UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended April 30, 2005

OR

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 þ NO o

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

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

CIENA CORPORATION

INDEX

FORM 10-Q

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)

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

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CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

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

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CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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 (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial position of Ciena 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, Ciena believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2004.

(2) SIGNIFICANT ACCOUNTING POLICIES

Segment Reporting

     Ciena’s operations are organized into the following operating segments for the purpose of making operating decisions and assessing performance: Transport and Switching Group (TSG); Data Networking Group (DNG); Broadband Access Group (BBG); and the Global Network Services Group (GNS).

Goodwill

     Effective November 1, 2001, Ciena adopted Statement of Financial Accounting Standard (“SFAS”) 142, “Goodwill and Other Intangible Assets” and ceased to amortize goodwill. As of April 30, 2005, Ciena’s assets included $408.6 million related to goodwill. Because our operations are organized into operating segments, SFAS 142 requires that we assign goodwill to Ciena’s reporting units. Ciena has determined its operating segments and reporting units are the same. In accordance with SFAS 142, Ciena tests each reporting unit’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 reporting unit below its carrying value. The following table summarizes the assignment and changes in the carrying amount of Ciena’s goodwill to its reporting units as of April 30, 2005 (in thousands):

Impairment or Disposal of Long-lived Assets

     Ciena accounts for the impairment or disposal of long-lived assets such as equipment, furniture, fixtures, and other intangible assets in accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” During the first six months of fiscal 2005, Ciena recorded impairment losses of $0.2 million primarily related to excess research and development test equipment classified as held for sale.

Investments

     Ciena’s short-term and long-term investments are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. Realized gains or losses and declines in value determined to be other than temporary, if any, on available-for-sale securities, are reported in other income or expense as incurred.

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     Ciena also has certain other minority equity investments in privately held technology companies. These investments are generally carried at cost as Ciena owns less than 20% of the voting equity and does not have the ability to exercise significant influence over any of these companies. These investments are inherently high risk as the market for technologies or products manufactured by these companies are usually early stage at the time of the investment by Ciena and such markets may never materialize or become significant. Ciena could lose its entire investment in some or all of these companies. Ciena monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. During the six months ended April 30, 2005, Ciena recorded a charge of $7.3 million from a decline in the fair values of certain equity investments that was determined to be other than temporary.

Pro Forma Stock-Based Compensation

     In December 2004, the FASB issued its final standard on accounting for share-based payments, SFAS 123R, “Share-Based Payment,” which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and requires instead that such transactions be accounted for using a fair-value-based method. SFAS 123R becomes effective in the first quarter of fiscal 2006 for Ciena. SFAS 123R permits early adoption for interim or annual periods for which financial statements or interim reports have not been issued. We expect the adoption of SFAS 123R will have a material effect on our financial position and results of operations but will not affect our net cash flows.

     Ciena 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)” and will implement SFAS 123R beginning the first quarter of fiscal 2006.

     Had (i) compensation cost for Ciena’s stock option plans and employee stock purchase plan been determined based on the Black-Scholes valuation method; and (ii) the fair value at the grant date for awards in the second quarter and first six months of fiscal 2004 and 2005 been determined consistent with the provisions of SFAS 123, “Accounting for Stock Based Compensation” as amended by SFAS 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” Ciena’s net loss and net loss per share for the second quarters and the six months ended April 30, 2004 and 2005 would have changed by the pro forma amounts indicated below (in thousands, except per share data):

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

(3) RESTRUCTURING COSTS

     Ciena has previously taken actions to align its workforce, facilities and operating costs with business opportunities. Prior to the adoption of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” applicable to transactions initiated after December 31, 2002, Ciena followed the guidance of Emerging Issues Task Force Issue No. 94-3 (“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

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differences in financial reporting. Ciena historically has committed to a restructuring plan and has incurred the associated 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 first six months of fiscal 2005 (in thousands):

(4) MARKETABLE DEBT AND EQUITY SECURITIES

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

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     The following table summarizes maturities of debt investments (including restricted investments) at April 30, 2005 (in thousands):

(5) ACCOUNTS RECEIVABLE

     As of April 30, 2005, trade accounts receivable, net of allowance for doubtful accounts, included three customers who accounted for 18.2%, 14.6% and 10.3% of net trade accounts receivable, respectively. As of October 31, 2004, trade accounts receivable, net of allowance for doubtful accounts, included three customers who accounted for 24.0%, 12.3% and 11.2% of 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. Ciena’s allowance for doubtful accounts as of October 31, 2004 and April 30, 2005 was $1.0 and $0.7 million, respectively.

(6) INVENTORIES

     Inventories are comprised of the following (in thousands):

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     Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by 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, 2005, Ciena recorded a provision for inventory reserves of $2.7 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, 2005 (in thousands):

     During the six months ended April 30, 2004, Ciena recorded a provision for excess inventory 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 and obsolete inventory during the six months ended April 30, 2004 (in thousands):

(7) EQUIPMENT, FURNITURE AND FIXTURES

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

     Ciena recorded an impairment of $0.2 million, primarily related to research and development equipment classified as held for sale in the first six months of fiscal 2005. The residual carrying value of these assets is insignificant.

(8) OTHER INTANGIBLE ASSETS

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

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     The aggregate amortization expense of other intangible assets was $8.7 million and $22.5 million for the six months ended April 30, 2004 and 2005, 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):

     Accrued liabilities (in thousands):

     The following table summarizes the activity in Ciena’s accrued warranty for the six months ended April 30, 2004 and 2005 (in thousands):

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Deferred revenue (in thousands):

(10) CONVERTIBLE NOTES PAYABLE

     On December 19, 2003, Ciena purchased the remaining $48.2 million of the outstanding ONI Systems Corp. convertible subordinated notes. Ciena 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.

     On February 9, 2001, Ciena completed a public offering of 3.75% convertible notes, in an aggregate principal amount of $690 million, due February 1, 2008. Interest is payable on February 1^st and August 1^st of each year. The notes may be converted into shares of Ciena’s common stock at any time before their maturity or their prior redemption or repurchase by Ciena. The conversion rate is 9.5808 shares per each $1,000 principal amount of notes, subject to adjustment in certain circumstances. Ciena has the option to redeem all or a portion of the notes that have not been previously converted at the following redemption prices (expressed as percentage of principle amount):

     On April 29, 2005, the fair market value of the Ciena convertible subordinated notes was $577.9 million. The fair value is based on quoted market price for the notes.

(11) LOSS PER SHARE CALCULATION

     Basic EPS is computed using the weighted average number of common shares outstanding (excluding restricted stock subject to repurchase). Diluted EPS is computed by combining basic EPS with shares underlying stock options, warrants, restricted stock, restricted stock units and Ciena’s 3.75% convertible notes determined using the treasury stock method.

     Weighted average number of common shares underlying stock options, warrants, restricted stock, restricted stock units, and Ciena’s 3.75% convertible notes totaled (i) approximately 34.2 million and 60.1 million during the second quarter of fiscal 2004 and 2005, respectively, and (ii) approximately 33.4 million and 55.0 million during the first six months of fiscal 2004 and 2005, respectively. These shares were not included in the computation of diluted EPS as the effect would be anti-dilutive.

(12) COMPREHENSIVE LOSS

     The components of comprehensive loss for the quarters and six months ended April 30, 2004 and 2005 were as follows (in thousands):

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(13) SEGMENT REPORTING

     Ciena’s geographic distribution of revenue for the quarters and six months ended April 30, 2004 and 2005 were as follows (in thousands, except percentage data):

*         Denotes % of total revenue

     During the quarters and six months ended April 30, 2004 and 2005, customers who each accounted for at least 10% of Ciena’s revenue during the respective periods were as follows (in thousands, except percentage data):

     The table below (in thousands, except percentage data) sets forth our operating segment revenues for the quarters and six months ended April 30, 2004 and 2005.

     Segment profit (loss) is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each operating segment in a given period. In connection with that assessment, the Chief Executive Officer excludes the following other non-performance items: corporate selling and marketing; corporate general and administrative costs; stock compensation; amortization of intangibles; in-process research and development; restructuring costs; long-lived asset impairment; recovery of sale, export and use taxes; provisions or recovery of doubtful accounts; accelerated amortization of leaseholds; interest income, interest expense, equity investment gains or losses, gains or losses on extinguishment of debt, and provisions for income taxes.

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     The table below sets forth our operating segment profit (loss) and the reconciliation to consolidated net loss for the quarters and six months ended April 30, 2004 and 2005.

(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. Ciena believes that it has valid defenses to the lawsuit and intends 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 and November 2, 2004, the PTO granted reexaminations of the ‘016 Patent, resulting in a continuation of the stay of the case.

     On March 31, 2005, Ciena and Broadwing Corporation, formerly known as Corvis Corporation (“Broadwing”), entered into a settlement of outstanding patent litigation proceedings pending in the United States District Court for the District of Delaware and the United States Court of Appeals for the Federal Circuit. The proceedings arose on July 19, 2004, when Ciena and Ciena Properties, Inc., a wholly owned subsidiary that was merged into Ciena on October 29, 2004, filed a complaint in the United States District Court for the District of Delaware asserting infringement by Broadwing upon certain of Ciena’s patents relating to optical networking communications systems and technology, and requesting damages and injunctive relief. Under the terms of the settlement, the parties agreed to dismiss their respective claims and counterclaims in the action, and Broadwing agreed to pay Ciena $35 million in three equal annual installments, of which $33 million may be used as credits toward the purchase of Ciena equipment and services at market prices. Broadwing must use the credits within 12 months of the date of each annual payment or they will be forfeited, provided that $5.5 million of the final payment may be used as a purchase credit through June 30, 2008.

     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

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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 the plaintiffs’ cases against the issuers are to be dismissed. The plaintiffs and issuer defendants subsequently moved the court for preliminary approval of the settlement agreement, which motion was opposed by the underwriter defendants. On February 15, 2005, the district court granted the motion 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 May 2, 2005, the parties submitted a revised settlement agreement for the court’s review.

     On January 18, 2005, Ciena filed a complaint in the United States District Court, Eastern District of Texas, Marshall Division against Nortel Networks, Inc., Nortel Networks Corporation and Nortel Networks Limited (collectively, “Nortel”), which complaint was subsequently amended on two occasions. Ciena’s amended complaint charges Nortel with infringement of seven patents related to Ciena’s communications networking systems and technology. Ciena seeks to enjoin Nortel’s infringing activities and recover damages caused by such infringement. On March 14, 2005, Nortel filed an answer to Ciena’s amended complaint and a counterclaim against Ciena, charging Ciena with infringement of seven patents related to Nortel’s communications networking systems and technology, including certain of Nortel’s SONET, ATM and VLAN systems and technology. Nortel’s counterclaim seeks injunctive relief and damages. On April 4, 2005, Ciena filed a reply to Nortel’s counterclaim. On May 12, 2005, Nortel filed a first amended complaint alleging Ciena’s infringement of six additional Nortel patents.

     In addition to the matters described above, we are subject to 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Some of the statements contained, or incorporated by reference, in this quarterly report discuss future events or expectations, contain projections of results of operations or financial condition or state other “forward-looking” information. These statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. 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. 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” below. 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 9, 2004, for a more complete understanding of the risks associated with an investment in Ciena’s Common Stock. Ciena undertakes no obligation to revise or update any forward-looking statements.

Overview

     Ciena Corporation supplies application-focused communications networking equipment, software and services to communications service providers, cable operators, governments and enterprises. Ciena is a network

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specialist, focused on optimizing access and edge networks for broadband communication, enhancing enterprise data services and evolving network infrastructure to support new services through automation and convergence. Ciena leverages its core competencies in optical networking, data networking and broadband access to develop and deliver solutions that address its customers’ most important networking problems. Our solutions enable customers to gain a competitive advantage by increasing the functionality of their networks and reducing their costs of transporting data, voice and video.

     The dramatic changes in the market for communications networking equipment over the last several years have required us to make efforts to expand our addressable market, diversify our customer base and broaden our networking solutions portfolio. Our strategy has been based on building from our historical expertise in core networking and positioning Ciena to take advantage of new market opportunities arising as communications service providers, cable operators, governments and enterprises invest in next-generation equipment. We also established as strategic goals increasing our sales to major communications service providers and increasing sales outside the United States. We have sought to achieve these goals through a combination of internal development and acquisitions, and by creating new strategic relationships and distribution arrangements to reach enterprise and government customers.

     We also recognized that expanding our addressable market to increase our revenues would not, by itself, be sufficient to restore Ciena to profitability. Accordingly, while making acquisitions, developing new products internally, expanding our customer base and developing new distribution channels, we have sought to align our workforce, facilities and operating expenses with the market opportunities available to us, balancing investments in research and development with cost controls and prudent cash management. In addition, we have devoted considerable efforts to reducing the cost to produce our products with a view to improving gross margins.

     We believe that the second quarter of fiscal 2005 reflected the effects of some of these efforts. Revenue increased to $103.8 million, representing a 9.6% increase from the first quarter of fiscal 2005 and a 39.0% increase from the second quarter of fiscal 2004. Consistent with our efforts to increase international sales, during the quarter we were selected as a preferred supplier for the optical transmission portion of BT’s 21st Century Network project. This project is based largely on deploying next-generation equipment, and will permit BT to migrate its services from a public switched telephone network to a single, multi-service internet protocol-based network.

     The quarter also reflects progress in the area of gross margins. Our product gross margin increased sequentially to 28.1% from 26.1% in the first quarter of fiscal 2005. The increase was primarily due to favorable product mix during the quarter, but margins also benefited from cost reductions. We continue to focus on aggressive cost reductions across all product lines in order to enable us to compete more effectively in the global marketplace.

     The quarter did not reflect as clearly the effects of our efforts to reduce ongoing operating expenses, which increased 16.3% sequentially from the first quarter. Nevertheless, we continue to take steps to reduce our general and administrative, sales and marketing and research and development costs. We have recently begun to execute our plan to establish a Ciena site in India and intend to pursue additional alternatives to achieve cost reductions, such as off-shoring resources and leveraging strategic relationships. To reduce ongoing operating expenses and better align our resources with market opportunities, in April we effected a headcount reduction of approximately 53 employees in our Raleigh, North Carolina facility, and in May (after the end of the second quarter) we effected a further reduction of approximately 90 employees, most employed in our Kanata, Ontario facility. We expect that the results of these and other steps we are taking will result in significant reductions in ongoing operating expenses in later periods.

     During the first half of fiscal 2005, there was a considerable increase in consolidation activity among U.S. communications service providers. This activity included proposed mergers between Verizon and MCI, and between SBC and AT&T, all of which have been significant customers during prior periods. Mergers of large carriers will have a major impact in shaping the future of the telecommunications industry, our historical customer base for core transport and switching products. These mergers also have the effect of further reducing the number of potential communications service provider customers seeking to purchase networking equipment from vendors and continuing to concentrate customer purchasing power. It is too soon to determine the near-term and long-term effects, if any, that these proposed consolidations will have on our business.

     As of April 30, 2005, Ciena had 1,616 employees, a net reduction of 35 employees from the 1,651 employees on October 31, 2004 and a net reduction of 86 employees from the 1,702 employees on April 30, 2004.

Results of Operations

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Three months ended April 30, 2004 compared to three months ended April 30, 2005

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 the second quarter of fiscal 2004 to the second quarter of fiscal 2005.

     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 2004 to the second quarter of fiscal 2005.

     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 2004 to the second quarter of fiscal 2005.

     The table below (in thousands, except percentage data) sets forth the changes in geographic distribution of revenues from the second quarter of fiscal 2004 to the second quarter of fiscal 2005.

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