SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the quarterly period ended April 30, 2004

OR

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

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

Commission file number: 0-21969

CIENA CORPORATION

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

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

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CIENA CORPORATION

INDEX

FORM 10-Q

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Item 1. Financial Statements

CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

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

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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS

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

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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1) INTERIM FINANCIAL STATEMENTS

     The interim financial statements included herein for CIENA Corporation (the “Company” or “CIENA”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial position of the Company at the date of the interim balance sheet. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the Company’s October 31, 2003 audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2003.

(2) SIGNIFICANT ACCOUNTING POLICIES

Segment Reporting

     In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 establishes annual and interim reporting standards for operating segments of a company. Effective as of the second quarter of fiscal 2004, CIENA reorganized its operations into multiple operating segments for the purpose of making operating decisions and assessing performance. Those operating segments are the following: Core Networking Group (CNG); Metro and Enterprise Solutions Group (MESG); and Data Networking Group (DNG). The Company’s operating segments have similar economic characteristics and are similar in each of the following areas: the nature of the products and services; the nature of the production processes; the type or class of customer that purchases their products and services; and the nature of the regulatory environment. Accordingly, CIENA has aggregated information related to CNG, MESG and DNG for reporting purposes into one reportable segment and reports only certain enterprise-wide disclosures

Impairment of Goodwill and Other Long-Lived Assets

     Effective November 1, 2001, CIENA adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and ceased to amortize goodwill. As of April 30, 2004, CIENA’s assets include $336.0 million related to goodwill. SFAS 142 requires that we assign goodwill to the Company’s operating segments and to test each segment’s goodwill for impairment on an annual basis, and between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the segment below its carrying value. Prior to the reorganization of the Company into operating segments the fair value of CIENA’s goodwill was tested for impairment on an annual basis, and between annual tests if an event occurs or circumstances change that would, more likely than not, reduce the fair value of CIENA on an entity level, rather than a segment level, below its carrying value.

Pro forma stock-based compensation

     The Company has elected to continue to account for its stock-based compensation in accordance with the provisions of APB 25 as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” (“FIN 44”).

     Had compensation cost for the Company’s stock option plans and employee stock purchase plan been determined based on the Black-Scholes valuation method and the fair value at the grant date for awards in the second quarter and first six months of fiscal 2003 and 2004 been determined consistent with the provisions of Statement of Financial Accounting Standard No. 123 (“SFAS 123”), “Accounting for Stock Based Compensation” as amended by Statement of Financial Accounting Standard No. 148 (“SFAS 148”), “Accounting for Stock Based Compensation-Transition and Disclosure,” the Company’s net loss and net loss per share for the second quarter of fiscal 2003 and 2004 would have increased to the pro forma amounts indicated below (in thousands, except per share data):

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     The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years.

(3) RESTRUCTURING COSTS

     The Company’s actions were taken to align its workforce, facilities and operating costs with business operations. Prior to the adoption of Statement of Financial Accounting Standard No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” for transactions initiated after December 31, 2002, CIENA followed the guidance of Emerging Issues Task Force Issue No. 9413 (“EITF 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” for restructuring charges. However, given the manner in which CIENA undertook such restructuring activities, there have been no significant differences in financial reporting. The Company historically has committed to a plan and incurred the liability concurrently – meeting the criteria of both EITF 94-3 and SFAS 146 consistently. The following table displays the activity and balances of the restructuring reserve account for the period ended April 30, 2004 (in thousands):

(a)		During the second quarter of fiscal 2003, CIENA reduced its workforce by approximately 75 employees. CIENA recorded a restructuring charge of $2.7 million associated with the workforce reduction.
		During the third quarter of fiscal 2003, CIENA recorded a restructuring charge of $15.5 million associated with a workforce reduction of approximately 84 employees, lease terminations, non-cancelable lease costs and the write-down of certain property, equipment and leasehold improvements.
		During the fourth quarter of fiscal 2003, CIENA recorded a restructuring charge of $12.9 million associated with a workforce reduction of approximately 231 employees, lease termination, non-cancelable lease costs and the write-down of certain property, equipment and leasehold improvements.
(b)		During the third quarter of fiscal 2003, CIENA and WaveSmith reduced their combined workforce by 8 employees. Approximately $0.4 million of cost associated with the WaveSmith workforce reduction qualify for treatment under EITF 95-3 “Recognition of Liabilities in Connection with a Purchase Combination” and were recorded as an element of the acquisition.

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(c)		During the first quarter of fiscal 2004, CIENA incurred charges of $3.4 million related to the exit of a warehouse, work force reductions of approximately 52 employees and adjustments to previous estimates.
		During the second quarter of fiscal 2004, CIENA recorded a restructuring charge of $5.9 million related to a workforce reduction of approximately 68 employees and an adjustment to an estimate of previously restructured facilities.
(d)		Non-cash charges during fiscal 2003 include the disposal of previously reserved property and equipment.

     On April 20, 2004, the Company announced its intention to close its San Jose, California facility by September 30, 2004. The San Jose facility closing, and related actions will affect approximately 425 employees. The Company expects to incur additional restructuring costs and accelerated amortization of leasehold costs of between $75.0 million and $85.0 million associated with this action. The Company expects these costs to include employee severance costs, and asset write-downs. The timing of the restructuring charges will correspond to the specific actions and will likely occur over the next several fiscal quarters.

(4) MARKETABLE DEBT AND EQUITY SECURITIES

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

     The following table summarizes maturities of debt investments (including restricted investments) at April 30, 2004 (in thousands):

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(5) ACCOUNTS RECEIVABLE

     As of April 30, 2004, the trade accounts receivable, net of allowance for doubtful accounts, included one customer who accounted for 26.0% of the trade accounts receivable. As of October 31, 2003, the trade accounts receivable, net of allowance for doubtful accounts, included three customers who accounted for 23.6%, 12.5% and 10.1% of the net trade accounts receivable, respectively.

     CIENA performs ongoing credit evaluations of its customers and generally has not required collateral or other forms of security from its customers. CIENA maintains an allowance for potential losses on a specific identification basis. During the first six months of fiscal 2004, the Company recovered $3.1 million from a customer, from which payment was previously deemed doubtful due to the customer’s financial condition. The Company also recorded an allowance for doubtful accounts during the first six months of fiscal 2004 of $0.3 million. CIENA’s allowance for doubtful accounts as of April 30, 2004 and October 31, 2003 was $1.7 and $1.5 million, respectively.

(6) INVENTORIES

     Inventories are comprised of the following (in thousands):

     The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. During the six months ended April 30, 2004, CIENA recorded a provision for inventory reserves of $1.1 million primarily related to excess inventory due to a change in forecasted sales for certain products. The following is a summary of the change in the reserve for excess inventory and obsolete inventory during the six months ended April 30, 2004 (in thousands):

     During the six months ended April 30, 2003, CIENA recorded a benefit for inventory reserves of $4.1 million primarily related to the realization of sales from previously reserved excess inventory. The following is a summary of the change in the reserve for excess inventory and obsolete inventory during the six months ended April 30, 2003 (in thousands):

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(7) EQUIPMENT, FURNITURE AND FIXTURES

     Equipment, furniture and fixtures are comprised of the following (in thousands):

     During the second quarter of fiscal 2004 the company recorded $1.7 million in accelerated amortization expense of leasehold improvements related to the planned exit of its San Jose, California facility.

(8) OTHER INTANGIBLE ASSETS

     Other intangible assets are comprised of the following (in thousands):

     The aggregate amortization expense of other intangible assets was $4.4 million and $4.4 million for the quarters ended April 30, 2003 and 2004, respectively. The following table represents the expected future amortization of other intangible assets as follows (in thousands):

(9) OTHER BALANCE SHEET DETAILS

Other long-term assets (in thousands):

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Accrued liabilities (in thousands):

     The following table summarizes the activity in the Company’s accrued warranty and other contractual obligations for the six months ended April 30, 2003 and 2004 (in thousands):

Deferred revenue (in thousands):

(10) CONVERTIBLE NOTES PAYABLE

     On December 19, 2003, CIENA purchased the remaining $48.2 million outstanding ONI Systems Corp. convertible subordinated notes. The Company paid $49.2 million for notes with a cumulative accreted book value of $41.0 million, which resulted in a loss on early extinguishment of debt of $8.2 million.

(11) EARNINGS (LOSS) PER SHARE CALCULATION

     Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of common shares outstanding, stock options and warrants using the treasury stock method. Approximately 40.1 million and 34.2 million options and unvested restricted stock were outstanding during the second quarters of fiscal 2003 and 2004 respectively, but were not included in the computation of diluted EPS as the effect would be anti-dilutive.

     Approximately 35.9 million and 33.4 million options and unvested restricted stock were outstanding during the first six months of fiscal 2003 and 2004 respectively, but were not included in the computation of diluted EPS as the effect would be anti-dilutive.

(12) COMPREHENSIVE INCOME

The components of comprehensive loss are as follows (in thousands):

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(13) SEGMENT REPORTING

     Effective as of the second quarter of fiscal 2004, CIENA reorganized its operations into multiple operating segments for the purpose of making operating decisions and assessing performance. Those operating segments are the following: Core Networking Group (CNG); Metro and Enterprise Solutions Group (MESG); and Data Networking Group (DNG). Each operating group includes products for sale to external customers, the related research and development and product line management. CNG incorporates CIENA’s core transport and core switching product lines. MESG incorporates CIENA’s metropolitan transport, metropolitan switching, storage extension, and LightWorks ON-Center management suite product lines. DNG incorporates CIENA’s multiservice networking product lines and Laurel Networks, Inc. and Luminous Networks, Inc. products that CIENA resells.

     On May 3, 2004, CIENA completed the acquisitions of Catena Networks, Inc. and Internet Photonics, Inc. Internet Photonics’ product lines will be incorporated into MESG, and Catena’s product lines will form a new operating segment, the Broadband Access Group (BBG). The CNG, MESG and DNG operating segments have similar economic characteristics and are similar in each of the following areas: the nature of the products and services; the nature of the production processes; the type or class of customer that purchases their products and services; and the nature of the regulatory environment. Accordingly, CIENA has aggregated information related to CNG, MESG and DNG for reporting purposes into one reportable segment and reports only certain enterprise-wide disclosures.

     CIENA’s geographic distribution of revenue for the quarter and six months ended April 30, 2003 and 2004 are as follows (in thousands):

     CIENA’s revenue derived from products and services for the quarter and six months ended April 30, 2003 and 2004 are as follows (in thousands):

     During the quarter and six months ended April 30, 2003 and 2004, customers who each accounted for at least 10% of CIENA’s revenue during the respective periods are as follows (in thousands):

* – denotes revenue recognized less than 10% of total revenue for the period.

** – denotes % of total revenue

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(14) CONTINGENCIES

Litigation

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

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

     As a result of the merger with ONI, we became a defendant in a securities class action lawsuit. Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York. These complaints name ONI, Hugh C. Martin, ONI’s former chairman, president and chief executive officer; Chris A. Davis, ONI’s former executive vice president, chief financial officer and administrative officer; and certain underwriters of ONI’s initial public offering as defendants. The complaints were consolidated into a single action, and a consolidated amended complaint was filed on April 24, 2002. The amended complaint alleges, among other things, that the underwriter defendants violated the securities laws by failing to disclose alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the initial public offering’s registration statement and by engaging in manipulative practices to artificially inflate the price of 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 2002, ONI and other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied as to ONI on February 19, 2003. CIENA has participated, together with the other issuer defendants in these cases, in mediated settlement negotiations that have led to a preliminary agreement among the plaintiffs, the issuer defendants and their insurers. The settlement, which is subject to court approval, would result in the dismissal of the plaintiffs’ cases against the issuers. CIENA has agreed in principle to the terms of this settlement. Draft settlement documents were circulated for final review in March 2004.

     As a result of the merger with ONI, we also became a defendant in two substantially identical purported class actions on behalf of ONI security holders originally brought against ONI and members of its board of directors. The complaints allege that the director defendants breached their fiduciary duties to ONI in approving the merger with CIENA and seek declaratory, injunctive and other relief permitted by equity. The plaintiffs failed to obtain an injunction against completion of the merger. The first of these cases was filed on February 20, 2002, in the Superior

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Court of the State of California, County of San Mateo, and is encaptioned K.W. Sams, On Behalf of Himself and All Others Similarly Situated v. ONI Systems Corporation, et al. The second case was brought on March 19, 2002, in the Superior Court of the State of California, County of Santa Clara, and is encaptioned Steven Myeary, On Behalf of Himself and All Others Similarly Situated v. ONI Systems Corporation. On April 14, 2003, the plaintiffs in these cases filed a consolidated amended complaint and named four additional defendants: CIENA Corporation, James F. Jordan, Kleiner Perkins Caufield & Byers and Mohr Davidow Ventures. CIENA and the other defendants subsequently filed a demurrer and served a motion for sanctions on plaintiffs based on factual inaccuracies in the consolidated amended complaint. In response, the plaintiffs filed a corrected consolidated amended complaint, the demurrer to which was sustained by the court in April 2004 with leave to amend. We believe that these lawsuits are without merit and will continue to defend them vigorously.

(15) SUBSEQUENT EVENTS

     On May 3, 2004, the Company acquired Catena Networks and Internet Photonics. As a result of these acquisitions the Company expects to record charges for in-process research and development and record intangible assets related existing technology, customer relationships, customer contracts and customer order backlog. The Company expects to complete its tangible and intangible asset and liability assessments, with the help of third party valuation findings, associated with the acquisitions during the third quarter of fiscal 2004.

     Under the terms of the agreement to acquire Catena, all the outstanding shares of Catena common stock, preferred stock and outstanding stock options and warrants were exchanged for 75.9 million shares of CIENA common stock. The Company expects to record an aggregate purchase price of approximately $466.1 million for Catena. The purchase price for this acquisition was based on the average closing price of CIENA’s common stock for two trading days prior to, the date of, and the two trading days after the February 19, 2004 announcement.

     Under the terms of the agreement to acquire Internet Photonics, all the outstanding shares of Internet Photonics common stock, preferred stock and outstanding stock options and warrants were exchanged for 24.1 million shares of CIENA common stock. The Company expects to record an aggregate purchase price of approximately $148.2 million for Internet Photonics. The purchase price for this acquisition was based on the average closing price of CIENA’s common stock for two trading days prior to, the date of, and the two trading days after the February 19, 2004 announcement.

Item 2. 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, forward-looking statements that involve risks and uncertainties. Under the heading “Risk Factors,” we have described what we believe to be some of the major risks related to these forward-looking statements, as well as the general outlook for our business. Investors should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on December 11, 2003, for a more complete understanding of the risks associated with an investment in the Company’s Common Stock.

Overview

     CIENA is a leading global provider of innovative network solutions. Our existing and potential customers include:

•		communications carriers including regional bell operating companies (RBOCs), independent operating companies (IOCs), competitive local exchange carriers (CLECs), long-distance carriers, wireless carriers and wholesale carriers;
•		other communications service providers including cable operators and Internet service providers;
•		enterprises including large businesses, educational and non-profit institutions;
•		federal, state and local governments; and
•		integrators and resellers.

     In early 2001, the telecommunications industry began a severe decline, and our dominant customer base, communications carriers, responded by curtailing network build-outs and reducing their overall capital expenses. As a result, the market for our core networking products declined sharply. After several years of significantly lower capital spending, most carriers’ operating costs remain high while their revenue is growing slowly, if at all.

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     In this environment, we expect that most major carriers will hold their aggregate capital spending flat for the next several years and will not invest substantially in building new core networks or upgrading existing ones. Instead, we believe that carriers, other communications service providers, enterprises and governments will make significant investments in next-generation equipment, particularly equipment that resides at the edge of communications networks and enables the creation and delivery of new high-bandwidth data services. As a result, we have undertaken a number of efforts to expand our addressable market including making acquisitions, establishing partnerships with other equipment suppliers and investing internal resources towards developing, marketing and selling products that address this broader market.

     As part of our strategy to increase our addressable market, we completed the acquisitions of Catena Networks and Internet Photonics on May 3, 2004. Catena’s broadband access solutions enable the delivery of traditional “plain old telephone service” (POTS), digital subscriber line service (DSL), and voice-over-IP (VoIP) from a single, integrated platform. Prior to the acquisition, Catena’s customers included RBOCs, major IOCs and CLECs. Internet Photonics has sold its carrier-grade optical Ethernet transport and switching solutions to several large cable providers and carriers who use Internet Photonics’ solutions to deploy Ethernet private-line services. The broadband access markets served by both Catena and Internet Photonics’ products are expected to benefit as service providers shift spending to target the access portions of their networks to enable increased residential access to high-bandwidth services such as DSL, video-on-demand and high definition television (HDTV).

     As a result of the Catena and Internet Photonics acquisitions, we expect to incur additional ongoing costs related to product development, selling, and marketing activities. In addition, we expect to incur costs associated with these acquisitions related to amortization of purchased intangible assets, in-process research and development and deferred stock compensation.

     Also in pursuit of our strategy, we expect to continue our efforts to reduce our ongoing operating costs in order to better align them with our market opportunities and changing product mix. On April 20, 2004, we announced our intention to close our San Jose, California facility by September 30, 2004. Over the next two fiscal quarters we expect to incur additional restructuring costs and accelerated amortization of leasehold cost of between $75.0 million and $85.0 million associated with this action.

     We reported revenue of $74.7 million for the second quarter of fiscal 2004. This was an increase of 12.5% from the first quarter of fiscal 2004 and 1.6% from second quarter of fiscal 2003. We expect revenue for the third quarter of fiscal 2004 will increase by as much as 30 percent from the second quarter of fiscal 2004 primarily as a result of the inclusion of revenue from Catena and Internet Photonics products for the first time.

     Our margins can fluctuate substantially from quarter to quarter based on a number of factors, including the mix of products and services we sell and the customers to which we sell them; the volume of products and services we sell; and the amount of provisions or benefits we may incur related to excess inventory costs. Our gross margin for the second quarter of fiscal 2004 was 11% compared to 30.9% for the first quarter of fiscal 2004 and 23.1% for the second quarter of fiscal 2003. The decline in gross margin for the second quarter of fiscal 2004 compared to the first quarter was due primarily to the increased percentage of revenue from core transport systems in the second quarter. The decline in gross margin from the same period a year ago was due to a combination of the increased percentage of revenue from core transport systems and a lower percentage of revenue from core switching systems than in the second quarter of fiscal 2003.Gross margin in the second quarter of fiscal 2004 was also adversely affected by revenues associated with initial deployments of long-haul transport equipment for two significant customers. This equipment, which includes “common equipment” such as chassis and amplifiers, tends to have lower margins than channel cards and other equipment deployed later in the network build. We expect, therefore, that the margins on sales associated with these two projects will improve over time.

     As of April 30, 2004, CIENA had 1,702 employees, which was a net reduction of 76 employees from the 1,778 employees on January 31, 2004. We expect to reduce our headcount by approximately 425 employees related to the exiting of the San Jose, California facility. Catena and Internet Photonics will add an aggregate of approximately 380 employees to CIENA in the third quarter of fiscal 2004.

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Results of Operations

Three months ended April 30, 2003 compared to three months ended April 30, 2004

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 the second quarter of fiscal 2003 to the second quarter of fiscal 2004.

* - Denotes % of total revenue

** - Denotes % change from 2003 to 2004

     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 the second quarter of fiscal 2003 to the second quarter of fiscal 2004.

* - Denotes % of product revenue

** - Denotes % change from 2003 to 2004

     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 the second quarter of fiscal 2003 to the second quarter of fiscal 2004.

* - Denotes % of service revenue

** - Denotes % change from 2003 to 2004

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     The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenues from the second quarter of fiscal 2003 to the second quarter of fiscal 2004.

* - Denotes % of total revenue

** - Denotes % change from 2003 to 2004

     Historically, we have relied on a limited number of customers for a substantial portion of our revenue. During the second quarter of fiscal 2003 and second quarter of fiscal 2004, certain customers each accounted for at least 10% of our revenues during the respective periods as follows (in thousands, except percentage data):

** - Denotes % of total revenue

* - Denotes revenues recognized less than 10% for the period.

  Revenue

•

Product revenue decreased from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 primarily due to decreased sales of our metropolitan networking products, partially offset by increased sales from our multiservice networking products, core networking products and LightWorks ON-Center software.

•

Service revenue increased from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 due to increased sales of maintenance contracts.

•

Domestic revenue increased from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 primarily due to increased sales of our core networking products and multiservice networking products, partially offset by decreased sales from our metropolitan networking products.

•

International revenue decreased from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 primarily due to decreased sales of our metropolitan and core networking products, partially offset by increased sales of installation and maintenance revenue.

  Gross profit