Good day, everyone, and welcome to the Ciena Corporation second quarter 2008 results conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chief Communications Officer, Ms. Suzanne DuLong. Please go ahead.

Thanks, Katy. Good morning and welcome, everyone. I am pleased to have with me Gary Smith, Ciena's CEO and President, and Jim Moylan, our CFO. In addition, Steve Alexander, our Chief Technology Officer, will be with us for the Q&A portion of today’s call. Our call this morning will be presented in four segments. Gary will provide some brief introductory comments; Jim will review the financial results for the second quarter; Gary will then discuss our outlook and strategy; and Jim will conclude our prepared remarks with guidance for Q3. We will then open the call for questions from the sell-side analysts. This morning’s press release is available on national business wire and First Call and also on Ciena's 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 here today. These statements should be viewed in the context of the risk factors detailed in our 10-Q filed with the SEC on March 7, 2008. We have until June 12th to file our 10-Q for the 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. Today we delivered solid financial performance, including 7% sequential revenue growth and operating profit and net income in line with our targets. Even in today’s highly competitive environment, we continue to grow faster than the market through the sustained execution of our business plan and our differentiated market position. We are leveraging our strong business model and our specialist role to provide the essential architectural foundation to address our customers’ major priorities and network imperatives. Meanwhile, we remain acutely focused on ensuring a balanced investment in our business that enables us to fuel long-term growth while also delivering sustained operating profit. I will discuss the quarter in more detail and our business outlook after Jim reviews the quarter’s results. Jim.

Thanks, Gary and good morning, everyone. This morning we reported second quarter revenue of $242 million. This represents an increase of 7% sequentially and 25% year over year. We had three 10%-plus customers in the quarter that combined to represent 52% of total sales. Two are North America based customers and one is international. Only one of the three 10% customers in Q2 was also a 10% customer in Q1. Sales from international customers represented 30% of total revenue in the quarter, up slightly from 26% in Q1. We delivered sequential revenue increases across all of our product groups. Our converged ethernet infrastructure group increased to $203 million, representing 84% of total revenue. We have renamed our former ethernet access group. The new group, ethernet service delivery, incorporates all of our access products and as of this quarter, revenue from the worldwide packets portfolio. Ethernet service delivery contributed $13 million in Q2, representing 5% of total revenue. And global network services, which encompasses all of our services related offerings, was $26 million, representing 11% of total revenue. Within our converged ethernet infrastructure group, core switching was the largest contributor at $83.4 million. Long-haul transport contributed $54.8 million in revenue, and our CN 4200 advanced services platform added $45.1 million in revenue for the quarter. In the remainder of my comments today, I’ll speak to both the GAAP results and to what the results would have been if we excluded those items detailed in the press release to develop what we call the as-adjusted basis. Turning to gross margin, Q2’s GAAP gross margin was 53%, up slightly from Q1’s 51%. Our as-adjusted gross margin was 54%. This number is exclusive of share-based compensation and an adjustment to cost of goods sold, or a write-up to worldwide packets inventory. Because this increase…

Thanks, Jim. While mindful of the broader economic environment, the fundamental demand drivers of our business and those of our customers we believe remain strong. Network traffic continues to increase, given growing end user demand and the constant introduction of new services and applications. To put this in perspective, take online video as a single example. In just one month’s time in February of 2008, U.S. Internet users viewed more than 10 billion online videos. And YouTube, which makes up roughly 7% currently of all Internet traffic, experiences 10 hours of content uploads every minute. And consumers, I would also point out, represent only a portion of the overall demand. Enterprise applications are also requiring not only more bandwidth but seamless remote connectivity as well. And in response to these demands, service providers are moving towards more sustainable business models grounded in market and technology realities, supported by end users who will pay for use. In other words, it’s no longer just about creating capacity. The focus has shifted to monetizing that capacity with service driven networks. At its core, this change in focus is driving the shift from legacy TDM based networks to next generation packet based architectures. Initially, service providers were focused on capacity and cost reduction. Ciena historically addressed that with market leading WDM and optical switching solutions and we continue to address capacity and cost related challenges with innovations like mesh architectures. The focus then shifted to efficiency as the key value and we addressed that with the addition and proliferation of ethernet across our portfolio. This is most clearly evidenced by the success of our CN 4200 platform with nearly $0.25 billion in revenue recognized since its inception. Today, our customers’ priorities are in fact more complex. They are concerned with enabling new service revenue…

Thanks, Gary. Let me conclude our prepared remarks today with our guidance. I will remind everyone that the statements we’ve made today and those that I am about to make are forward-looking and it’s important to understand them in the context of the risk factors detailed in our 10-Q. As we said in the press release, we remain optimistic about our outlook for the year and reiterate our expectation for annual revenue growth of up to 27% in fiscal 2008. First Call consensus expectations for our Q3 revenue are currently at $253 million and we are comfortable with those expectations. Our expectations around contribution from our packets acquisition also remain unchanged. We expect the former packets business will contribute between $35 million and $40 million in revenue for our fiscal ’08. On gross margin, gross margin remains difficult for us to predict with accuracy and we expect it will continue to fluctuate from quarter to quarter. Our gross margin ultimately depends on a combination of factors, including product and customer mix. Based on our visibility into expected order flow and product mix, we believe our Q3 gross margin, as adjusted for the items in our press release, will be in the low 50s, though somewhat below Q2’s 54%. As I mentioned previously, this expectation is exclusive of the write-up of the acquired worldwide packets inventory, which could be roughly $4 million in our Q3 GAAP gross margin. We expect operating expenses will increase over the last half of the year to fund planned research and development and to hire additional sales and administrative resources to support the growth of our business. As we said last quarter, in part as a result of the addition of packets related costs, but also as a result of our action to accelerate certain other R&D investments, we are likely to exceed our targeted 12.5% to 15.5% of revenue range for R&D investment for the remainder of 2008. However, we remain focused on steering toward our target of 15% as adjusted income from operations. We expect other income and expense net during the third quarter to be income of approximately $4 million. This reflects our lower cash balance as a result of the repayment of the $542 million in principal on our 3.75 notes at maturity and the roughly $200 million cash consideration in the packets acquisition, as well as lower interest rates. We anticipate our third quarter income tax expense will represent primarily foreign taxes, which we expect will be approximately $1.5 million. We estimate Q3’s diluted share count at approximately 113 million total shares, reflecting the addition of the shares issued in the packets transaction for a full quarter. Finally, we expect we will continue to be cash flow positive in Q3. Operator, we’ll now take questions from sell-side analysts.

(Operator Instructions) We’ll go first to Cobb Sadler with Deutsche Bank.

Thanks a lot, guys. I had one question and I may have missed it, on your operating margin guidance. Did you give a number for operating margin and have you given one for worldwide packets separately?

We have not broken out worldwide packets separately. We gave guidance for Q3’s gross margin at 50s, low 50s, somewhat below the 54%, and we said that we are targeting a 15% operating margin.

Okay, and that’s -- I mean, that scaling toward 15%, I guess you were above that this quarter. Do you think -- I mean, do you plan on scaling down 50 basis points or do you think the operating margin could be lower than 15 in the coming quarter and then you wind up scaling back up to 15% later on? And that’s it. Thanks a lot.

I think there’s always going to be the chance for a range around 15%. We are targeting toward 15% and we think that we can make it for the year. We’ll move around it as we move through the year.

Okay. Okay, so -- all right. Thanks a lot.

Thank you. Our next question comes from Tal Liani with Merrill Lynch.

Thank you very much. I have a few questions. The first one is if you could provide an update on BT21CN and the Gig-B projects. There were some concerns or some questions during the quarter, especially on the BT side. The second question I have is more long-term. You have a phenomenal performance right now -- gross margin is going up well beyond expectations if I compare the current numbers to last year numbers, and the question is how much of the performance is related to the core director recent surge in demand and what is the sustainability of this demand if you kind of fast forward a year from now? And I know you cannot give customer specific information but I would like to hear your views about the long-term plans for core director and what is the size of the opportunity the way you see it? Thank you.

On BT, without getting into too much detail on specific customers, I think the BT project, Century 21 large project, we’ve seen ebbs and flows as you’d expect on such a large project. I don’t think any of that is new news to us. You know, Century 21 is part of our revenues with BT. You know, we have a lot of other parts of BT that we are doing business with as well, so that sort of helps balances out the ebbs and flows of a large project through it. In terms of the margin, you know, I think strategically we’ve been heading towards more software orientation around the platforms. You know, we are certainly not complete with that. We are investing heavily in it and we think long-term, we are aiming for a gross margin that begins with a 5 that is sustainable for the long-term, so things like the mesh architecture, I would say that is sustainable. I think that’s an underpinning of a lot of the cycle that we are on right now as folks shift towards ethernet and packet based. You know, packet does not operate very well on rings, Sonnet/SDH, therefore I think folks are accelerating the move towards mesh. I would also say we have a pretty broad customer base for platforms like core director, for example. I think we have 14, 15 customers in the quarter for core director, to give you an example, and also 4200 is ramping. I think we did about $45 million in 4200 as well, and that had some pretty significant software aspects to it on certain applications. You know, and we are continuing to increase that. Steve, do you want to add anything on the longer term plans?

Sure, Gary. I think long-term, if anything, you are going to see additional demand for the kinds of features and functionality you get from mesh and you get from core director. You already see people looking to see larger scale switches of that kind built and consequently we are going to do what we need to to fill that need, solve that problem.

Thank you. Our next question comes from Nikos Theodosopoulos with UBS.

Thank you. Can you talk a little bit about the -- well, two things; first of all on the services margin, it has been quite volatile in the last couple of years and you’ve gotten it back up to a good level and now feel more comfortable about that. Can you talk about why there is more comfort and is it likely to be much less volatile? So that would be the first question. And then on the second question on your 10% customers, can you talk a little bit about the two new ones that were added this quarter, one domestic, one overseas? Were they primarily core director and 4200 customers, given those businesses had nice sequential increases? Thank you.

Let me take the services one first. I think many of you are familiar with the challenges that we’ve had in the last 18 months or so on the services side, specifically driven by a shift on the business model from more outsourcing to in-sourcing and getting that balance right, particularly internationally which caused us some substantial challenges, to the point where we got to zero gross margin on the overall aggregate services model. This is an issue that we dealt with. We are very confident about our model going forward and it certainly has way less exposure to those kinds of shifts. We think we’ve got the balance right both domestically and internationally on the services delivery model, so it’s going to fluctuate like -- even like the product portfolio. It’s got different kinds of mixes in there where we install equipment, where we do some professional services. You know, the margins do differ on that and it’s going to fluctuate from quarter to quarter but you know, given all of that, we still think in a mid to late 20s range, we are pretty confident of that going forward.

I would just point, Gary, too that since that one or two quarters where we really struggled with our service margin, we’ve had a very steady increase into the levels we are at today of 29% and we are confident that we’ll maintain something close to that going forward.

On the 10% new customers, or the addition of two customers in there, I will say to you they are both customers that are existing customers to us. They are buying across the portfolio and both are buying into, you know, to Tal’s earlier question, both are buying into new mesh based infrastructure, which is consistent with where we think the market is going. But they are all buying across the portfolio.

Okay, great. Thank you.

Thank you. Our next question comes from Tim Long with Bank of America.

Thank you. Just two quick ones, if I could; just to follow up on Nikos’ there, if you could talk a little bit about the 10% customer that dropped off. Are they -- was that a customer that was pretty close to 10% in the quarter? Meaning could there be more risk to the downside, or are you looking at that customer in North America potentially jumping back? And then also, could you just give us a little commentary around visibility, how you see the pipeline out there, has there been any slowdown given some of the macro drivers? Obviously there’s customer-specific things going on but if you could just talk to the overall pipeline, that would be great.

Okay, Tim. In terms of customer dropping off -- let me answer the piece, the question like this; there were a couple of large customers that came close to 10% this quarter but we -- you know, they didn’t come over that threshold so we didn’t call them out. And that probably gives you the -- some insight into I think what is behind the question there. The trick to this is getting as many of these large customers in the boat that you can and sell as much to them across the portfolio. That reduces volatility as best you can and gives you more balance, and I think we are fortunate that we’ve got a number of those tier one type accounts that give us some balance as we go through from quarter to quarter, because you are always going to get some ebbs and flows as they do certain projects, as they look at certain capital expenditures and do what’s required for their business. You’ve just got to get as many of them as you can. So we had two that came close to 10% but we didn’t call them out and I think one of them was a 10% customer last quarter. I think I’m right in saying that. In terms of the overall macro environment, not really seeing much change from last quarter. I mean, it’s sort of steady. I mean, we are seeing this shift across in architecture from Sonnet/SDH towards packet driven by a need to get more efficient on the networks. We are seeing, as I mentioned in some of my earlier comments, folks focused on more of a service delivery piece and how they can leverage their value from that but I don’t think we are seeing anything particularly different than we’ve seen in previous quarters on the macro. As you say, there’s certain accounts that have particular challenges, as you’d normally expect across the industry and that’s just the normal sort of ebb and flow of what goes on from quarter to quarter. Not seeing anything appreciably different from that really, Tim.

Okay. Thank you.

Our next question comes from Ehud Geldblum with JP Morgan.

Thank you very much. A couple of questions but first of all a clarification; Jim, can you just quickly explain again the inventory write-up on worldwide packets? Just the accounting behind that -- why it is and how that happens. I just want to understand a little bit better. And then your inventory went up, finished goods particularly went up pretty strongly from 101 last quarter up to about 125 I think you said. In the past, inventory that was in finished goods was an indication of equipment that was shipped awaiting revenue recognition from customers and was some sort of a look into your visibility and into future quarter revenue so to speak, as it was already sitting in customer networks. Can you explain how much of that came from packets and how much maybe core Ciena and whether that’s some sort of an indication as to future revenue?

Sure. On the allocation to inventory with respect to packets, FAS-141 speaks to the question of allocating purchase price. The concept is that you are supposed to look at only a selling margin on finished goods inventory, so you end up allocating purchase price to your finished goods inventory and that’s what we’ve done. We allocated an amount to that. Because it’s essentially amortization of an intangible, we don’t think that it’s applicable to an as adjusted gross margin and so we have taken it out, $1 million in this quarter to get to as adjusted gross margin. As we said, the number does get bigger in Q3. We think it could be as much as $4 million, depending upon when we recognize revenue on those finished goods.

So this is all determined on the inventory that you took on your balance sheet when you let worldwide packets?

Yes.

How large was that, so we can get a sense as to how many quarters of this we’ll see?

I think it’s mainly just going to be the next -- this quarter and the next quarter, we believe. The total value of the finished goods inventory that we took on from packets was around $12 million. That includes the write-up of the fair value on the inventory.

So even without that, finished goods inventory went up substantially.

Yes.

Again, is that some sort of an indication of revenue sitting at customer sites awaiting recognition?

Yes.

Okay. The last thing, Gary, can you give us an update on the AT&T opportunity with respect to not your current quarter [inaudible], that’s a good one as well but the worldwide packets deal that you announced when you first announced the acquisition, and give us an update on the timing of that and the size and types of products that could feed into that, in addition to the worldwide packets?

Sure, without going into too much specifics -- clearly we’ve refrained from talking about size for obvious reasons in these kinds of deals. It’s progressing well. All the activity required to prepare the rollout and the rest of it with them on their service delivery aspects for the ethernet piece. So we are engaged with them on that. I mean, I think as we said, both at the time of the acquisition and the last conference call, I think we -- we don’t really expect to see revenues to that until fiscal ’09 and then it will ramp up during the year is our expectation as they begin to roll out, probably towards the Q3, Q4, with all due reality applied to it. But yeah, it’s going well.

Okay, and then if you can compare that to the AT&T business you have today, adjusting for when you first began shipping core directors into AT&T -- is this an equal size opportunity?

Well, I guess that’s a good way of asking the question of how big it is. I mean, we just think this whole ethernet piece, if you look at ethernet services, is just a very large opportunity and you are looking at a very larger carrier. So I think it’s tough for me to say more than that, really.

Okay. Thanks so much.

Thank you. Our next question comes from Paul Silverstein with Credit Suisse.

Thanks. Gary, I’ve got a couple; first off, can you talk to us about bookings trends? And then I’ll follow-up with a couple more, if I might.

That’s not something that we really talk about, Paul. I mean, we talk about overall visibility, which is -- combines bookings, pipeline and all the rest of it. We have not gone into specifics on bookings.

Well, is there a reason why you won’t? I mean --

We would not -- I mean, we take a view on visibility, which we include into our overall forecast. We have restated our view around the year, so we encompass all of those things into our considerations.

Okay. Operating margin, it’s obviously a simple formula, gross margin less OpEx; your OpEx is up almost 50% year over year. It’s up huge quarter over quarter. Can you give us some sense for -- I understand you are investing in your future but can you give us some sense for where this is going to max out? What type of increases are we talking about from here? I mean, you’ve already taken it up huge numbers -- how much more is there to go?

Well, Paul, you know, we’re scaling the business and we see opportunities to invest. We are investing, I think as we’ve demonstrated over the last few quarters, we’ve got to a more normalized business model. We’ve got a target of 15% operating profit, which we have delivered. In fact, we’ve exceeded that. We are aiming at a target of that as we think about modeling our business going forward and we are disciplined around it. You know, it’s really -- you know, I would say the business model is working and we are demonstrating that and that’s allowing us to invest, you know, as you say substantial amounts of money in R&D, in sales and the things that we need to do. So from that point of view, we are ahead of where thought we would be able to be. But we’ve done it, I think, in a balanced way that delivers, improves a sustained business model whilst enhancing our opportunities for future growth.

If I may, let me ask the question a different way -- when you talk about 15% operating margin, is that a sign post on the way to something better, i.e. are you going to get OpEx under control, or is 15% -- is that the ultimate -- I would hope that’s not the ultimate goal here, but if you are going to run your OpEx at 38%, it’s going to be hard for you to do much better than that.

Well, I think we’ve come a long way very quickly and remember it wasn’t long ago we were putting a sign post, a milestone of 10% operating profit and we came through that very, very quickly. And we came through 15% and we’ve achieved more than 15% for the last couple of quarters. So we are very disciplined around it and I think our OpEx is -- you know, our investment, as I would say is very controlled, which is how we’ve been able to deliver that operating model and continue to invest. So we’ve got a very good handle on our strategic investments and our operating expenses and what we are investing in and the model right now that we are steering towards is a 15% operating profit, which we think is a good balance. It allows us to make significant investments and get consistency around a sustainable business model. Now, the things that we are investing in, back to what we were talking about earlier around more software enabled networks, we do believe that over time that will allow us to get a more sustained gross margin in the 50s, and we are seeing some of that right now. I think to sustain that, I think you are probably looking at 2010 and beyond. I think that there is operating leverage in this business and we will be able to steadily take that. But I think you are probably looking at right now 15% feels about right in the balance of opportunity. We are at the early stages I think of this whole cycle, so the money spent now on investments, provided we spend it wisely, is going to have a huge leverage effect later on. Now we will see if we are right about that but I would say that we’ve been right to invest in the downturn previously so we’ve got some track record around that and we see that kind of opportunity in front of us.

All right. One last question, if I may -- 40G; if this product cycle turns out to be longer and stronger than you think it is, is that going to be a problem or are we going to see the transport business decline further?

Paul, we already take -- when the 40-gig is already in the marketplace, we are already playing in that space. We’ve got our eyes set on the 100-gig, 100-gig ethernet, all those sorts of things, so I think we are quite well-positioned for -- as we see the -- call it the transport space rolling out.

Steve, do you have any 40G revenue?

Yes.

Okay. Thanks, guys.

Thank you. Our next question comes from Jack Monty with Lehman Brothers.

Thanks for taking my question. I just wanted to touch on the 10% customers and diversification through the year. I know AT&T is a big customer. When you look at a bottoms-up from a customer perspective at the guidance and the forecast, what is the probability of just having one greater than 10% customer in the year? Would you view that as a high probability scenario?

It’s certainly possible. You know, you’ve got the threshold at 10%. As I said, you had a couple that came very close to it this quarter as well, so you could have had 5%. Is it possible you end up with one? I think given what we are trying to do with the other markets that we are addressing, things like the wireless backhaul, the enterprise, the government space, some of the things, new markets internationally, it is certainly possible. I think we tend to be around two in the quarter, seems to be the natural flow, two to three right now. Certainly possible that it could be one, but I would think it would be caused specifically by a very large blip in one customer and/or accompanied by our increasing penetration in other markets, which gives us a little more balance. You know, our enterprise business, whilst not large, is likely to be, combined with some of the other pieces, about 10% of our business, so it does give us a little more balance than we’ve had previously.

Thank you very much, and also on the CN5060, is this earlier than the company was anticipating? And kind of how early can we expect to maybe see revenues or customer discussions that you are willing to share with us on this product? Thank you very much.

So the 5060 is the way that we are basically interfacing the ethernet world in and out of things like MPLS and such. It plays into application spaces for various back-haul pieces and such. It has a set of road map deliverables throughout this year, so I would expect you would start to see additional discussion around it shortly.

So was this announcement released today, that was ahead of schedule or that was online with schedule of the roadmap?

It’s nominally in line. You know, we’ve adjusted the features coming to market as we get better clarity as to what all the opportunities are.

Thank you very much.

Thank you. We’ll go next to Mark Sue with RBC Capital Markets.

Good morning. This is actually Joe for Mark. Two questions; one, getting back to gross margin, you guys indicating down from the 54% this quarter. Is that primarily due to the sort of return to normality in the services gross margins that you spoke about earlier?

No, it’s really a product mix question. We have pretty substantial differences in margin with our different products and customers and so we look at our mix coming up as compared to the mix in the last quarter and we think the margin will come in a little bit on products.

Okay, and then on operating margins, sticking to the 15% for the year, and you’ve been above that, sort of implying that it could be down in the back half, and I know you said that that’s primarily due to increased R&D, is the level of R&D that you experienced in the second quarter sort of what we should expect for the back half of the year?

I think we will continue to increase that, although we did take a big jump in the second quarter, partly as a result of packets. I don’t think you’ll see that kind of increase coming forward into the next quarter.

You are talking on a percent of sales basis?

I was talking dollars. I was just talking dollars.

But as a percent of sales, you said it’s going to be above the 15%, so similar to what we -- but a little below what we saw in the second quarter?

I don’t want to get that specific about it. I’d just say that in dollars, it will go up somewhat going from this quarter into the next quarter, second quarter into the third quarter.

Okay, great. Thanks.

And we’ll go next to George Notter with Jeffries & Company. George Notter - Jeffries & Co.: Thanks very much, guys. I just wanted to get back to the visibility question. Exiting Q2, I guess I’m wondering if your visibility is better than or equal to or worse than the visibility you had exiting Q1. And then I think in the past, you guys had mentioned that that was roughly two quarters or so of visibility. Is that still consistent now with what you’ve got looking forward?

I would say it’s consistent. I would say it’s consistent with that. That’s about what it is. I mean, it has some risks to it, you are still relying on some other orders and things but the visibility is similar. George Notter - Jeffries & Co.: Got it. And then on DSOs, I noticed that your international mix picked up a little bit, yet the DSO calculation was down. Is that a function of linearity being more front-end loaded in the quarter or is there something going on with collections? What kind of comment do you have there?

Nothing really going on in collections. I mean, I think we do a great job of collections but basically it was that we had a lot of front-end quarter loaded deliveries and revenue. George Notter - Jeffries & Co.: Okay. Thanks very much.

And we’ll go next to Simon Leopold with Morgan Keegan.

Thanks. Just first a quick double-check -- you’ve talked about the worldwide packets contribution for the full year and I just wanted to see if we could find out where the -- where we are starting out in terms of the sales from worldwide packets in the April quarter.

We won’t give you a specific. We said going into the quarter that we would generate a small initial revenue contribution from packets and they achieved expectations.

Well, maybe if you could quantify what you think of as a range for small -- is that kind of a low-single-digit million?

You’re in the range there.

Okay. Now moving on to a broader question -- trying to assess the opportunities for mesh, I think that remains a challenge. Clearly a customer like AT&T is somewhat unique on a global basis. There aren’t that many of those around the world, so how do you think about the total addressable market for mesh, given that there are few carriers with the scope and geographic scale of AT&T?

Well, you’ve got multiple applications for it. I mean, you know, you’ve got -- and we’ve got a lot of customers, as we said. We recognized I think it was about 12, 13 in the current quarter for core director. So you know -- and they adopt different kinds of density around mesh and different expansiveness in their reach, et cetera. But you got some pretty large carriers on board with that kind of technology, including BSNL, British Telecom, et cetera. So you’ve got some larger carriers out there and the market is moving more towards that mesh architecture. So we think there’s plenty of opportunity for both new wins in that area and further penetration in some of the larger accounts that we’ve got.

And to just follow-up, you mentioned BSNL and BT, maybe more broadly, how should we think about your strengths internationally? My impression being you tend to be much stronger with alternative and competitive carriers than PTTs, and maybe help me -- am I wrong there?

Well, if you look at our PTT base, it’s actually pretty strong. I mean, you’ve got Korea Telecom, you’ve got British Telecom, you’ve got France Telecom, you’ve got Swiss Com, you’ve got Telmax -- I mean, you’ve got some pretty larger carriers, you know, tier one, that you would historically call sort of PTT type carriers. And we’ve got long-term relationships with those folks, and most of them is mesh architecture.

Okay, and just to follow-up and close out on the questions, when we think about trending within the metro space, the 4500 seems to be hitting its stride. I think it’s fair to characterize its past quarters being a bit disappointing. How do we think about this product trending forward, given the kind of lumpiness you’ve put up in the past few quarters on that? And then I’ll yield the floor. Thanks.

I think it still has the potential to fluctuate quarter to quarter, but you’d see a definite trend to the right and upwards. You know, it’s been slower to ramp up to the $40 million mark than I would have anticipated but it’s past that and I think we are now -- we’ve launched it in North America a couple of quarters ago and that’s beginning to ramp nicely. I mean, this is a fabulous platform that addresses a number of applications because of the software and flexibility of the platform. So I would expect, Simon, this thing to continue to grow beyond what it is today.

Great. Thank you. And we will go next to Subu Subrahmanyan with Sanders Morris Harris.

Thank you. I have two questions; one is on the worldwide packets expense contribution. It closed on March 3rd, I believe, so you have only a partial quarter of OpEx. Is that part of the OpEx increase going forward? The other was specific to AT&T, just because in such a large quarter [at your customer], year over year numbers I think you’ve said in the past core director would be similar. I wonder what that means for second half comparables for core director.

On the OpEx, you are exactly correct. We did have only two months of packets in there and so that is part of the increase going forward. I think that answer the first question.

In terms of the core director, core director overall I expect to be similar in the second half to the first half for all the customers that we -- you know, the overall demand.

Got it. And is there a worldwide packets OpEx number for this quarter you’d be willing to share?

No, we are not going to talk about packets individually. You know, we basically integrated packets into our company and so it’s not that meaningful, really, to talk about their individual OpEx. They are meaningful numbers in and of themselves but it’s not meaningful to talk about them individually.

We’ve tried to give you an indication in terms of the revenues and where we are tracking to that and that sort of $35 million we think we will track on the revenue side for them.

Got it. Thank you.

And we’ll take our next question from Scott Coleman with Morgan Stanley.

Thanks, guys. Good morning. I am wondering if you could speak a little bit to the competitive environment. Last year there was a fair amount of M&A amongst your competitors, which at least my assumption is that helps you gain share as they work through their optical portfolios. I’m wondering how you are thinking about this year, if you are seeing changes in the pricing environment, if you are seeing increased competition from some of the Asian vendors as well.

The competitive environment continues to be challenging but I don’t think it’s any different than we’ve seen it last year, particularly in the area of focus that we are on. You know, mesh architecture, more software orientated platforms, you know, most of the commodity type vendors tend to be on just the point-to-point transport stuff. So you know, we don’t see some of that -- some of the challenges at the bottom end of the market there. So I would say the competitive environment continues to be challenging but no different than it has been particularly.

And what about the pricing environment? If you could speak to that more specifically.

Again, I mean, similar. If you are looking at software and those kind of highly differentiated platforms, you see less pricing competition.

So are you saying that on like for like products, your pricing is actually going up year over year?

Scott, what I am saying is we are competing in a space where some of the players that you’re talking about don’t really have the same kind of solutions. We’re not saying it’s like for like. We’ve got highly differentiated solutions that enable service provisioning, reduced operating costs, provisioning time, those kinds of things. We’ve carefully chosen high growth segments of the market where we can add considerable value through software, and so that tends to be less price sensitive than some other areas. You know, what I’d say to you is just look at our gross margin performance. That’s financial evidence of that.

Fair enough. Thanks, Gary.

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

Good morning. Just two small questions, and they’ll be quick; first a clarification -- when you say $4 million of interest and other income, when you do your as adjusted non-GAAP operating EPS, you always add back the interest and other income -- I’m sorry, you add back the interest income, sorry. When you say $4 million, are you implying with the interest income or without the interest income?

You’re talking about EPS?

Yes.

All right. In our as adjusted EPS, that does include the interest income and expense net. However, we do have interest expense on the converts, which you need to add back to your as adjusted net income and then divide by the share count, fully diluted share count.

Right, so when you guide third quarter towards $4 million, if we wanted to calculate the EPS that you will put out in your press release as an as adjusted number, we would need to add the interest back into that number?

The interest expense. If you look at the $4 million, that’s about $6 million or so of income and $2 million or so of expense, so that’s how you get to the net interest income number and that’s in our as adjusted net income. To get to as adjusted net income per share, you’ve got to add back just the interest expense piece of that, which is $1.8 million or $2 million or so, and then divided by the 113 million fully diluted shares.

And the reason you do that is because you already have the converts in the fully diluted shares?

Yes, exactly. Right, that the converts are in the fully diluted shares, exactly.

Perfect. I just want to make sure we got the right guidance clarification there. And then the actual question here -- listen, on the 10% customers, it sounds like if I understood you correctly, two 10% customers this quarter were not 10% customers in the first quarter. Were those two that are these new 10% customers this quarter, were they historically at all 10% customers in the past, at any point in the past or are these new 10% customers to the company?

They were -- both of those I believe were 10% customers in the past.

At some point in the past.

At some point in the past, yes.

Perfect. Thank you very much, gentlemen.

Thank you. We’ll go next to Tim Savageaux with Merriman.

Good morning and congrats on some strong results. We seem to be back sort of in a situation where we’ve been -- I don’t know, year or two ago, where you are obviously delivering on the top line, certainly on the gross margin line ahead of expectations, but aggressively ramping operating expenses in anticipation of something. And we didn’t know what that something was a year or two ago and we kind of know now, so can you give us some color as to -- and I’ve asked this question actually a couple of times before -- what sort of growth rate you hope to maintain through the operating expense spending, or what sort of particular areas outside of just layering on worldwide packets, because it does seem to be beyond that, that you are focused on that you don’t already have, which is to say obviously previous investments have yielded some pretty impressive results. You clearly expect that to continue but I think given the degree of the increase, we’ve probably a little more color on once again exactly where you are headed here.

We’ve increased our investment in there. We’ve done it in a way that sustains our model around the 15% target for operating profit. We’ve been able to achieve and in fact over-achieve some of the growth plans. We took our revenue number up for the year outside of packets acquisition, and so we think we’ve got an opportunity now with the portfolio that we’ve got, provided that we invest in some of the things that we see opportunities for for it, you know, things like the wireless backhaul, accelerating some of the software provisionings across all of the platforms. We’ve got some new platforms that we are working on as well to bring out during ’09 to flush out further the family. So really a lot of the investment is going on the operating systems, on the software side, linking them all together and increasing our capability in that space. You know, where we are really kind of aiming to is we think we can get leverage across the portfolio and increase our ability to drop to the bottom line over time, you know, improve on the 15 over time and to continue to grow faster than the market and to assure that as we go through 2010. You know, a lot of the investments that we are making now particularly are really in the portfolio will come to market towards the end of ’09 and the first part of 2010 to assure our position there. But we think we can continue to grow faster than the market as we go forward. Steve, do you have anything else on the sort of specifics to the portfolio?

I would again emphasize the increasing importance of software in the portfolio. There’s a tremendous amount of opportunity out there for ethernet service delivery. The carrier ethernet space is one that is known to be growing very, very rapidly, so is wireless backhaul. And the features that we are adding into the portfolio are all intended to address those opportunities. We see lots of opportunities and we want to invest appropriately.

Some of it as well, Tim, is around scaling the sales and marketing and field force as well, because there’s certain geographies in certain vertical markets where we see opportunity for our kind of value proposition and we’ve got to ensure that we can get to market as well to scale the front as well.

Okay, and just to follow-up and this seems relatively familiar as well, which is to say making those investments has obviously sort of -- there’s been both some very, very macro concern about the impact of the current economic situation on your customers spending behavior and some very micro concern about individual customers, none of which has seemed to come to anything. And can we in the past take your sort of willingness to step up and invest operating dollars now as some indicator of confidence or stability with regard to what you are seeing with regard to your major customers’ plans, behavior, spending priorities going forward? Or how would you characterize any changes, positive or negative with regard to what you are hearing from major carrier customers in terms of their going forward investment priorities?

Well, I think you describe it well. I mean, the macro environment, certainly you know we are not -- we are very cognizant around the sort of macroeconomic environment and some of the micro issues around certain customers. But overall as we look at the thing, I think the overall demands are being driven by some very compelling applications and I think the overall traffic growth, I mean, we’re just very confident in seeing that continue to grow and in conversations with our customers globally, they share that and in fact are concerned around how they can handle that growth economically. That in turn is driving them to look at new ways of evolving their networks, which really plays into our specialist position and where we’ve invested in that. So we see the overall dynamics despite the macro financial environment as being very favorable. I wouldn’t say we are immune from it. Clearly we are not but right now, we are not -- there is nothing I can really point to to say that’s an impact from the macroeconomic environment. So we actually see a strong environment both in the short-term and which is why we have, despite all of these challenges, we’ve reiterated our 27% up to growth guidance for the year and why we continue to invest in the opportunity. We are very confident about the opportunity in the long-term, provided that we execute well and invest wisely, both in terms of our R&D and in terms of our sales and marketing force. So I think the long answer to your question there is yes, it is a sign of our overall long-term confidence.

Okay. Thanks very much.

Thank you and with that, we will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Gary Smith for any additional or closing remarks.

Thanks, folks, and I appreciate your ongoing support and for your time this morning. We look forward to seeing many of you at [NexCon] in Las Vegas. Thank you very much.

Thank you. This will conclude today’s conference. We do appreciate your participation. You may disconnect at this time.