistletoe Technologies, Inc. and Spectragenics, Inc., all of which are privately held companies.

     Michael J. Rowny has served as a Director of Ciena since August 2004. Mr. Rowny has been Chairman of Rowny Capital, a private equity firm, since 1999. From 1994 to 1999, and previously from 1983 to 1986, Mr. Rowny was with MCI Communications in positions including President and Chief Executive Officer of MCI’s International Ventures, Alliances and Correspondent group, acting Chief Financial Officer, Senior Vice President of Finance, and Treasurer. Mr. Rowny serves on the board of directors of Neustar, Inc. Mr. Rowny also serves on the board of directors of Llamagraphics, Inc., a privately held company.

     Gerald H. Taylor has served as a Director of Ciena since January 2000. Mr. Taylor has served as a Managing Member of mortonsgroup, LLC, a venture partnership specializing in telecommunications and information technology, since January 2000. From 1996 to 1998, Mr. Taylor was Chief Executive Officer of MCI Communications Corporation.

Item 1A. Risk Factors

     Investing in our securities involves a high degree of risk. In addition to the other information contained in this report, you should consider the following risk factors before investing in our securities.

We face intense competition that could hurt our sales and our ability to achieve and maintain profitability.

     The markets in which we compete for sales of networking equipment, software and services are extremely competitive, particularly the market for sales to telecommunications service providers. Competition in these markets is based on any one or a combination of the following factors: price, functionality, manufacturing capability, installation, services, existing business and customer relationships, scalability and the ability of products and services to meet the immediate and future network requirements of customers. A small number of very large companies have historically dominated the communications networking equipment industry. Many of our competitors have substantially greater financial, technical and marketing resources, greater manufacturing capacity and better established relationships with telecommunications carriers and other potential customers than we. Recent consolidation activity among large networking equipment providers has the effect of causing our competitors to grow even larger and more powerful, magnifying their strategic advantages. On November 30, 2006, Alcatel completed its acquisition of Lucent. In June 2006, Nokia and Siemens agreed to combine their communications service provider businesses to create a new joint venture, and in January 2006, Ericsson completed its acquisition of certain key assets of Marconi Corporation plc’s telecommunications business. These mergers may adversely affect our competitive position by causing our competitors to grow larger and increasing their resources. We also compete with low-cost producers that can influence pricing pressure and a number of smaller companies that provide significant competition for a specific product, customer segment or geographic market. These competitors often base their products on the latest available technologies. Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly and may be more attractive to customers.

     Increased competition in our markets has resulted in aggressive business tactics, including:

	•		intense price competition, particularly from competitors in Asia;
	•		early announcements of competing products and extensive marketing efforts;
	•		“one-stop shopping” options;
	•		competitors offering to repurchase our equipment from existing customers;
	•		customer financing assistance;
	•		marketing and advertising assistance; and
	•		intellectual property assertions and disputes.

     The tactics described above can be particularly effective in an increasingly concentrated base of potential customers such as telecommunications service providers. Our inability to compete successfully in our markets would harm our sales and our ability to maintain profitability.

Our revenue and operating results can fluctuate unpredictably from quarter to quarter.

     Our revenue can fluctuate unpredictably from quarter to quarter. Fluctuations in our revenue can lead to even greater fluctuations in our operating results. Our budgeted expense levels depend in part on our expectations of future revenue. Any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time. Consequently, if our revenue declines, our levels of inventory, operating expense and general overhead would be high relative to revenue, resulting in additional operating losses.

     Other factors contribute to fluctuations in our revenue and operating results, including:

	•		the level of demand for our products and the timing and size of customer orders, particularly from telecommunications service provider customers;
	•		satisfaction of contractual customer acceptance criteria and related revenue recognition requirements;

	•		delays, changes to or cancellation of orders from customers;
	•		the availability of an adequate supply of components and sufficient manufacturing capacity;
	•		the introduction of new products by us or our competitors;
	•		readiness of customer sites for installation; and
	•		changes in general economic conditions as well as those specific to our market segments.

     Many of these factors are beyond our control, particularly in the case of large carrier orders and multi-vendor or multi-technology network builds where the achievement of certain performance thresholds for acceptance is subject to the readiness and performance of the customer or other providers and changes in customer requirements or installation plans. Any one or a combination of the factors above may cause our revenue and operating results to fluctuate from quarter to quarter. As a consequence, our revenue and operating results for a particular quarter may be difficult to predict and our prior results are not necessarily indicative of results likely in future periods.

Our gross margin may fluctuate from quarter to quarter and our product gross margin may be adversely affected by a number of factors, some of which are beyond our control.

     Our gross margin fluctuates from period to period and our product gross margin may be adversely affected by numerous factors, including:

	•		increased price competition;
	•		the mix in any period of higher and lower margin products and services;
	•		sales volume during the period;
	•		charges for excess or obsolete inventory;
	•		changes in the price or availability of components for our products;
	•		our ability to continue to reduce product manufacturing costs;
	•		introduction of new products, with initial sales at relatively small volumes with resulting higher production costs; and
	•		increased warranty or repair costs.

     The factors discussed above regarding fluctuations in revenue and operating results can also affect gross margin. We expect product gross margin to continue to fluctuate from quarter to quarter. As a consequence, our gross margin for a particular quarter may be difficult to predict and our prior results are not necessarily indicative of results likely in future periods.

A small number of our telecommunication service provider customers accounted for a significant portion of our revenue in fiscal 2006. The loss of one or more of these customers, reductions in spending or changes affecting the market for telecommunications service providers generally, could negatively affect our business, financial condition and results of operations.

     During fiscal 2006, Sprint, Verizon and AT&T accounted for 40.2% of our revenue in the aggregate. Our concentration in revenue increased during fiscal 2006 largely due to the effect of mergers among some of our significant customers. The industry has experienced substantial consolidation recently, including the merger of Verizon and MCI, and the combination of SBC, AT&T and BellSouth, all of which have been significant customers during prior periods. These mergers have the effect of further reducing the number of potential communications service provider customers seeking to purchase networking equipment from vendors, thereby concentrating customer purchasing power. Moreover, these mergers may result in delays in, or the curtailment of, network investments. If consolidation among telecommunications carriers continues to increase, we may be subject to additional concentration of revenue, pricing pressure and quarterly fluctuation in revenue.

     While we continue to diversify into new customer markets, a significant majority of our revenue is concentrated in our traditional customer market of telecommunications service providers. Our concentration of revenue in this customer market exposes us to significant risks associated with a market wide change in business prospects, competitive pressures or other conditions affecting telecommunications carriers. The telecommunications industry has undergone significant changes in recent years and service providers have experienced increased competition from within and outside their market. These pressures are likely to continue to cause telecommunications service providers to seek to minimize the costs of the equipment that they buy and may cause static or reduced capital expenditures. These competitive pressures may also result in pricing becoming a more important factor in customer purchasing decisions. Increased focus on pricing may favor low-cost vendors and larger competitors that can spread the effect of price discounts across a broader offering of products and services and across a larger customer base. The loss of one or more large customers, a significant reduction in spending by such customers, or a change negatively affecting the business prospects of the telecommunications industry, could have a material adverse affect on our business, financial condition and results of operations.

Network equipment sales to large communications service providers often involve lengthy sales cycles and protracted contract negotiations and may require us to assume terms or conditions that negatively affect our pricing, payment and timing of revenue recognition.

     In recent years we have sought to add large communication service providers as customers for our products, software and services. Our future success will depend on our ability to maintain and expand our sales to existing customers and add new customers. Many of our competitors have long-standing relationships with communications service providers, which can pose significant obstacles to our sales efforts. Sales to large communications service providers typically involve lengthy sales cycles, protracted or difficult contract negotiations, and extensive product testing and network certification. We are sometimes required to assume terms or conditions that negatively affect pricing, payment and the timing of revenue recognition in order to consummate a sale. This may negatively affect the timing of revenue recognition, which would, in turn, negatively affect our results of operations. Communications service providers may ultimately insist upon terms and conditions that we deem too onerous or not in our best interest. Moreover, our customers are typically not contractually obligated to purchase a certain amount of products or services from us and often have the right to reduce, delay or even cancel previous orders. As a result, we may incur substantial expenses and devote time and resources to potential relationships that never materialize or result in lower than anticipated sales.

We may invest development resources in products or technologies for which market demand is lower than anticipated.

      The market for communications networking equipment is characterized by rapidly evolving technologies and changes in market demand. To succeed in this market, we must continue to invest in research and development to enhance our existing products and create new ones. There is often a significant time between beginning a new development initiative and bringing the new or revised product to market, and during this time technology or the market may move in directions we did not anticipate. There is a significant probability, therefore, that at least some of our development decisions will not turn out as anticipated, and that our investment in a project will be unprofitable. Changes in the market may also cause us to discontinue previously planned investments in products, which can have a disruptive effect on relationships with customers that were anticipating the availability of a new product or feature. Product development investment decisions are difficult and there is no assurance that we will be successful. If we fail to make prudent research and development investments, our competitive position may suffer and the growth of our business and revenues could be harmed.

Product performance problems could damage our business reputation and negatively affect our results of operations.

     The development and production of new products, and enhancements to existing products, are complicated and often involve problems with software, components and manufacturing methods. Due to the complexity of these products, some of them can be fully tested only when deployed in communications networks or with other equipment. We have introduced new or upgraded products in recent quarters and expect to continue to enhance and extend our product portfolio. Product performance problems are often more acute for initial deployments of new products and product enhancements. Modifying our products to enable customers to integrate them into a new type of network architecture entails similar risks. If significant reliability, quality, or network monitoring problems develop as a result of our product development, manufacturing or integration, a number of negative effects on our business could result, including:

•

increased costs associated with addressing software or hardware defects, including service and warranty expenses;

	•		payment of liquidated damages for performance failures or delays;
	•		high inventory obsolescence expense;
	•		delays in collecting accounts receivable;
	•		cancellation or reduction in orders from customers; and
	•		damage to our reputation or legal actions by customers or end users.

     Because we outsource manufacturing to contract manufacturers and use a direct order fulfillment model for certain of our products, we may be subject to product performance problems resulting from the acts or omissions of these third parties. These product performance problems could damage our business reputation and negatively affect our results of operations.

We may be required to write off significant amounts of inventory.

     In recent years, we have placed the majority of our orders to manufacture components or complete assemblies for many of our products only when we have firm orders from our customers. Because this practice can result in delays in the delivery of products to customers and place us at a competitive disadvantage, we now order equipment and components from our contract manufacturers and suppliers based on forecasts of customer demand across all of our products. We believe this change is necessary in response to increased customer insistence upon shortened delivery terms. This change in our inventory purchases exposes us to the risk that our customers will not order those products for which we have forecasted sales, or will purchase fewer than the number of products we have forecasted. Our purchase agreements generally do not require that a customer guarantee any minimum purchase level and customers often may modify, reduce or cancel purchase quantities. As a result we may purchase inventory based on forecasted sales and in anticipation of purchases that never come to fruition. In such cases, we may be required to write off inventory. We may also be required to write off inventory as a result of the effect of environmental regulations such as the Restriction of the Use of Certain Hazardous Substances (RoHS), adopted by the European Union. As a result of previous component purchases that we based on forecasted sales, we currently hold inventory that includes non-compliant components. If we are unable to locate alternate demand for these non-compliant components outside of the European Union, we may be required to write off or write down this inventory. If we are required to write off, or write down inventory, it may result in an accounting charge that could materially affect our results of operations for the quarter in which such charge occurs.

Continued shortages in component supply or manufacturing capacity could increase our costs, adversely affect our results of operations and constrain our ability to grow our business.

     As we have expanded our product portfolio, increased our use of contract manufacturers and increased our product sales in recent years manufacturing capacity and supply constraints related to components and subsystems have become increasingly significant issues for us. We have encountered and continue to experience component shortages that have affected our operations and ability to deliver products to customers in a timely manner. Growth in customer demand for the communications networking products supplied by us, our competitors and other third parties, has resulted in supply constraints among providers of some components used in our products. In addition, environmental regulations, such as the Restriction of the Use of Certain Hazardous Substances (RoHS) adopted by the European Union, have resulted in increased demand for compliant components from suppliers. As a result, we may experience delays or difficulty obtaining compliant components from suppliers. Component shortages and manufacturing capacity constraints may also arise, or be exacerbated by difficulties with our suppliers or contract manufacturers, or our failure to adequately forecast our component or manufacturing needs. If shortages or delays persist or worsen, the price of required components may increase, or the components may not be available at all. If we are unable to secure the components or subsystems that we require at reasonable prices, or are unable to secure manufacturing capacity adequate to meet our needs, we may experience delivery delays and may be unable to satisfy our contractual obligations to customers. These delays may cause us to incur liquidated damages to customers and negatively affect our revenue and gross margin. Shortages in component supply or manufacturing capacity could also limit our opportunities to pursue additional growth or revenue opportunities and could harm our business reputation and customer relationships.

We may not be successful in selling our products into new markets and developing and managing new sales channels.

     We continue to take steps to sell our expanded product portfolio into new geographic markets and to a broader customer base, including enterprises, cable operators, and federal, state and local governments. We have less experience in these

markets and believe, in order to succeed in these markets, we must develop and manage new sales channels and distribution arrangements. We expect these relationships to be an increasingly important part of the growth of our business and our efforts to increase revenue. Because we have only limited experience in developing and managing such channels, we may not be successful in reaching additional customer segments, expanding into new geographic regions, or reducing the financial risks of entering new markets and pursuing new customer segments. We may expend time, money and other resources on channel relationships that are ultimately unsuccessful. In addition, sales to federal, state and local governments require compliance with complex procurement regulations with which we have little experience. We may be unable to increase our sales to government contractors if we determine that we cannot comply with applicable regulations. Our failure to comply with regulations for existing contracts could result in civil, criminal or administrative proceedings involving fines and suspension or debarment from federal government contracts. Failure to manage additional sales channels effectively would limit our ability to succeed in these new markets and could adversely affect our ability to grow our customer base and revenue.

We may experience delays in the development and enhancement of our products that may negatively affect our competitive position and business.

     Because our products are based on complex technology, we can experience unanticipated delays in developing, improving, manufacturing or deploying them. Each step in the development life cycle of our products presents serious risks of failure, rework or delay, any one of which could decrease the timing and cost-effective development of such product and could affect customer acceptance of the product. Unexpected intellectual property disputes, failure of critical design elements, and a host of other execution risks may delay or even prevent the introduction of these products. Our development efforts may also be affected, particularly in the near term, by our decision to restructure development functions around technology sets rather than product lines or location-specific development. In addition, we expect to increase hiring of personnel for our development facility in India and expand research and development activity. Modification of research and development strategies and changes in allocation of resources could be disruptive to our development efforts. If we do not develop and successfully introduce products in a timely manner, our competitive position may suffer and our business, financial condition and results of operations would be harmed.

We must manage our relationships with contract manufacturers to ensure that our product requirements are met timely and effectively.

     We rely on contract manufacturers to perform the majority of the manufacturing operations for our products and components and we are increasingly utilizing overseas suppliers, particularly in Asia. The qualification of our contract manufacturers is a costly and time-consuming process, and these manufacturers build product for other companies, including our competitors. We are constantly reviewing our manufacturing capability, including the work of our contract manufacturers to ensure that our production requirements are met in terms of cost, capacity, quality and reliability. From time to time, we may decide to transfer the manufacturing of a product from one contract manufacturer to another, to better meet our production needs. Efforts to transfer to a new contract manufacturer or consolidate our use of suppliers may result in temporary increases in inventory volumes purchased in order to ensure continued supply. It is possible that we may not effectively manage these contract manufacturer transitions. Moreover, new contract manufacturers may not perform as well as expected. As a result, we experience risks associated with lead times, on time delivery and quality assurance that could harm our business. In addition, we do not have contracts in place with some of these providers and do not have guaranteed supply of components or manufacturing capacity. Our inability to effectively manage our relationships with our contract manufacturers, particularly overseas, could negatively affect our business and results of operations.

We depend on a limited number of suppliers, and for some items we do not have a substitute supplier.

     We depend on a limited number of suppliers for our product components and subsystems, as well as for equipment used to manufacture and test our products. Our products include several components for which reliable, high-volume suppliers are particularly limited. Some key optical and electronic components we use in our products are currently available only from sole or limited sources, and in some cases, that source also is a competitor. As a result of this concentration in our supply chain, particularly for optical components, our business and operations would be negatively affected if our suppliers were to experience any significant disruption affecting the price, quality, availability or timely delivery of components. The loss of a source of key components could require us to re-engineer products that use those components, which would increase our costs and negatively affect our product gross margin. The partial or complete loss of a sole or limited source supplier could result in lost revenue, added costs and deployment delays that could harm our business and customer relationships.

Our failure to manage our relationships with service delivery partners effectively could adversely impact our financial results and relationship with customers.

     We rely on a number of service delivery partners, both domestic and international, to complement our global service and support resources. We expect to increasingly rely upon third party service delivery partners for the installation of our equipment in larger network builds, which often include more onerous installation, testing and acceptance terms. In order to ensure that we timely install our products and satisfy obligations to our customers, we must identify, train and certify additional appropriate partners. The certification of these partners can be costly and time-consuming, and these partners service products for other companies, including our competitors. We may not be able to effectively manage our relationships with our partners and we cannot be certain that they will be able to deliver our services in the manner or time required. If our service partners are unsuccessful in delivering services:

	•		we may suffer delays in recognizing revenue in cases where revenue recognition is dependent upon product installation, testing and acceptance;
	•		our services revenue may be adversely affected; and
	•		our relationship with customers could suffer.

We may incur significant costs and our competitive position may suffer as a result of our efforts to protect and enforce our intellectual property rights or respond to claims of infringement from others.

     Despite efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. This is likely to become an increasingly important issue as we expand our product development into India and the manufacture of products and components to contract manufacturers in Asia. These and other international operations could expose us to a lower level of intellectual property protection than in the United States. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps that we are taking will prevent unauthorized use of our technology. If competitors are able to use our technology, our ability to compete effectively could be harmed.

     In recent years, we have filed suit to enforce our intellectual property rights. From time to time we have also been subject to litigation and other third party intellectual property claims, including as a result of our indemnification obligations to customers or resellers that purchase our products. The frequency of these assertions is increasing as patent holders, including entities that are not in our industry and that purchase patents as an investment or to monetize such rights by obtaining royalties, use infringement assertions as a competitive tactic and a source of additional revenue. Intellectual property claims can significantly divert the time and attention of our personnel and result in costly litigation. Intellectual property infringement claims can also require us to pay substantial royalties, enter into license agreements and/or develop non-infringing technology. Accordingly, the costs associated with third party intellectual property claims could adversely affect our business, results of operations and financial condition.

Our international operations could expose us to additional risks and result in increased operating expense.

     We market, sell and service our products globally. We have established offices around the world, including in North America, Europe, Latin America and the Asia Pacific region. We have also established a development operation in India to pursue offshore development resources and are increasingly relying upon overseas suppliers, particularly in Asia, for materials sourcing of components and contract manufacturing of our products. We expect that our international activities will be dynamic during fiscal 2007, and we may enter new markets and withdraw from or reduce operations in others. These changes to our international operations will require significant management attention and financial resources. In some countries, our success will depend in part on our ability to form relationships with local partners. Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our products could impact our ability to maintain or increase international market demand for our products.

     International operations are subject to inherent risks, and our future results could be adversely affected by a number of factors, including:

	•		greater difficulty in collecting accounts receivable and longer collection periods;
	•		difficulties and costs of staffing and managing foreign operations;
	•		the impact of recessions in economies outside the United States;
	•		reduced protection for intellectual property rights in some countries;

	•		adverse tax consequences;
	•		social, political and economic instability;
	•		trade protection measures, export compliance, qualification to transact business and other regulatory requirements;
	•		effects of changes in currency exchange rates; and
	•		natural disasters and epidemics.

Our efforts to offshore certain development resources and operations to India may not be successful and may expose us to unanticipated costs or liabilities.

     We have established a development operation in India and expect to increase hiring of personnel for this facility during fiscal 2007. We have limited experience in offshoring our business functions, particularly development operations, and there is no assurance that our plan will enable us to achieve meaningful cost reductions or greater resource efficiency. Further, offshoring to India involves significant risks, including:

	•		difficulty hiring and retaining appropriate engineering resources due to increased competition for such resources;
	•		the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and other third parties;
	•		heightened exposure to changes in the economic, security and political conditions of India;
	•		currency exchange and tax risks associated with offshore operations; and
	•		development efforts that do not meet our requirements because of language, cultural or other differences associated with international operations, resulting in errors or delays.

     Difficulties resulting from the factors above and other risks associated with offshoring could expose us to increased expense, impair our development efforts, harm our competitive position and damage our reputation. Our efforts to offshore certain development resources to India could be disruptive to our business and may cause us to incur substantial unanticipated costs or expose us to unforeseen liabilities.

Our exposure to the credit risks of our customers and resellers may make it difficult to collect receivables and could adversely affect our operating results and financial condition.

     Industry and economic conditions have weakened the financial position of some of our customers. To sell to some of these customers, we may be required to take risks of uncollectible accounts. We may be exposed to similar risks relating to third party resellers and other sales channel partners, as we intend to increasingly utilize such parties as we enter into new geographies, particularly in Europe. While we monitor these situations carefully and attempt to take appropriate measures to protect ourselves, it is possible that we may have to write down or write off doubtful accounts. Such write-downs or write-offs would negatively affect our operating results for the period in which they occur, and, if large, could have a material adverse effect on our operating results and financial condition.

Efforts to restructure our operations and align our resources with market opportunities could disrupt our business and affect our results of operations.

     We have taken several steps, including reductions in force, office closures, and internal reorganizations to reduce the size and cost of our operations and to better match our resources with our market opportunities. We continue to make changes to our operations and allocation of resources in order to improve efficiency and match our resources with market opportunities. These changes could be disruptive to our business. In addition, our efforts in prior periods to reduce cost and improve efficiency have resulted in the recording of accounting charges. These include inventory and technology-related write-offs, workforce reduction costs and charges relating to consolidation of excess facilities. If we are required to take a substantial charge related to restructuring efforts, our results of operations would be adversely affected in such period.

If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively.

     Competition to attract and retain highly skilled technical and other personnel with experience in our industry is increasing in intensity and our employees have been the subject of targeted hiring by our competitors. We may experience difficulty retaining and motivating existing employees and attracting qualified personnel to fill key positions. It may be difficult to replace members of our management team or other key personnel, and the loss of such individuals could be disruptive to our business. Because we generally do not have employment contracts with our employees, we must rely upon providing competitive compensation packages and a high-quality work environment in order to retain and motivate employees. We have informed employees that we will not be issuing equity awards as broadly or at the same level as historical stock option grants. If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively.

We may be required to assume warranty, service, development and other unexpected obligations in connection with our resale of complementary products of other companies.

     We have entered into agreements with strategic partners that permit us to distribute the products of other companies. As part of our strategy to diversify our product portfolio and customer base, we may enter into additional resale and original equipment manufacturer agreements in the future. To the extent we succeed in reselling the products of these companies, we may be required by customers to assume certain warranty, service and development obligations. While our suppliers often agree to support us with respect to these obligations, we may be required to extend greater protection in order to effect a sale. Moreover, some of the companies whose products we resell are relatively small companies with limited financial resources. If they are unable to satisfy these obligations, we may have to expend our own resources to do so. This risk is amplified because the equipment that we are selling has been designed and manufactured by other third parties and may be subject to warranty claims, the magnitude of which we are unable to evaluate fully. We may be required to assume warranty, service, development and other unexpected obligations in connection with our resale of complementary products of other companies.

Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.

     We may acquire or make strategic investments in other companies to add or expand the markets we address and diversify our customer base. We may also engage in these transactions to acquire or accelerate the development of products incorporating new technologies sought after by our customers. To do so, we may use cash, issue equity that would dilute our current shareholders’ ownership, incur debt or assume indebtedness. Strategic investments and acquisitions involve numerous risks, including:

	•		difficulties in integrating the operations, technologies and products of the acquired companies;
	•		diversion of management’s attention;
	•		potential difficulties in completing projects of the acquired company and costs related to in-process projects;
	•		the potential loss of key employees of the acquired company;
	•		subsequent amortization expenses related to intangible assets and charges associated with impairment of goodwill;
	•		ineffective internal controls over financial reporting for purposes of Section 404 of the Sarbanes-Oxley Act;
	•		dependence on unfamiliar supply partners; and
	•		exposure to unanticipated liabilities, including intellectual property infringement claims.

     As a result of these and other risks, any acquisitions or strategic investments may not reap the intended benefits and may ultimately have a negative impact on our business, results of operation and financial condition.

We may be required to take further write-downs of goodwill and other intangible assets.

     As of October 31, 2006, we had $232.0 million of goodwill on our balance sheet. This amount primarily represents the remaining excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At October 31, 2006, we had $91.3 million of other intangible assets on our balance sheet. The amount primarily reflects purchased technology from our acquisitions. At October 31, 2006, goodwill and other intangible assets represented approximately 17.6% of our total assets. During the fourth quarter of 2005, we incurred a goodwill impairment charge of approximately $176.6 million and an impairment of other intangibles of $45.7 million. If we are required to record additional impairment

charges related to goodwill and other intangible assets, such charges would have the effect of decreasing our earnings or increasing our losses in such period. If we are required to take a substantial impairment charge, our earnings per share or net loss per share could be materially adversely affected in such period.

We may be adversely affected by fluctuations in currency exchange rates.

     Historically, our primary exposure to currency exchange rates has been related to non-U.S. dollar denominated operating expenses in Europe, Asia and Canada where we sell primarily in U.S. dollars. As we increase our international sales and utilization of international suppliers, we expect to transact additional business in currencies other than the U.S. dollar. As a result, we will be subject to the possibility of greater effects of foreign exchange translation on our financial statements. For those countries outside the United States where we have significant sales, a devaluation in the local currency would result in reduced revenue and operating profit and reduce the value of our local inventory presented in our financial statements. In addition, fluctuations in foreign currency exchange rates may make our products more expensive for customers to purchase or increase our operating costs, thereby adversely affecting our competitiveness. To date, we have not significantly hedged against foreign currency fluctuations; however, we may pursue hedging alternatives in the future. Although exposure to currency fluctuations to date has not had an adverse effect on our business, there can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our revenue from international sales and, consequently, our business, operating results and financial condition.

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business, operating results and stock price.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report, a report containing management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of our fiscal year and a statement as to whether or not such internal controls are effective. Such report must also contain a statement that our independent registered public accounting firm has issued an attestation report on management’s assessment of such internal controls.

     We initially became subject to these requirements for our fiscal year ended October 31, 2005. Compliance with these requirements has resulted in, and is likely to continue to result in, significant costs and the commitment of time and operational resources. Growth of our business, including our broader product portfolio and increased transaction volume, will necessitate ongoing changes to our internal control systems, processes and infrastructure, including our information systems. Our increasingly global operations, including our development facility in India and offices abroad, will pose additional challenges to our internal control systems as their operations become more significant. We cannot be certain that our current design for internal control over financial reporting, and any modifications necessary to reflect changes in our business, will be sufficient to enable management or our independent registered public accounting firm to determine that our internal controls are effective for any period, or on an ongoing basis. If we are unable to assert that our internal controls over financial reporting are effective (or if our independent registered public accounting firm is unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s assessment of the effectiveness of internal controls over financial reporting), our business may be harmed. Market perception of our financial condition and the trading price of our stock may be adversely affected and customer perception of our business may suffer.

Our business is dependent upon the proper functioning of our information systems and upgrading these systems may result in disruption to our operating processes and internal controls.

     The efficient operation of our business is dependent on the successful operation of our information systems. In particular, we rely on our information systems to process financial information, manage inventory and administer our sales transactions. In an effort to improve the efficiency of our operations, achieve greater automation and support the growth of our business, we are in the process of upgrading certain information systems and expect to implement a new version of our Oracle management information system during fiscal 2007. As a result of these changes, we anticipate that we will have to modify a number of our operational processes and internal control procedures to conform to the work-flows of new or upgraded information systems. We will also have to undergo a process of validating the data in any new system to ensure its integrity and will need to train our personnel. We cannot assure you that these changes to our information systems will occur without some level of disruption of our operating processes and controls. Any material disruption, malfunction or similar problems with our information systems could negatively impact our business operations.

Obligations associated with our outstanding indebtedness on our convertible notes may adversely affect our business.

     At October 31, 2006, indebtedness on our outstanding 3.75% Convertible Notes, due February 1, 2008 and 0.25%

Convertible Senior Notes due May 1, 2013 totaled $842.3 million in aggregate principal. Our indebtedness and repayment obligations could have important negative consequences, including:

	•		increasing our vulnerability to general adverse economic and industry conditions;
	•		limiting our ability to obtain additional financing;
	•		reducing the availability of cash resources available for other purposes, including capital expenditures;
	•		limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
	•		placing us at a possible competitive disadvantage to competitors that have better access to capital resources.

     We may also add additional indebtedness such as equipment loans, working capital lines of credit and other long term debt. Our repayment obligations associated with our convertible notes may adversely affect our business.

Our stock price is volatile.

     Our common stock price has experienced substantial volatility in the past, and may remain volatile in the future. Volatility can arise as a result of a number of the factors discussed in this “Risk Factors” section, as well as divergence between our actual or anticipated financial results and published expectations of analysts, and announcements that we, our competitors, or our customers may make. Volatility in our common stock price and liquidity in our common stock may also be negatively affected by the one-for-seven reverse stock split of our common stock completed on September 22, 2006.

Item 1B. Unresolved Staff Comments

     Not applicable.

Item 2. Properties

     As of October 31, 2006, all of our properties are leased. Our principal executive offices are located in Linthicum, Maryland. We lease twenty-four facilities related to our ongoing operations. These include four buildings located at various sites near Linthicum, Maryland, including an engineering facility, two manufacturing facilities, and one administrative and sales facility. We also have engineering and/or service facilities located in Alpharetta, Georgia; Acton, Massachusetts; and Kanata, Canada. During fiscal 2006, we commenced operations of our development facility in Gurgaon, India and a manufacturing support office in Shenzhen, Peoples Republic of China. We also lease various small offices in the United States and abroad to support our sales and services. We believe the facilities we are now using are adequate and suitable for our business requirements.

     We lease a number of properties that we no longer occupy. As part of our restructuring costs, we provide for the estimated cost of the net lease expense for these facilities. The cost is based on the fair value of future minimum lease payments under contractual obligations offset by the fair value of the estimated future sublease payments that we may receive. As of October 31, 2006, our accrued restructuring liability related to these properties was $35.6 million. If actual market conditions relating to the use of these facilities are less favorable than those projected by management, additional restructuring costs associated with these facilities may be required. For additional information regarding our 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 against Ciena and several other defendants, alleging that optical fiber amplifiers incorporated into certain of those parties’ products infringe U.S. Patent No. 4,859,016 (the “‘016 Patent”). The complaint seeks injunctive relief, royalties and damages. 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 and November 2, 2004, the PTO granted reexaminations of the ‘016 Patent, resulting in a continuation of the stay of the case. On September 11, 2006, the PTO issued a Notice of Intent to Issue a Reexamination Certificate and Statement of Reasons for Patentability/Confirmation, stating its intent to confirm certain claims of the ‘016 Patent.

Thereafter, on September 19, 2006, Litton Systems filed a status report in which it requested that the district court lift the stay of the case, which request was denied by the district court on October 13, 2006. We believe that we have valid defenses to the lawsuit and intend to defend it vigorously in the event the stay of the case is lifted.

      As a result of our merger with ONI Systems Corp. in June 2002, 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 ONI’s 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 2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including Ciena), and their insurers entered into a settlement agreement, whereby, if approved, the plaintiffs’ cases against the issuers would be dismissed, the insurers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to assign or surrender to the plaintiffs certain claims the issuers may have against the underwriters. The settlement agreement does not require Ciena to pay any amount toward the settlement or to make any other payments. In October 2004, the district court certified a class with respect to the Section 10(b) claims in six “focus cases” selected out of all of the consolidated cases, which cases did not include Ciena, and which decision was appealed by the underwriter defendants to the U.S. Court of Appeals for the Second Circuit. On February 15, 2005, the district court granted the motion filed by the plaintiffs and issuer defendants for preliminary approval of the settlement agreement, subject to certain modifications to the proposed bar order, and directed the parties to submit a revised settlement agreement reflecting its opinion. On August 31, 2005, the district court issued a preliminary order approving the revised stipulated settlement agreement, and approving and setting dates for notice of the settlement to all class members. A fairness hearing was held on April 24, 2006, at which time the court took the matter under advisement. If the court determines that the settlement is fair to the class members, the settlement will be approved. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the district court’s grant of class certification in the six focus cases. Because the settlement agreement involves certification of a settlement class as part of the approval process, the impact of the Second Circuit’s decision on the settlement remains unclear.

     In addition to the matters described above, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material effect on our results of operations, financial position or cash flows.

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 2006.

PART II

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

     (a) Ciena’s common stock is traded on the NASDAQ Global Select Market under the symbol “CIEN.” The following table sets forth the high and low sales prices of Ciena common stock, as reported on the NASDAQ Global Select Market, for the fiscal periods indicated. The sales prices below have been adjusted to reflect the one-for-seven reverse stock split of Ciena’s authorized and outstanding common stock effected on September 22, 2006.

		Price Range of Common Stock
		High				Low
Fiscal Year 2005
First Quarter ended January 31		$	24.50			$	15.40
Second Quarter ended April 30		$	20.65			$	11.48
Third Quarter ended July 31		$	18.55			$	14.35
Fourth Quarter ended October 31		$	20.30			$	14.28
Fiscal Year 2006
First Quarter ended January 31		$	28.77			$	16.31
Second Quarter ended April 30		$	39.34			$	26.04
Third Quarter ended July 31		$	33.67			$	23.38
Fourth Quarter ended October 31		$	30.87			$	23.08

     As of December 15, 2006, there were approximately 1,958 holders of record of Ciena’s common stock and 84,939,780 shares of common stock outstanding.

     Ciena has never paid cash dividends on its capital stock. We intend to retain earnings for use in our business and we do not anticipate paying any cash dividends in the foreseeable future.

     In connection with the reverse stock split of its common shares described above, through its transfer agent, Ciena sold 1,011 shares of its common stock on October 9, 2006. The sale resulted in proceeds of approximately $27,500, which were used to fund the payment to shareholders of record of cash in lieu of fractional shares resulting from the reverse stock split. The sale of these shares was exempt from registration pursuant to Rule 236 of the Securities Act of 1933, as amended.

     (b) Not applicable.

     (c) Not applicable.

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. Each fiscal year in the tables below comprised 52 weeks.

     On September 22, 2006, we effected a one-for-seven reverse stock split of our authorized and outstanding common stock. Pursuant to the reverse stock split, each seven shares of authorized and outstanding common stock was reclassified and combined into one share of new common stock. All references to share and per-share data for all periods presented have been adjusted to give effect to the reverse stock split.

Balance Sheet Data:

		As of October 31,
		(in thousands)
		2002				2003				2004				2005				2006
Cash, cash equivalents, short- and long-term investments		$	2,069,812			$	1,611,467			$	1,268,823			$	1,093,487			$	1,199,964
Total assets			2,751,022				2,378,165				2,137,054				1,675,229				1,839,713
Long-term obligations, excluding current portion			999,935				861,149				824,053				761,398				924,484
Stockholders’ equity		$	1,527,269			$	1,330,817			$	1,154,422			$	735,367			$	753,626

Statement of Operations Data:

		Year Ended October 31,
		(in thousands, except per share data)
		2002				2003				2004				2005				2006
Revenue		$	361,155			$	283,136			$	298,707			$	427,257			$	564,056
Cost of goods sold			596,034				210,091				226,954				291,067				306,275
Gross profit (loss)			(234,879	)			73,045				71,753				136,190				257,781
Operating expenses:
Research and development			255,291				212,523				205,364				137,245				111,069
Selling and marketing			133,836				105,921				112,310				115,022				104,434
General and administrative			53,704				39,703				28,592				33,715				47,476
Amortization of intangible assets			8,972				17,870				30,839				38,782				25,181
In-process research and development			—				2,800				30,200				—				—
Restructuring costs			98,093				13,575				57,107				18,018				15,671
Goodwill impairment			557,286				—				371,712				176,600				—
Long-lived asset impairment			127,336				47,176				15,926				45,862				—
Gain on lease settlement			—				—				—				—				(11,648	)
Recovery of sale, export, use tax liabilities and payments			—				—				(5,388	)			—				—
Provision (benefit) for doubtful accounts			14,813				—				(2,794	)			2,602				(3,031	)
Total operating expenses			1,249,331				439,568				843,868				567,846				289,152
Loss from operations			(1,484,210	)			(366,523	)			(772,115	)			(431,656	)			(31,371	)
Interest and other income, net			64,173				45,987				25,936				31,294				50,245
Interest expense			(48,367	)			(39,359	)			(29,841	)			(28,413	)			(24,165	)
Loss on equity investments, net			(15,677	)			(4,760	)			(4,107	)			(9,486	)			215
Gain (loss) on extinguishment of debt			(2,683	)			(20,606	)			(8,216	)			3,882				7,052
Gain (loss) before income taxes			(1,486,764	)			(385,261	)			(788,343	)			(434,379	)			1,976
Provision for income taxes			110,735				1,256				1,121				1,320				1,381
Net income (loss)		$	(1,597,499	)		$	(386,517	)		$	(789,464	)		$	(435,699	)		$	595
Basic net income (loss) per common share		$	(30.62	)		$	(6.06	)		$	(10.60	)		$	(5.30	)		$	0.01
Diluted net income (loss) per dilutive potential common share		$	(30.62	)		$	(6.06	)		$	(10.60	)		$	(5.30	)		$	0.01
Weighted average basic common shares			52,172				63,814				74,493				82,170				83,840
Weighted average dilutive potential common shares			52,172				63,814				74,493				82,170				85,011

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

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that discuss future events or expectations, contain projections of results of operations or financial condition, changes in the markets for our products and services, or state other “forward-looking” information. Ciena’s “forward-looking” information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. You should be aware that these statements only reflect our current predictions and beliefs. These statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially. Important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report, particularly under the heading “Risk Factors” in Item 1A of Part I of this annual report. You should review these risk factors for a more complete understanding of the risks associated with an investment in Ciena’s securities. Ciena undertakes no obligation to revise or update any forward-looking statements. The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and Ciena’s consolidated financial statements and notes thereto included elsewhere in this annual report.

Overview

     Ciena Corporation is a supplier of communications networking equipment, software and services that support the delivery and transport of voice, video and data services. Our products are used in communications networks operated by telecommunications service providers, cable operators, governments and enterprises across the globe. We specialize in transitioning legacy communications networks to converged, next-generation architectures, capable of efficiently delivering a broader mix of high-bandwidth services. By improving network productivity, reducing costs and enabling integrated services offerings, our optical, data and broadband access platforms create business and operational value for our customers.

     Over the past fiscal year, Ciena generated significant revenue growth. We also improved our gross margin and reduced our operating costs over the prior fiscal year. Our steady progress along these fronts has resulted in an important milestone for our business and financial results. For the fourth quarter of fiscal 2006, Ciena had net income of $13.1 million, or $0.14 per diluted share, representing the achievement of quarterly profitability on a GAAP basis for the first time since the third quarter of 2001. These quarterly results enabled us to achieve net income of $0.6 million, or $0.01 per diluted share for fiscal 2006.

     Revenue was $160.0 million for the fourth quarter of fiscal 2006, representing our eleventh consecutive sequential quarterly increase. Revenue increased 32.0% from $427.3 million in fiscal 2005 to $564.1 million in fiscal 2006. Revenue growth continues to be driven, in substantial part, by customers’ transitioning legacy networks to next-generation networks better able to address a broader mix of traffic types and services. In addition, increased broadband usage by end users continues to fuel demand for our products as service providers address network capacity requirements. We expect that current market conditions will enable further growth of our business, including opportunities for sales of our metro transport and switching products, particularly for Ethernet-driven applications. Our percentage of international revenue increased from $86.5 million, or 20.2% of total revenue in fiscal 2005, to $140.4 million, or 24.9% of total revenue in fiscal 2006. As a result of our participation in BT network builds, including their 21^st Century Network project, or 21CN, and other international network projects, we expect our international sales to continue to increase in fiscal 2007 and be a significant contributor to our growth. While we believe that current market conditions will enable us to continue to grow our revenue during fiscal 2007, our business remains susceptible to fluctuation from quarter to quarter due to the timing and size of equipment orders, our ability to deliver products to fulfill those orders, and the timing of product acceptance for revenue recognition.

     Sprint, Verizon and AT&T each accounted for greater than 10% of our fiscal 2006 revenue, and 40.2% in the aggregate. BellSouth, Verizon and SAIC each accounted for greater than 10% of our fiscal 2005 revenue, and 31.3% in the aggregate. Our concentration in revenue increased during fiscal 2006 largely due to the effect of mergers involving some of our largest customers. The telecommunications industry has experienced substantial consolidation, including the mergers of Verizon and MCI, and SBC and AT&T during our fiscal 2006. Each of these companies has been a significant customer during prior periods. In addition, AT&T completed its acquisition of BellSouth in December 2006. As a result, AT&T is likely to represent a greater percentage of our revenue in fiscal 2007.

     Improving gross margin was a significant focus for us during fiscal 2006. Gross margin for fiscal 2006 was 45.7%, up from 31.9% in fiscal 2005. Increased gross margin during fiscal 2006 reflects favorable product mix, product cost reductions

and improved manufacturing efficiencies. To the extent we encounter increased pricing pressure during fiscal 2007, achieving further product cost improvements will be important for us to maintain the gross margin levels attained during fiscal 2006. To continue to drive these product cost reductions, we are emphasizing a global approach to sourcing components and manufacturing our products, and are increasingly utilizing overseas suppliers in lower cost regions, particularly in Asia. While we experienced improved gross margin stability during fiscal 2006, gross margin may be susceptible to fluctuation in fiscal 2007 due to product and customer mix, our ability to drive further product cost reductions and pricing pressure.

     Operating expense decreased from $301.8 million in the fourth quarter of fiscal 2005 to $68.9 million in the fourth quarter of fiscal 2006. Operating expense decreased from $567.8 million in fiscal 2005 to $289.2 million in fiscal 2006. During the fourth quarter of fiscal 2005, we incurred aggregate charges of $222.3 million associated with impairment of goodwill and long-lived assets. Exclusive of these impairment charges, the steps we have taken to improve operational efficiencies enabled us to reduce our operating expense during fiscal 2006. We expect quarterly operating expense to increase from the fourth quarter of fiscal 2006 during fiscal 2007 as we fund the growth of our business through research and development initiatives, increased hiring and the expansion of our development operations in India. While we expect operating expense to increase, reducing these expenses as a percentage of revenue will be critical if we are to maintain and build upon the profitable operating results achieved in fiscal 2006.

     During fiscal 2006, we completed a public offering of 0.25% Convertible Senior Notes due May 1, 2013, in aggregate principal amount of $300.0 million. This offering resulted in proceeds of $263.6 million, net of offering expenses, underwriting discounts and the $28.5 million cost of a call spread option purchased by Ciena. During fiscal 2006, we also repurchased $106.5 million of our outstanding 3.75% convertible notes, due February 1, 2008, in open market transactions for $98.4 million. We recorded a gain on the extinguishment of debt in the amount of $7.1 million, which consists of the $8.1 million gain from the repurchase of the notes less a write-off of $1.0 million of associated debt issuance costs. At October 31, 2006, the remaining principal balance on our outstanding 3.75% convertible notes was $542.3 million. Additional information regarding our outstanding convertible notes can be found in Note 12 to the Consolidated Financial Statements under Item 8 of Part II of this annual report.

     During fiscal 2006, we eliminated our former business units and discontinued reporting our results of operations on a historical operating segment basis. Ciena’s financial results for fiscal 2006 are reported in this annual report as a single business segment. Financial results for fiscal 2006 also represent our first full fiscal year reflecting the effect of our adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment.” SFAS 123(R) requires that we recognize compensation expense on our consolidated statement of operations for all share-based awards made to employees and directors based on estimated fair values. We adopted SFAS 123(R) using the modified prospective application transition method, and accordingly have not restated financial statements for prior periods to include the impact of SFAS 123(R). Share-based compensation was $14.0 million during fiscal 2006, of which $0.3 million was capitalized as part of inventory. Additional information regarding our adoption of SFAS 123(R) is set forth in the Note 16 to the Consolidated Financial Statements under Item 8 of Part II of this annual report and in “Critical Accounting Policies and Estimates” below.

Results of Operations

Fiscal 2005 compared to Fiscal 2006

Revenue, cost of goods sold and gross profit

     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.

     The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold and gross profit from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
Revenue:
Products		$	374,275				87.6			$	502,427				89.1			$	128,152				34.2
Services			52,982				12.4				61,629				10.9				8,647				16.3
Total revenue		$	427,257				100.0			$	564,056				100.0				136,799				32.0
Costs:
Products			248,931				58.2				263,667				46.7				14,736				5.9
Services			42,136				9.9				42,608				7.6				472				1.1
Total cost of goods sold			291,067				68.1				306,275				54.3				15,208				5.2
Gross profit		$	136,190				31.9			$	257,781				45.7			$	121,591				89.3

     The table below (in thousands, except percentage data) sets forth the changes in product revenue, product cost of goods sold and product gross profit from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
Product revenue		$	374,275				100.0			$	502,427				100.0			$	128,152				34.2
Product cost of goods sold			248,931				66.5				263,667				52.5				14,736				5.9
Product gross profit		$	125,344				33.5			$	238,760				47.5			$	113,416				90.5

     The table below (in thousands, except percentage data) sets forth the changes in service revenue, service cost of goods sold and service gross profit from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
Service revenue		$	52,982				100.0			$	61,629				100.0			$	8,647				16.3
Service cost of goods sold			42,136				79.5				42,608				69.1				472				1.1
Service gross profit		$	10,846				20.5			$	19,021				30.9			$	8,175				75.4

     Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
United States		$	340,774				79.8			$	423,687				75.1			$	82,913				24.3
International			86,483				20.2				140,369				24.9				53,886				62.3
Total		$	427,257				100.0			$	564,056				100.0			$	136,799				32.0

     During fiscal 2005 and fiscal 2006, certain customers accounted for 10% or more of our revenue during the respective periods as follows (in thousands, except percentage data):

		Fiscal Year
		2005				%*				2006				%*
Verizon		$	43,673				10.2			$	70,225				12.4
BellSouth			43,946				10.3				N/A				—
SAIC			46,058				10.8				N/A				—
Sprint			N/A				—				89,793				15.9
AT&T			N/A				—				66,926				11.9
Total		$	133,677				31.3			$	226,944				40.2

Revenue

	•		Product revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $48.3 million increase in sales from our CN 4200™ FlexSelect™ Advanced Services Platform introduced in the third quarter of fiscal 2005, a $43.7 million increase in sales from our core transport products and a $35.0 million increase in sales from our CoreDirector® Multiservice Switch.
	•		Service revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $ 4.6 million increase in sales of maintenance and support services, a $2.2 million increase in sales of deployment services, and a $1.2 million increase in sales of product training services.
	•		United States revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $38.1 million increase in sales from our core transport products, a $30.7 million increase in sales from our CoreDirector® Multiservice Switch, and a $15.9 million increase from sales our CN 4200™ FlexSelect™ Advanced Services Platform.
	•		International revenue increased from fiscal 2005 to fiscal 2006, primarily due to a $32.4 million increase in sales from our CN 4200™ FlexSelect™ Advanced Services Platform and a $10.9 million increase in sales from our multiservice optical access products.

Gross profit

	•		Gross profit as a percentage of revenue increased from fiscal 2005 to fiscal 2006 largely due to increased sales volume, sales of higher margin products and cost improvements resulting from our efforts to employ a global approach to sourcing components and manufacturing our products.
	•		Gross profit on products as a percentage of product revenue increased from fiscal 2005 to the fiscal 2006, primarily due to cost reductions and higher margin product mix.
	•		Gross profit on services as a percentage of services revenue increased from fiscal 2005 to fiscal 2006, primarily due to service rate stability in connection with our deployment services and reduced service overhead and deployment costs.

Operating expenses

     The table below (in thousands, except percentage data) sets forth the changes in operating expenses from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
Research and development		$	137,245				32.1			$	111,069				19.7			$	(26,176	)			(19.1	)
Selling and marketing			115,022				26.9				104,434				18.5				(10,588	)			(9.2	)
General and administrative			33,715				7.9				47,476				8.4				13,761				40.8
Amortization of intangible assets			38,782				9.1				25,181				4.5				(13,601	)			(35.1	)
Restructuring costs			18,018				4.2				15,671				2.8				(2,347	)			(13.0	)
Goodwill impairment			176,600				41.3				—				—				(176,600	)			(100.0	)
Long-lived asset impairment			45,862				10.7				—				—				(45,862	)			(100.0	)
Provision for (recovery of) doubtful accounts, net			2,602				0.6				(3,031	)			(0.5	)			(5,633	)			(216.5	)
Gain on lease settlement			—				—				(11,648	)			(2.1	)			(11,648	)			N/A
Total operating expenses		$	567,846				132.8			$	289,152				51.3			$	(278,694	)			(49.1	)

	•		Research and development expense decreased from fiscal 2005 to fiscal 2006, primarily due to reductions of $12.3 million in employee compensation, $6.9 million in prototype expense and $6.3 million in depreciation expense. The reduction in employee compensation was driven by headcount reductions. We expect research and development expense to increase during fiscal 2007 as a result of increased development activity, offset to some extent by cost efficiencies from our India development operations.
	•		Selling and marketing expense decreased from fiscal 2005 to fiscal 2006 due to reductions of $7.3 million in depreciation costs, $2.2 million in product introduction and marketing activities, $2.0 million in facility and information systems expense, $1.7 million in temporary import costs and $0.8 million in travel. These reductions were slightly offset by increases of $2.3 million in employee compensation. Salaries, bonuses and commissions increased by $3.3 million during fiscal 2006, offset by a reduction of $1.1 million in share-based compensation expense. We also expect sales and marketing expense to increase during fiscal 2007 as we continue to grow our revenue.
	•		General and administrative expense increased from fiscal 2005 to fiscal 2006 due to an increase of $6.5 million in legal expense, primarily related to our patent litigation with Nortel Networks, $5.9 million in employee compensation and $1.5 million in audit fees partially offset by a decrease of $0.5 million in directors and officers insurance expense. Included in the legal expenses were $5.7 million in contingent fees paid to outside counsel and advisors connected with the settlement of the Nortel litigation. The increase in employee compensation included an increase of $2.7 million in share-based compensation expense.
	•		Amortization of intangible assets costs decreased from fiscal 2005 to fiscal 2006 due to the write-off of intangible assets recorded in the fourth quarter of fiscal 2005.
	•		Restructuring costs incurred during fiscal 2006 were primarily related to a $10.0 million charge associated with previously restructured unused facilities located in San Jose, CA, and $6.3 million in charges related to workforce reductions of approximately 155 employees and costs associated with the closure of facilities located in Kanata, Canada; Shrewsbury, NJ and Beijing, China.
	•		Provision for (recovery of) doubtful accounts, net for fiscal 2006 was related to the receipt of amounts due from customers from whom payment was previously deemed doubtful due to the customers’ financial condition.
	•		Gain on lease settlement for fiscal 2006 was related to the termination of our obligations under the leases for our former Fremont, CA and Cupertino, CA facilities.

Other items

     The table below (in thousands, except percentage data) sets forth the changes in other items from fiscal 2005 to fiscal 2006.

		Fiscal Year
																		Increase
		2005				%*				2006				%*				(decrease)				%**
Interest and other income, net		$	31,294				7.3			$	50,245				8.9			$	18,951				60.6
Interest expense		$	28,413				6.7			$	24,165				4.3			$	(4,248	)			(15.0	)
Gain (loss) on equity investments, net		$	(9,486	)			(2.2	)		$	215				—			$	9,701				(102.3	)
Gain on extinguishment of debt		$	3,882				0.9			$	7,052				1.3			$	3,170				81.7
Provision for income taxes		$	1,320				0.3			$	1,381				0.2			$	61				4.6

	•		Interest and other income, net increased from fiscal 2005 to fiscal 2006 primarily due to higher interest rates.
	•		Interest expense decreased from fiscal 2005 to fiscal 2006 due to the repurchase of a portion of our outstanding 3.75% convertible notes during fiscal 2005 and fiscal 2006.
	•		Gain (loss) on equity investments, net in fiscal 2005 was due to a decline in the value of our investments in privately held technology companies that was determined to be other than temporary.
	•		Gain on extinguishment of debt for fiscal 2006 resulted from our repurchase of $106.5 million of our outstanding 3.75% convertible notes in open market transactions for $98.4 million. We recorded a gain on the extinguishment of debt in the amount of $7.1 million, which consists of the $8.1 million gain from the repurchase of the notes, less a write-off of $1.0 million of associated debt issuance costs.
	•		Provision for income taxes for fiscal 2005 and fiscal 2006 was primarily attributable to foreign tax related to Ciena’s foreign operations. We did not record a tax benefit for domestic losses during fiscal 2005 or fiscal 2006. We will continue to maintain a valuation allowance against certain deferred tax assets until sufficient evidence exists to support its reversal.

Fiscal 2004 compared to Fiscal 2005

Revenue, cost of goods sold and gross profit

     The table below (in thousands, except percentage data) sets forth the changes in revenue, cost of goods sold and gross profit from fiscal 2004 to fiscal 2005.

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
Revenue:
Products		$	250,210				83.8			$	374,275				87.6			$	124,065				49.6
Services			48,497				16.2				52,982				12.4				4,485				9.2
Total revenue			298,707				100.0				427,257				100.0				128,550				43.0
Costs:
Products			186,461				62.4				248,931				58.2				62,470				33.5
Services			40,493				13.6				42,136				9.9				1,643				4.1
Total cost of goods sold			226,954				76.0				291,067				68.1				64,113				28.2
Gross profit		$	71,753				24.0			$	136,190				31.9			$	64,437				89.8

     The table below (in thousands, except percentage data) sets forth the changes in product revenue, product cost of goods sold and product gross profit from fiscal 2004 to fiscal 2005

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
Product revenue		$	250,210				100.0			$	374,275				100.0			$	124,065				49.6
Product cost of goods sold			186,461				74.5				248,931				66.5				62,470				33.5
Product gross profit		$	63,749				25.5			$	125,344				33.5			$	61,595				96.6

     The table below (in thousands, except percentage data) sets forth the changes in service revenue, service cost of goods sold and service gross profit (loss) from fiscal 2004 to fiscal 2005.

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
Service revenue		$	48,497				100.0			$	52,982				100.0			$	4,485				9.2
Service cost of goods sold			40,493				83.5				42,136				79.5				1,643				4.1
Service gross profit		$	8,004				16.5			$	10,846				20.5			$	2,842				35.5

     Revenue from sales to customers outside of the United States is reflected as International in the geographic distribution of revenue below. The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenue from fiscal 2004 to fiscal 2005.

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
United States		$	221,456				74.1			$	340,774				79.8			$	119,318				53.9
International			77,251				25.9				86,483				20.2				9,232				12.0
Total		$	298,707				100.0			$	427,257				100.0			$	128,550				43.0

     During fiscal 2004 and fiscal 2005, certain customers each accounted for at least 10% of our revenue during the respective periods as follows (in thousands, except percentage data):

		Fiscal Year
		2004				%*				2005				%*
Verizon		$	N/A				—			$	43,673				10.2
BellSouth			N/A				—				43,946				10.3
SAIC			46,557				15.6				46,058				10.8
Total		$	46,557				15.6			$	133,677				31.3

     Revenue

•

Product revenue increased from fiscal 2004 to fiscal 2005 due to a $51.4 million increase in sales of broadband access systems obtained from our May 2004 acquisition of Catena Networks, a $36.5 million increase in sales from our core transport products, a $12.0 million increase in sales of our metro transport and switching products, an

$11.1 million increase in sales of our data networking products, and a $9.6 million increase in sales of our CoreDirector® Multiservice Switch. As a result of the timing of our acquisitions of Catena and IPI, product revenue for fiscal 2004 reflects only two quarters of revenue from these acquired products.

	•		Service revenue increased from fiscal 2004 to fiscal 2005 due to a $2.4 million increase in deployment services and a $1.6 million increase from sales of training in fiscal 2005.
	•		United States revenue increased from fiscal 2004 to fiscal 2005 due to a $51.2 million increase in sales of broadband access systems, a $19.0 million increase in sales of our CoreDirector® Multiservice Switch, a $17.6 million increase in sales from our core transport products, an $11.4 million increase in sales of our data networking products, a $9.4 million increase in sales of our metro transport and switching products, and a $7.2 million increase in sales of deployment services, maintenance and support, and training.
	•		International revenue increased from fiscal 2004 to fiscal 2005 due an $18.9 million increase in sales from our core transport products, and a $ 2.6 million increase in sales of our metro transport and switching products, partially offset by a $9.4 million decrease in sales of our CoreDirector® Multiservice Switch and a $ 2.7 million decrease in sales of deployment services, maintenance and support, and training.

Gross profit

	•		Gross profit as a percentage of revenue increased from fiscal 2004 to fiscal 2005 primarily due to improvements in product gross profit and to a lesser extent, improvements in service margins.
	•		Product gross profit as a percentage of product revenue increased from fiscal 2004 to fiscal 2005 largely due to favorable product mix, including a full year of sales of broadband access products in fiscal 2005, and product cost reductions and improved manufacturing efficiencies.
	•		Service gross profit as a percentage of services revenue increased from fiscal 2004 to fiscal 2005 primarily due to increased sales of training and reduced service overhead costs in fiscal 2005.

Operating expenses

     The table below (in thousands, except percentage data) sets forth the changes in operating expenses from fiscal 2004 to fiscal 2005.

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
Research and development		$	205,364				68.8			$	137,245				32.1			$	(68,119	)			(33.2	)
Selling and marketing			112,310				37.6				115,022				26.9				2,712				2.4
General and administrative			28,592				9.6				33,715				7.9				5,123				17.9
Amortization of intangible assets			30,839				10.3				38,782				9.1				7,943				25.8
In-process research and development			30,200				10.1				—				0.0				(30,200	)			(100.0	)
Restructuring costs			57,107				19.1				18,018				4.2				(39,089	)			(68.4	)
Goodwill impairment			371,712				124.4				176,600				41.3				(195,112	)			(52.5	)
Long-lived asset impairment			15,926				5.3				45,862				10.7				29,936				188.0
Recovery of sale, export, use tax liabilities and payments			(5,388	)			(1.8	)			—				0.0				5,388				(100.0	)
(Recovery of) provision for doubtful accounts, net			(2,794	)			(0.9	)			2,602				0.6				5,396				(193.1	)
Total operating expenses		$	843,868				282.5			$	567,846				132.9			$	(276,022	)			(32.7	)

•

Research and development expense decreased from fiscal 2004 to fiscal 2005 primarily due to $22.5 million of accelerated leasehold amortization recorded in fiscal 2004 with no comparable expense in fiscal 2005. This reduction of expense also included a reduction of $15.6 million in employee-related costs, $9.9 million in depreciation expense, $8.3 million in facility related costs, $7.2 million in consulting costs, and $3.4 million in information systems costs during fiscal 2005. Ciena’s accelerated leasehold amortization expense during fiscal 2004 was due to the closing of our San Jose, CA facility in September 2004. Employee-related expense reductions in 2005 reflect lower headcount from the closing of our San Jose, CA facility and our further headcount reductions in fiscal 2005.

	•		Selling and marketing expense increased from fiscal 2004 to fiscal 2005 due to an increase of $3.0 million related to customer demonstration systems, $1.1 million in tradeshow and marketing activities, $1.4 million employee-related cost, and $0.6 million consulting, partially offset by reductions in depreciation expense of $1.7 million and reductions of information system expenses of $1.3 million.
	•		General and administrative expense increased from fiscal 2004 to fiscal 2005 primarily due to an increase of $2.6 million related to legal services, $1.7 million for outside services related to Sarbanes-Oxley compliance, $1.2 million related to the outsourcing of certain accounting services for our international operations, and $1.3 million information systems. This was partially offset by a reduction of $1.9 million in employee-related costs.
	•		Amortization of intangible assets costs increased from fiscal 2004 to fiscal 2005 due to higher amounts of purchased intangible assets, such as developed technology and customer relationships, resulting from our acquisitions of Catena Networks and Internet Photonics in May 2004. As a result of the timing of these acquisitions, amortization of intangible assets in fiscal 2004 reflects only two fiscal quarters associated with these additional purchased intangible assets.
	•		In-process research and development (IPR&D) represents the estimated value of purchased in-process technology that had not reached technological feasibility and had no alternative future use at the time of acquisition. In the third quarter of fiscal 2004 we recorded $25.0 million and $5.2 million of IPR&D from our Catena and Internet Photonics acquisitions, respectively. We had no acquisitions in fiscal 2005.
	•		Restructuring costs decreased from fiscal 2004 to fiscal 2005. In 2005, restructuring costs include an adjustment of $11.4 million related to previously restructured facilities, due to lower expected sublease payments from the continued excess supply of commercial property in certain markets where our unused facilities are located. Restructuring costs for fiscal 2005 also include $6.6 million primarily related to workforce reductions of approximately 177 employees. In 2004, restructuring costs included $27.8 million, primarily related to the closure of our San Jose, CA facility. Restructuring costs in 2004 also included $21.8 million related to workforce reductions of approximately 560 employees and adjustments of $7.5 million, related to previously restructured facilities, associated with lower expected sublease payments and increased estimated operating expenses. These workforce reductions were taken as part of our plan to reduce our costs and align resources with market opportunities.
	•		Goodwill impairment decreased from fiscal 2004 to fiscal 2005. We incurred a goodwill impairment of $176.6 million related to one of our former business units in fiscal 2005. This impairment was related to our decision to suspend research and development for our CN 1000™ Next-Generation Broadband Access platform. We recorded a goodwill impairment of $371.7 million related to three of our former business units in fiscal 2004. This impairment was related to the decline in the forecasted demand for our products, along with the reduction in valuations of comparable businesses.
	•		Long-lived assets impairment charges for fiscal 2005 were $45.9 million, and were largely attributable to our decision to suspend research and development of our CN 1000™ Next-Generation Broadband Access platform and market conditions affecting our broadband access products. The impairment of long-lived assets in fiscal 2005 included $45.7 million of intangible assets and $0.2 million of impaired research and development equipment, which was classified as held for sale. During fiscal 2004, we recorded $15.9 million long-lived assets impairment, largely attributable to the closure of our San Jose, CA facility. The impairment of long-lived assets in fiscal 2004 included $15.9 million of impaired research and development equipment, which was classified as held for sale.
	•		Recovery of sales, export, use tax liabilities and payments during the fiscal 2004 was due to the resolution of a use tax audit related to assets acquired from ONI.
	•		(Recovery of) provision for doubtful accounts, net during fiscal 2005 was $2.6 million and was related to one customer from which payment was deemed doubtful due to the customer’s financial condition. During fiscal 2004, we recorded a recovery of doubtful accounts of $2.8 million, related primarily to the receipt of payment from a customer from which payment was previously deemed doubtful. We maintain an allowance for potential losses on a specific identification basis.

Other items

     The table below (in thousands, except percentage data) sets forth the changes in other items from fiscal 2004 to fiscal 2005.

		Fiscal Year
																		Increase
		2004				%*				2005				%*				(decrease)				%**
Interest and other income, net		$	25,936				8.7			$	31,294				7.3			$	5,358				20.7
Interest expense		$	29,841				10.0			$	28,413				6.7			$	(1,428	)			(4.8	)
Loss on equity investments, net		$	4,107				1.4			$	9,486				2.2			$	5,379				131.0
Gain (loss) on extingusihment of debt		$	(8,216	)			(2.8	)		$	3,882				0.9			$	12,098				(147.2	)
Provision for income taxes		$	1,121				0.4			$	1,320				0.3			$	199				17.8

	•		Interest and other income, net increased from fiscal 2004 to fiscal 2005 because of higher rates of return on our investments.
	•		Interest expense decreased from fiscal 2004 to fiscal 2005 due to the decrease in our outstanding debt obligations in fiscal 2005, resulting from our repurchase of all of the remaining outstanding ONI 5.0% convertible subordinated notes during fiscal 2004 and the repurchase of $41.2 million in principal amount of our 3.75% convertible notes during the third quarter of fiscal 2005.
	•		Loss on equity investments, net increased from fiscal 2004 to fiscal 2005 due to a further decline in the value of our investments in privately held technology companies that was determined to be other than temporary.
	•		Gain (loss) on extinguishment of debt during fiscal 2005 resulted from our repurchase of $41.2 million of our outstanding 3.75% convertible notes, due February 1, 2008, in open market transactions for $36.9 million. We recorded a gain on the extinguishment of debt in the amount of $3.9 million, which consists of the $4.3 million gain from the repurchase of the notes less a write-off of $0.4 million of associated debt issuance costs. During fiscal 2004, we recorded an $8.2 million loss on the extinguishment of debt related to our repurchase of all of the remaining ONI 5.0% convertible subordinated notes outstanding.
	•		Provision for income taxes for 2004 and 2005 was primarily attributable to foreign tax related to Ciena’s foreign operations. We did not record a tax benefit for our domestic losses during either period. We will continue to maintain a valuation allowance against certain deferred tax assets until sufficient evidence exists to support its reversal.

Liquidity and Capital Resources

     At October 31, 2006, our principal source of liquidity was cash and cash equivalents, short-term investments and long-term investments. The following table summarizes our cash and cash equivalents, short-term investments and long-term investments (in thousands):

		October 31,				October 31,				Increase
		2005				2006				(decrease)
Cash and cash equivalents		$	358,012			$	220,164			$	(137,848	)
Short-term investments			579,531				628,393				48,862
Long-term investments			155,944				351,407				195,463
Total cash, cash equivalents, short-term and long-term investment		$	1,093,487			$	1,199,964			$	106,477

     The increase in total cash, cash equivalents and short-term and long-term investments during fiscal 2006 was primarily related to our issuance on April 10, 2006 of $300.0 million in aggregate principal amount of 0.25% Convertible Senior Notes due May 1, 2013, resulting in proceeds of $263.6 million, net of offering expenses, underwriting discounts and the $28.5 million cost of a call spread option purchased by Ciena. This increase was partially offset by $98.4 million of cash used to repurchase a portion of our outstanding 3.75% convertible notes. Cash, cash equivalents and short-term and long-term investments at October 31, 2006 also reflect $79.4 million of cash consumed in operating activities during fiscal 2006. 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 and other liquidity requirements associated with our existing operations through at least the next 12 months.

     The following sections review the significant activities that had an impact on our cash during fiscal 2006.

Operating Activities

     The following tables set forth (in thousands) significant components of our $79.4 million of cash used in operating activities for fiscal 2006.

     Net income

		Year Ended
		October 31, 2006
Net income		$	595

     Our net income for fiscal 2006 included the significant non-cash items summarized in the following table (in thousands):

Gain on early extinguishment of debt		$	(7,052	)
Amortization of intangibles			29,050
Share-based compensation costs			14,042
Depreciation and amortization of leasehold improvements			16,401
Provision for inventory excess and obsolescence			9,012
Provision for warranty			14,522
Total significant non-cash charges		$	75,975

     Accounts Receivable, Net

     Cash consumed by accounts receivable, net increased from fiscal 2005 to fiscal 2006, due to increased sales volume, contractual acceptance terms affecting the timing of our invoicing, recognition of revenue and longer payment terms associated with our increased international revenue. The increase in our accounts receivable caused our days sales outstanding (“DSO”) to increase from 61 days for fiscal 2005 to 68 days for fiscal 2006. We expect that our accounts receivable, net may fluctuate from quarter to quarter, but generally will increase during fiscal 2007, due to expected increased sales volume, and longer payment terms particularly related to our international customers.

     The following table sets forth (in thousands) changes to our accounts receivable, net of allowance for doubtful accounts, balance from the end of fiscal 2005 to the end of fiscal 2006.

		October 31,				October 31,				Increase
		2005				2006				(decrease)
Accounts receivable, net		$	72,786			$	107,172			$	34,386

     Inventory, Net

     Cash consumed by inventory, net increased from the end of fiscal 2005 to the end of fiscal 2006, due to a combination of inventory purchased based on customer forecasts in advance of orders, finished goods inventory located at customer facilities awaiting contractual acceptance and contract manufacturer transitions to consolidate our supply chain and reduce product costs. As a result, Ciena’s inventory turns declined from 5.0 turns per year for the period ending October 31, 2005 to 2.5 turns per year for the period ending October 31, 2006. Our cash consumed by inventory has increased in recent quarters. We expect our inventory turns will increase during fiscal 2007.

     The following table sets forth (in thousands) changes to the components of our inventory from the end of fiscal 2005 through the end of fiscal 2006.

		October 31,				October 31,				Increase
		2005				2006				(decrease)
Raw materials		$	21,177			$	29,627			$	8,450
Work-in-process			3,136				9,156				6,020
Finished goods			47,615				89,628				42,013
Gross inventory			71,928				128,411				56,483
Reserve for excess and obsolescence			(22,595	)			(22,326	)			269
Net inventory		$	49,333			$	106,085			$	56,752

     Restructuring and unfavorable lease commitments

     During fiscal 2006, we paid $23.6 million in connection with a termination of our obligations under leases for our former Fremont, CA and Cupertino, CA facilities. We paid an additional $9.5 million on leases related to restructured facilities and $9.3 million on leases associated with unfavorable lease commitments. The following table reflects (in thousands) the balance of liabilities for our restructured facilities and unfavorable lease commitments and the change in these balances from the end of fiscal 2005 through the end of fiscal 2006.

		October 31,				October 31,				Increase
		2005				2006				(decrease)
Restructuring liabilities		$	15,492			$	8,914			$	(6,578	)
Unfavorable lease commitments			9,011				8,512				(499	)
Long-term restructuring liabilities			54,285				26,720				(27,565	)
Long-term unfavorable lease commitments			41,364				32,785				(8,579	)
Total restructuring liabilities and unfavorable lease commitments		$	120,152			$	76,931			$	(43,221	)

     Interest Payable on Ciena’s Convertible Notes

     Interest on Ciena’s outstanding 3.75% convertible notes, due February 1, 2008, is payable on February 1^st and August 1^st of each year. During fiscal 2006, Ciena paid $21.7 million in interest on the 3.75% convertible notes.

     Interest on Ciena’s outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May 1^st and November 1^st of each year, commencing on November 1, 2006.

     The following table reflects (in thousands) the balance of interest payable and the change in this balance from the end of fiscal 2005 through the end of fiscal 2006.

		October 31,				October 31,				Increase
		2005				2006				(decrease)
Accrued interest payable		$	6,082			$	5,502			$	(580	)