When we checked in on telecom equipment maker Ciena (NASDAQ:CIEN) six months ago, the company was reporting good news to its investors. Revenues had grown impressively over the past year, and net losses had declined. On the other hand, Ciena pared its losses in part by cutting costs on such frivolities as . research and development.

Two quarters later, the song remains more or less the same. Fiscal Q3 2005 saw Ciena grow its revenues by a healthy 46% year over year. That's actually faster than the 43% growth the company posted in Q1, suggesting that business may be picking up a bit in the telecom industry. Overall, it brings the company's average year-to-date revenue growth up to 43%. Nice.

Of course, the company is still losing money hand over fist. Don't be fooled (small "f") by the analysts and their projected $0.04-per-share loss -- or by Ciena's self-calculated "adjusted net" result, which just happened to match analysts' expectations. As Ciena itself acknowledges, "These adjustments are not in accordance with GAAP, and making these adjustments may not permit meaningful comparisons to other companies." (Such as, say, competitors Cisco (NASDAQ:CSCO), Lucent (NYSE:LU) and Nortel (NYSE:NT).) The real loss for the quarter was more than twice that sum -- $0.09 per diluted share. Year to date, the company has lost $0.32 per diluted share.

As bad as that sounds, it's still a sizeable improvement over last year's losses: $0.25 for fiscal Q3 2004 and $0.58 for the first nine months of fiscal 2004. And here's where the Q3 song diverges from the one we heard six months ago. Ciena didn't rely on slashing R&D spending to cut its losses -- although it did that too. R&D expenditures have declined by 33% year to date, and 44% in Q3.

However, Ciena also managed to improve its gross margins. That's why this quarter just might have sounded the opening notes of a happier tune for Ciena. In Q3 2004, Ciena achieved just a 25% gross margin on its products -- this year, the company upped that by roughly 900 basis points, scoring a 34%. What's more, this quarter's gross showed a dramatic improvement not just over last year's, but over the previous two quarters of the fiscal year. In the first nine months of fiscal 2005, Ciena averaged a gross of only 29%.

If Ciena can sustain this trend of growing gross margins, it could well make good on CEO Gary Smith's prediction that "fourth-quarter results will demonstrate continued progress toward profitability and positive cash flow."

So why is a company with strengthening margins selling for two bucks and change? Find out in:

Fool contributor Rich Smith owns stock in none of the companies mentioned above.