: Tim Savageaux, Merriman Curhan Ford Cobb Sadler, Deutsche Bank Ehud Geldblum, JP Morgan Samuel Wilson, JMP Securities Marcus Kupferschmidt, Lehman Brothers Paul Silverstein, Credit Suisse Tim Daubenspeck, Pacific Crest Securities Simon Leopold, Morgan Keegan Joe Chiasson, Susquehanna John Marchetti, Morgan Stanley Brantley Thompson, Goldman Sachs Tim Long, Banc of America Securities Nikos Theodosopolous, UBS

Good day everyone and welcome to the Ciena Corporation Second Quarter 2006 Results Conference Call. Today’s call is being recorded. At this time for opening remarks and introduction, I’d like to turn the call over to the Chief Communications Officer, Ms. Suzanne DuLong, please go ahead.

Thanks Felicia. Good morning and welcome everyone. I’m pleased to have with me Gary Smith, Ciena’s CEO and President; Joe Chinnichi our CFO, and Steve Alexander, our Chief Technology Officer. Our call this morning will be presented in five segments. Gary will provide some brief introductory comments, Joe will review the quarter’s financial results, Steve will then talk to Ciena’s product vision and execution. Gary will discuss the business in the quarter and our outlook for our fiscal third quarter, and Joe will wrap up our prepared remarks with guidance for the third quarter. We’ll then open the call to questions from the certified analysts. To ensure we answer questions from as many participants as possible, we ask that the sell-siders limit themselves to one question each. This morning’s press release is available on national business wire and first call and on our website at ciena.com. Before I turn the call over to Gary, I’ll remind you that during this call we will be making some forward-looking statements. Such statements are based on current expectations, forecasts, and assumptions of the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our 10-Q filed with the SEC on March 3rd. We have until June 8th to file our 10-Q for our fiscal second quarter and we expect to do so by then or before. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise, Gary?

Thanks Suzanne and good morning everyone. We are very pleased to achieve the significant milestone of an as adjusted profitability in the quarter. We also understand while an important milestone, it’s just a same post along the way to future earnings growth. In addition to continued strong revenue growth, the quarter’s results benefitted from strong gross margin improvement driven in part by favorable product mix including strong course switching revenue resulting from capacity adds at existing customers. At this point, we are executing according to plan and are confident that market dynamics will make it possible for us to accelerate that growth in the second half of the year. I’ll discuss that business in the quarter and I’ll progress in more detail after Joe reviews the quarter’s results, Joe?

Thanks Gary and good morning everyone. This morning we reported second quarter revenue totaling $131.2 million. This represents an increase of 8.9% sequentially and 26.3% year-over-year. There were three 10%+ customers in the second quarter that combined, represented 41.5% of total sales. Two of the three 10% are North American customers, one of which was also a 10% customer in the first quarter. Both of the North American 10% customers were participants in recent service provider consolidation. This is the second quarter we’ve talked about one in its new combined form and the first for the other. Both also purchase crossed our entire product portfolio. The third 10% customer in the quarter is an international channel partner focussed on our CN4200 and other Ethernet products. This customer has not previously been a 10% customer. International sales increased to 27% of total revenue in the second quarter compared to 15% in the first quarter. This increase reflects the 10% international customer adjustment as well as initial revenues from the BT 21CN project as well as other non-21CN related revenue from BT. However, BT was not a 10%+ customer in the quarter. Moving now to talk about quarterly revenue contribution. Revenue from our transport and switching group or TSG as we call it, increased sequentially from $74.9 million in the first quarter to $83.8 million in the second quarter, representing 64% of the quarter’s total revenue. This group consists of core transport, core switching, multi-service access, metro transport switching, Ethernet transport, and switching and storage extension solutions. Core switching related revenue increased sequentially and was the largest single contributor to TSG’s revenue in the second quarter, representing roughly 27% of the group’s total revenue. Long haul optical transport was down sequentially, ran a close second at 23% of the group’s total. Revenue…

Thanks Joe. This morning I’ve asked Steve Alexander to spend a few minutes talking about Ciena’s product vision and execution and how we believe would differentiate it in the market place, Steve?

Thanks Gary. Over the next several quarters, we’re going to be rolling out additional features of Ciena’s FlexSelect architecture and we wanted to take a few minutes to remind everyone what FlexSelect is and how it is shaping our product portfolio. FlexSelect is Ciena’s blueprint for practical cost effective approach to migrate Legacy Networks to be able to take advantage of the economics of Ethernet. And while our CN4200 advance services platform was the first product introduced under this vision, it’s clearly not the only one. FlexSelect combines a number of specific attributes that let’s us offer our customers and any service, any port, anywhere network architecture but does not lock them into a services specific architecture and allows them to take advantage of attractive Ethernet cost. Virtually all network operators today have some mix of Legacy DWDM, TDM, as well as new packet networks. And as more and more broadband services are delivered, Ethernet combined with CWDM and DWDM for transport along with packet aggregation and switching technologies are merging as the most economical message for delivering services. Because of its concurrent flexibility, our FlexSelect customers don’t need to predict exactly when they’ll have to make the transition from Legacy Networks to Ethernet or what their mix of traffic might be. They only need to know that they will eventually need to make the transition. Ciena’s approach provides substantial peace of mind and investment protection and enables them to make the transition on their schedule, not their vendor schedule. As one customer put it to me, they can afford to be wrong. It was this flexibility that has enabled some of our recent substantial wins in next generation networks including BTs 21 Century Network. In implementing FlexSelect within our portfolio, you’re following four guiding principles. The first is the…

Thanks Steve. Steve has just summarized some of the reasons why we are so enthusiastic about our FlexSelect vision and product families like our CN4200. We believe our strategy in the last several years has enabled us to position our product portfolio in alignment with significant market demand drivers and this is true not only in our traditional customer base of Telco service providers but also across our expanded customer base of cable service providers, government customers, and enterprises; as carriers look to converge desperate networks and to offer bundle video, voice, and data services, and as the enterprises look to enhance network reliability and security and the ability to address industry specific applications, and as more and more networks look to packet-friendly carrier Ethernet as a convergence enabler. This alignment combined with our efforts to get our business model in line with our revenue opportunity I think vote very well for Ciena’s future even with the uncertainty surrounding carrier consolidation in our market, though it’s clearly too soon to say how carrier consolidation will effect anyone specific vendor, what we’ve seen thus far is encouraging. We’ve worked hard over the last several years to build a role for ourselves as a strategic provider to these carriers and we are optimistic that our combination of innovation and understanding of that business will serve us well. Ciena’s key differentiator has always been the practical application of the innovative technology and an appreciation of the business needs of our customers, and this continues to be a fundamental part of our approach to the market. In addition to signs that the overall market is improving and that our positioning is aligned with these market dynamics, we continue to make significant progress with our operating performance improvement. As Joe noted, in addition to our…

Sure thing. Before I begin to offer guidance, I’ll remind everyone that the statements Gary just made and those that I’m about to make are forward looking. It is important to review the risk factors detailed in our 10-Q in order to understand the factors that might cause actual results to differ materially from this guidance. As stated in the press release, we expect our fiscal per quarter revenue will increase by between 7 to 10% sequential and Gary noted gross margin is difficult for us to predict with accuracy as it ultimately depends on a variety of things such as volume, product mix, customer mix, and the effects of our ongoing product cost reductions. While we continue pursue additional product and manufacturing related cost reductions, we expect quarter to quarter variability in gross margins in large part depending upon product mix. We expect that over the next several quarters, our gross margins will settle into the mid 40s. In other words while our third quarter gross margin is likely to be down from the second quarter is 48%, we still expect to show an improvement over the first quarter’s 41.9%. We expect overall operating expenses in the third quarter exclusive of any unusual or non-operating items including unforeseen cost associated with our pending Nortel litigation will be flat down from the second quarter reflecting our ongoing efforts to gain operating efficiencies balanced with the needs of our growing business. We expect other income expense in the third quarter will increase as a result of improving interest rates and our higher cash balance. We expect other income net of approximately $7.4 million. We expect the third quarter’s basic share count at approximately 588 million shares. We estimate the third quarter’s fully diluted share count at 658 million total shares. Prior to get to our as adjusted presentation, we will continue to use a 35% tax rate. While we have substantial NOLs and as a result are not likely to pay U.S. Federal taxes for sometime after we achieve GAAP profitability, we are still using the 35% tax rate as we have all along allows a more consistent presentation of our as adjusted result. We expect that exclusive of unusual or non-operating items and exclusive of share based payment expense related to 123R, our adjusted third quarter net income will be in a range of between break even and 1 penny per share. Finally, on cash. We expect overall operating cash needs will increase slightly from the second quarter’s $13.5 million as a result of general working capital needs including inventory and A/R. So, now, operator we’ll take some calls from sell-side.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the “*” key followed by the digit “1” on your touchtone telephone. If you’re using a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, that’s “*1” to pose a question. We’ll go to Tim Savageaux of Merriman Curhan Ford.

Hi, good morning can you hear me.

Just barely Tim.

Okay, how about that.

Yeah that’s good.

Hey, you guys aren’t buying Power Way anything are you? Yeah, okay good to hear that. Congratulations on a strong quarter. I wonder if you could comment on your expectations. It looks like you saw significant increase in both finished goods inventory and on a deferred revenue side. We would assume that BT was a key driver there, but if you comment on what were the key drivers in terms of both of those lines and also I would have expected to see a reverse split announcement here, given that you’ve achieved profitability and likely to sustain it pending given the recent approval. I wonder if you could give us your thoughts surrounding that particular item.

I’ll take the first part. Tim, this is Joe. On the deferred revenue of the inventory bills, it’s a combination of things which will make the explanation a little bit longer, but it just reinforces the good news story I think. One thing you have to remember is that we have a litigation settlement with Broadwing and they gave us the second payment. So, that fits in deferred revenue until we figure out whether they are going to take orders or not. So, that was a piece of it. The second piece of it is we’ve had some larger service providers who are deploying new technology and like many of our contracts in going back to the beginning of time, the first deployment of that new technology kind of goes through our first office application or a soak site program and in many cases these guys know they’re going to buy it and so they pay for it within normal payment terms. We’ve got a lot of that stuff going on. On the other side, you’ve got some stuff with on the inventory front, where if you take a look at the inventory billed, a lot of it offsite. It’s waiting for rev rec where it involves in several large major deployments as we speak and is just a functional dynamic of the business all of which are great things. So, that’s about on that question.

Tim why don’t I take the other one. The other point is as Joe said, it’s a number of customers, it’s not just one. On the reverse split, as you know, we got shareholder authorized for the directors to affect the reverse split which really is at the board’s discretion and clearly if we did that, we’d announce it in a press release. So, I can’t really comment any further on that at the moment Tim, but I understand your perception.

Okay thanks and congratulations on a great quarter.

Thank you.

We’ll go next to Cobb Sadler of Deutsche Bank.

Okay thanks a lot. Hi guys, quick question on the gross margins 48% and then you’ve given guidance of mid 40s, but that’s above where we were, I think which was above 40. And then I know that in the product mix you got a lot of CoreDirector in the quarter, data networking was up, WDM line cards in North America, CN4200 almost 10% revenue. So, product mix helped you a lot. How should we look at gross margin going forward, I mean can it float above mid 40s for a while or is it hard as it got into the mid 40s.

Cobb, why don’t I take that? Yeah, I think you picked out some of the reasons for the favorable product mix. I think from our perspective, there’s clearly going to be volatility quarter to quarter in there and we’ve given a sort of range around that what we think was in the mid 40s overall is a sustainable gross margin. Could it be higher than that, could be slightly lower than that, it’s absolutely possible in the quarter. It’s probably one of the most difficult things for us to predict quite frankly, but I think we’re getting increasingly confident going forward that we see it in the mid 40s range.

Okay, great and then one quick followup. On the sustainability of line card shipments and existing customers in North America, kind of organic demand — how do you see that, do you see that sustainable from several quarters or is it kind of a one-time positive variant there?

At this moment in time, we’ve got better visibility than we’ve had into that and we think the overall capacity demands will continue. So, we think it is sustainable. It may even flow quarter to quarter, but we spent a lot of time getting footprint out there on some large long haul customers and I think we’re beginning to see the benefits of some of that with the favorable card mix and also we’ve got a very large installed customer base for the CoreDirector out there. So, the best we can tell right now Cobb, we actually think it is sustainable.

Sounds great, thanks a lot.

Thank you.

We’ll go next to Mike Jenneweave of Citigroup. : Great, thanks a lot. Hi Gary, Hi Joe. So, you guys — I mean for the first six months revenue growth was 27%. You’re talking about possibly accelerating faster into that half of the year, my question is really about the components environment and we’re hearing about supply constraints both at the low end of the pass of market as well as some of the high end actives in tunable lasers, things like that. So, my question is even if you guys have orders to grow at a high 20-30% type of range, do you think that you can contain enough component to actually fulfill that demand and secondly are you seeing any price increases or stretching lead times or anything else from the component suppliers and what does that mean for gross margins?

Okay Mike, this is Steve Alexander, I’ll address it from kind of the component side of this. There are two pieces to it; one is not every place that we’re seeing growth is depending upon the component vendors that you’re talking about. Another one is that in many cases, we’ve taken steps to double and triple source. You do see small shortages for time to time but it’s nothing that’s impacting our business.

Mike, this is Gary. I mean we have issues of the day on the component side and we’re working through those. We don’t believe there’ll be an impediment for us to achieve in the growth guidance that we gave. : Yeah thanks, can you comment just generally if you’re seeing increasing lead times in any places?

In certain components, I think it’s fair to say we’re seeking increasing lead times but we are working closely with the supply chain to mitigate that and I think we look for double supply wherever we can and I think we’re used to managing through that. It’s certainly a nice problem to have but I think we are confident of working through it. The other part you questioned Mike, was I think are we seeing increases in pricing and could that affect our gross margin. Well, I guess the answer to that is in one or two places, but again I think we’re sufficiently gotten diversity of supply in those areas that we’re able to mitigate that. : Okay, thanks.

Thank you.

We’ll go next to Ehud Geldblum of JP Morgan.

Thanks, can you hear me?

Yes.

Oh, excellent, thank you. Firstly, clarification and then a question, Clarification of the Broadwing settlement; when you mentioned that Joe, you brought it back about two or three years…settled; can you remind us how much that was and how much is that they still have to go through in revenue, do you recognize what period and when that kind of falls off, does it fall off or is it going to continue at that rate, that was a clarification. The question has to do with the gross margin, this huge revenue that you have this quarter. Can you help us determine roughly speaking how much of that came from the fact the huge revenue you had in the 4200s to the high gross margin as well as the movement in the broadband data that’s the DM that’s also relatively high in gross margin versus how much came from the cards on the long haul side, can you kind of explain each?

We can handle this, it’s very simple. I’ll do the first one, I’ll throw the ball over to Gary on the second one. As related to Broadwing just quickly, the overall settlement was in the low 30s back a year and a half or wherever it was ago and it called for three payments pretty much of equal amount. The second year payment and the third year payment are approximately $11 million each. We don’t take it as revenue basically until the year is finished. So, basically when they make that payment to us, we hang it up on the balance sheet. And they do have the ability to give us orders and if they do give us orders, we draw down on the 11 and taken into gross.

And that happens at the end of each fiscal year?

No, it happens as they give us orders, we take it down as we get. And we fulfill the revenue recognition process. If they don’t give us — say for example, use a hypothetical — say they gave us $11 million, then we can take it at the end of the year but you know that won’t happen. Their business is pretty strong and they’re doing a good job.

Ehud why don’t I take the second part which is the gross margin and how much specifically was affecting the 4200? I think the 4200 certainly helped and we were pleased with the growth to it but overall it was just about a 10% contribution from 4200 which was helpful but we had a lot of other positive product mix attribute. The data products were up. The CoreDirector was up significantly. We had a good mix on the line cards. So, you have to take all of those things into consideration. I don’t think you could point to just the 4200. I think that’s going to be helpful sort of fill out for gross margin attainment going forward, but I wouldn’t point to just that in the quarter. It was certainly helpful, but I think it was just a combination of that plus the ongoing cost reductions we’ve been able to execute on as well.

Okay, one more thing if I could get in, when you gave the guidance last quarter Joe, did you anticipate the end going up to $5 million as it did or was that a surprise?

It was one of those flex items that could have. It was a swing item, it could have and it couldn’t have. The guidance we gave you last quarter, I had it out there. It wasn’t totally dependent on it coming in though.

Okay, thanks so much.

We’ll go next to Samuel Wilson of JMP Securities.

Good afternoon everyone or good morning I guess. One clarification and one quick question. On the clarification, did you give deferred service and product revenues specifically — I know you give it in your SEC files, I was wondering if you gave that? And then the question, if you guys were coming out of the back side of consolidation in the North American service provider state and could you just give a little color as to — it seems like you’re now ordering, has things kind of stabilized with them, do you know who you’re talking to, just kind of an update on where that stands? Thank you.

Okay, do you want to know what the deferred revenue or just the amount of money in deferred lines?

Yes, by product and service.

Okay, as of April 30, 2006, products was approximately $28 million, services was approximately $30 million.

Thank you.

Sam, why don’t I take the other part of your question on the carrier consolidation? I think certainly things are settling down of the two large consolidations, Verizon and AT&T and I think things seem to be stabilizing there. I think they’ve integrated fairly quickly. As I said in my comments, generally speaking I think it’s early days but things look pretty positive for us in the scope of products and dialogue that we’re having with them. I would say that I think there’s more consolidation to come. Clearly, you’ve got bounce out and you potentially got some others as well. So, we’re looking at that very, very carefully but I think generally I think we feel that we are well positioned within the consolidation that’s happened so far.

Thank you Joe.

We’ll go next to Marcus Kupferschmidt at Lehman Brothers.

Hi, I wanted to clarify and ask a question just to understand the guidance for EPS of break even to a penny. I think you’re assuming a 35% tax rate on that?

That’s correct Marcus.

Okay and if you could help us just to think about things on an applet to applet basis with a lot of your peers who are just entering initial profit who have…can you talk just more about just what are the cash taxes you’re going to paying at this point and the international taxes I assume would just be $1 or $2 million bucks a quarter or something like that?

Sure Marcus. The taxes that we do actually pay each and every quarter are very, very small. I think if you were to use something like $1 million to $2 million it would more than cover it.

All right, it sounds to me like that maybe a better half of that comparison…okay and can you give us any better insight into kind of what you’re assuming for the next quarter in terms of the sales mixed type products.

Marcus why don’t I take that? I think we will see a similar mix that we’ve got right now. We got a lot of moving parts to that and you’ve got timing of revenue recognition. You know, Joe talked about how much deferred we’ve got out there as well. There are a lot of moving parts to that, but I would expect overall a similar kind of product mix but we’ve given guidance that we don’t think it will yield quite as high as 48, we set around the mid 40s to that. So, probably on the transport side, more chassis than cards, not quite as favorable a mix. So, there are some assumptions around that.

Great, thanks Gary.

Thank you.

We’ll go to Paul Silverstein of Credit Suisse.

Thank you, I’ve got a series of question but if I can do that one at a time. On the 4200 Gary or Joe, given that it went from 2 to12, I assume that’s a very nice impact or at least some impact in gross margins. Going forward, if that continues to ramp and we continue to get meaningful growth in that product, won’t that bolster your gross margin — what’s the offset that would limit your vision to the mid 40s as opposed to appear the 48% level, given that that product is likely to ramp and rest meaningfully in the next several quarters?

Paul, I’ll take that one. It is a function of mix, we’re seeing new bills as well and that’s really where this is going to go. New bills are typically thin on channel count. They have a lot of common equipment, a lot of chassis, so that’s why we gave the guidance the way we did in the mid 40s as opposed to something that will be higher than that and I think that really is the basic simple answer to your question. I understand what you’re saying, is it higher especially with the 4200 ramp in the way up we go again and the answer is yes, but we got a lot of chassis going out, a lot of a common equipment going out over the next couple of quarters.

So, performance beyond the next couple of quarters, if you look out to fiscal 2007, I recognize it’s a ways out, once you get beyond this pass of new bills, do you then get visibility as to high 40s, 50% type gross margins assuming the 4200 continues to ramp?

Well, I think the 4200 is going to be clearly helpful, but I think we’re assuming a number of builds, we got to assume some ongoing price competition that we’ve seen, that we’re used to all the time. So, that’s kind of built into it as well and really the best we can guide to right now based on what we see is the mid 40s. Could it be higher than that? Yes. It could also be slightly lower than that depending on quarter to quarter but we think in average about the mid 40s looks about right to us.

Joe, did I hear you’ll say that Metro was down given the 4200 was up?

Yes, the traditional Metro platform was slightly down.

Going forward in terms of the tradition of your platform, does that continue to bleed off or did that stabilize at these levels?

I think, in fact some of the comments that Steve talked about, a lot of this is sort of converging and we’re able to do some interesting things with the 4200 and the existing Metro platform. I would expect it to fluctuate quarter to quarter, but not go down significantly.

All right on the DN product, is the higher level sustainable. What’s going on in the quarter more poorly in terms of going forward, is that level sustainable and what should we expect?

Well, I think the DN — I think we should have another reasonable quarter this quarter. There was some handcuff revenue recognition that we were able to recognize in the second quarter and I think if all things go to plan in the third quarter, it should be a similar level. I go back to some of the comments that Steve made. You know, increasingly we’re not going to look at it as single platforms. We are taking a lot of that functionality putting it on things like CoreDirector and also putting more data functionality onto the 4200 as well.

Okay and finally in terms of competitive landscape, can you give us some insight into what you’re seeing out there, anybody stepping up, anybody falling off the wagon.

You know Paul I think it continues to be challenging from a competitive perspective. There is no different than it’s been for a while. I think the large players certainly — I think potentially loosened Alcatel merger I think is helpful for the industry overall and I think may add some additional opportunities to us, as some carriers don’t want to be dependent upon on a more single oriented supplier. So, I think that might helpful to us, but generally we see tough competition continuing, at least that’s our assumption anyway, but if that doesn’t happen then great, but I’ve got no reason to believe that it won’t and that’s what we are prepared for.

Okay. One quick clarification on BT, I know it wasn’t 10%, but would you characterize it as diminutiveness or something more than that?

Something more than that Paul.

Okay, thanks guys.

We’ll go to Tim Daubenspeck of Pacific Crest Securities.

Thank you. I just want to talk about the 4200 a little bit more, obviously a really strong quarter there. Can you give us a little color? I guess the first question what type of visibility do you have on the 4200 in terms of kind of the order pattern, how far out are you going to see this ramp or do you have good visibility, that’s the first question.

I’ll take that one Tim and I’ll let Gary off it. I just wanted to make sure we said one thing. One of the things we talked about with regard to the 4200 because we feel so compelling about how well that would be received and how strong our product is going to be and how competitive it’s going to be, we have geared the supply chain or we’re in the process of gearing the supply chain to be able to hit a $40 million a quarter run rate and we’re in the process of doing that, and I talked about it before when you guys have asked about the supply chain and demands on it and inventory levels. So, in terms of visibility, I’ll let Gary take it from there.

So, Tim I think we feel pretty confident about the ramp up to it. It may fluctuate a bit quarter to quarter, but I think we’re pleased with what we’re seeing. I think we take great comfort from the fact that it’s a broad range of customers. I mean it wasn’t a lot of revenue that we recognized in the quarter overall, but it was from a broad range of customers on the 4200. So, it’s not just one large customer that’s really impacting all of that, I think we’ve got pretty good visibility across the board on 4200 and I think we’ll see an increase next quarter as well but it’s not just one customer at this stage, it’s multiple customers. Interestingly, it’s across all of the market segments we address as well. I think it’s really one of the first platforms that we’ve been able to get out there. It’s got very early acceptance across Enterprise, into the cable space, into the large tier 1 carriers, and also we’ve got a number of opportunities on the government side and research in education as well. So, I think at this stage, it looks like it could be a broadly based framework for us to go forward within that space.

And just a second question, can you give us an idea the mix between say carrier cable and Enterprise today and kind of may be what do you see the mix over the next couple of years, just in general terms.

I think over the — you look at 12 months, there’s a couple of large carriers that would probably skew most of the demand. I don’t know if I can put a sort of percentage on it in absolute terms Tim, but you’ve got two or three large carriers that I think have gotten large deployments of the 4200. So, I think it would skew towards the carrier side. So, if you ask me for a number without getting into the detail of it, I’d say 40-50% carrier, then the rest spread across Enterprise, government, R&A cable, that kind of a mix.

Great, just the final question is the clarification and kind of the 4200 and the impact on gross margin going from I guess 2 to 12, are you saying it’s less of a drag or are we already above corporate average.

It’s in the range of the corporate average. Again, it depends on the mix within the 4200 as well, when the features and functionality are required by the various customers, but it’s in the corporate range.

Great, thank you very much.

Thanks Tim.

We’ll go to Simon Leopold or Morgan Keegan.

Thanks guys. I wanted to get a clarification and then get a question in here. Your early comments about the international business you’ve mentioned BT, I just want to clarify that that is a direct sale and I guess I was a little bit surprised on your ability to recognize revenue, although you had made those comments before; relative to other vendors who with direct contracts have to defer revenue. If you could give us a little bit more color on how your relationship with BT might be different than some of the other vendors into the project. And then regarding my question, let me fit that one in, it will be a quick one. The data networking products did pretty weak in past several quarters and this quarter was certainly a very positive quarter and it sounds like the outlook is good, if you could just drill down on this a little bit more in terms regarding what trends you’re seeing longer term beyond the next quarter to give us some suggestion of the sustainability and what metrics you’re using to determine whether or not you stay in that business or exit it.

On the BT side, we have a direct relationship with BT, as do I believe some of the larger vendors as well, some go through other larger vendors. We have a direct relationship with them and a direct contract with them. Depending upon the terms of that contract, we are able to recognize revenue and we’ve started to recognize that first Century 21 revenues from them. I would also say that we’ve also recognized revenues outside of the Century 21 contracts and when we talk about BT, we’re not just talking about Century 21 and that’s a point that I would make. The other question around the data side, I’ll hand over to Steve but just before I do, I would encourage you not to think about the data products just in terms of pure data platforms in the product what we have right now. And what we’ve been doing in the last 18 months is really to pull up some of that capability on 4200 and CoreDirector. So, as these products converge and lines blur across them, it is more and more challenging for us to talk in absolute terms about boxes and products. With that, Steve you may inform about some of the terms we’ve seen.

Sure…just to reemphasize what Gary said, a lot of the success going forward with the DN is to migrate that core competency out to the other product lines and launch what are the Ethernet features and things like the 4200 and Ethernet on CoreDirector features pretty prominently in the BT 21CN for example and we’re adding what is effectively layer to Ethernet to capabilities to the 4200 product line. That’s what related to our data networking core competency. So, when you look at the business going forward, it’s about us successfully migrating that outward into the other product line. I think the DN as itself is a multi-service switch has a good established customer base, two of the largest customers in North America. It’s a good business going forward just with that, but the real growth has got to come from us migrating it into other product lines.

Just to make sure I understand where you’re going with these comments, and I understand the application of Ethernet on the other boxes. When we look at this line item, the edge switch, the D&G group, about 11 million in the quarter, is that essentially accounting for revenue on the 4200 or CoreDirector that are Ethernet related or is it specifically the old wavesmith platforms.

It is specifically the 7200 the DN platforms. It is specifically that as a line item.

Great, thank you very much.

We’ll go to Joe Chiasson of Susquehanna Financial. Joe Chiasson, Susquehanna Financial : Good morning guys. Gary, I was wondering if you could talk a little bit about the large drop, it looks like about 40% drop in the long haul transport product segment. I mean obviously your guidance for next quarter would suggest that you either expect the snapback player or you’re going to make it up some place else, but with respect to the second quarter specifically, could you provide some color on what happened there?

Sure Joe, this is Joe, let me take that one. Number one, when you talk long haul you are talking major carriers. So, the evidence was that just naturally very lumpy. What I would also point you back to kind of connect the dot is go back to the very first question that Tim asked which was, we talk about inventory and we talk about the deferred revenue and that would point directly to long haul as well. So, it’s just the normalized ebb and flow and you’ll see something absolutely different in the third quarter. Joe Chiasson, Susquehanna : Okay, thanks.

We’ll go next to John Marchetti of Morgan Stanley.

Hi, thanks. Most of my questions have been answered here. So, just a couple of quick clarifications; first, Joe, if you could just give us a sense of the size of the cost of the Nortel litigation in the quarter and sort of how you see that playing out as we move forward here and then just from the way you guys have been talking a little bit today should we expect any kind of a change to the way you all are reporting segments going forward, thanks?

Let’s work backwards. In the case of the segment, if you reflect on what Steve has said and then in Gary’s prepared remarks, the way the technology is going, the things are coming together. The way that the R&D organizations have been reorganized, they are coming together as well and everything is starting to blur. So, we’ll reevaluate that each and every quarter as we move forward and it’s based upon the information we use to make decisions around here. So, we’ll share that with you as it develops going forward. Going to your question on the Nortel front, giving you exact information of how much we’re spending probably is in the best interest of this situation and the actual activity itself, I don’t think it’s fair to pull up on them. I’m not necessarily going to go there, but it’s definitely north of $1 million and it’s definitely a nice chunk of change. In terms of the overall process, it is a process and lawyers are involved, but we continue to feel optimistic and we feel that we are on the right page.

Okay, then just one last question if I might. In terms of revenue recognition from the channel partner for the 4200, is that recognized on a sell in or a sell through basis?

Sell in.

Okay, thank you.

We’ll go to Brantley Thompson of Goldman Sachs.

I was wondering if you can give an idea on two things. I guess the timeframe in terms of when you think the 4200 can reach that $40 million run rate that you guys have billed the supply chain for and then if you could talk about your broadband access outlook and how we should think about that trending since this is still a pretty significant portion of revenues, thanks?

Brantley, I’ll take that. If you look at the 4200, I’d expect to see it steadily increase next quarter before and then to get to the kind of run rate we’re talking about there, I think you’re probably looking at the early to mid part of 2007, it could be earlier than that, but I think round about that kind of timeframe. It’ll just be a steady run from where we are right now. In terms of the broadband, there’s a number of developments that we’re working on in the broadband space to extend the technology both into — allow it to play into the IPTV world and specifically to extend the CNX-5 further out into the network. At the moment, we’re still seeing pretty strong demands on the broadband side and quite frankly probably believe that will continue.

Thank you.

Thanks Brant.

We’ll go to Tim Long of Banc of America.

Thank you. All right, just two quick questions here. First, can you talk a little about — you mentioned increasing the partnership program, could you talk to us a little bit about what some of the areas are and what impact you could see that is kind of measured without increasing the op exp. side to get sales going a little bit more. If you could talk about that. And then I think you covered on the international side that’s very strong in the quarter, can you just give us a sense how strong sequentially, how distributed the increase in international revenues was in the second quarter, thanks?

Tim, when I talk about the partners program first. We’ve been working for quite a while now to lay the ground work for some partners, some of which are global, some of which achieve, give us leverage into certain market segments, particularly the Enterprise segments where we don’t have a large direct sales force but we do have tremendous applicability to some of the requirements there through things like the 4200 which we’re ramping into Enterprise as well. You know, people like EMC are a key, sort of global partner for us that give us access into that. These channels take a long time to develop and we’ve been working on some of these for over two years and we’re beginning to see some of the results of our efforts there. As Joe indicated in his comments, we recognized international customers over 10% which is actually through a channel that we’ve been working as well. So, we’re beginning to see that come together. Some of them are global partners, some of them are to address specific geographic areas particularly into places like Eastern Europe. So, it’s a combination of those things and we think we’ve got further leverage there on that business model, where we don’t have to clearly put related resources to an incremental increase in revenues. Second part of your question was the mix on the international front. I think we’ve said for a while that our international businesses have not been performing as well as we’ve thought. We’ve worked hard I think over the last 18 months to lay the ground work now for that to steadily increase as a percentage of our business in obviously absolute terms and I think again we’re again beginning to see the fruits of that. Clearly, you’ve got things like British Telecom, you’ve got Swisscom, you’ve got France Telecom, you’ve got the 4200 product which is particularly well timed into the European arena, given their adoption of Ethernet transport and services. So, I think the timing of that was helpful to us. So, we’re going to continue to see I think a ramp in our international revenues to employ.

Okay, thanks.

We’ll go next to Nikos Theodosopolous of UBS.

Yeah, thank you. I have few questions. On BT, now that you’ve started to recognize revenue, is it fair to say that for all the 21CN products that you were approved for or selected for that you have now achieved the revenue recognition and will just be shipping and recognizing revenue going forward or is there still some products that have not been formally through the revenue recognition product like in particular the 4200.

You want to ask both of them, or do you want to go one at a time Nikos?

Okay, the second question is on the international partner. I think last year at the analyst meeting you mentioned that Ericsson was the channel partner for the 4200 and Swisscom, so is this the partner that you’re talking about here and if you look at the quarter, 4200 was less than 10% of sales and yet this partner was above 10% of sales. So, it sounds like the partner is doing a lot more than just the 4200. Can you give us some additional color on who the partner is and if you can’t say who it is, what they’re doing because it just seems to be more than the 4200 that they’re selling based on the financials this quarter?

Okay, let’s go with the BT question first. All of the products have been tested and everything. So, there’s nothing avoiding any one of the products from being able to recognize the revenue and I think we did recognize revenue in all of them in the first quarter…in the case of the other international partner, I can say yes to your first question…it stands on the other side of the room and I’m not going to get kicked under the table. It was Ericsson we did flirt that out during the analyst date back in October. And your answer to the second question is accurate, yes, they are selling products other than the 4200. They are selling pretty much an entire portfolio of products and we’re trying to blossom that relationship, so that they even do more. Gary, you want to add anything to that one.

No, I think that’s pretty accurate Nikos. I mean they’re predominantly 4200, but they are marketing some other product into selective customer stores.

Okay, all right thank you.

And at this time, I’ll turn the conference back to Mr. Smith for any additional comments.

Thanks everyone for your time this morning and for your continued support, we appreciate it and we look forward to seeing many of you at Globalcom in Chicago next week. Thank you.

That does conclude today’s conference call. We thank you for your participation, you may disconnect at this time.