<PAGE>


As filed with the Securities and Exchange Commission on December 14, 2000.

                                                      Registration No. 333-49010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 ------------

                              AMENDMENT NO. 2

                                    TO
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     Under
                           THE SECURITIES ACT OF 1933
                                 ------------
                            CHORUM TECHNOLOGIES INC.
             (Exact Name of Registrant as Specified in its Charter)
                                 ------------
        Delaware                     3674                    84-1431727
     (State or Other           (Primary Standard          (I.R.S. Employer
     Jurisdiction of              Industrial           Identification Number)
    Incorporation or          Classification Code
      Organization)                 Number)

                1303 East Arapaho Road, Richardson, Texas 75081
                                 (214) 570-3500
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                                 ------------
                                 Scott C. Grout
                     President and Chief Executive Officer
                            Chorum Technologies Inc.
                1303 East Arapaho Road, Richardson, Texas 75081
                                 (214) 570-3500
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                                 ------------
                                   Copies to:
          Kirk E. Lundburg                        Christopher J. Ozburn
          Anthony M. Allen                        William B. Owens, Jr.
          James D. Robinett                         Melissa M. Munson
       F. Javier Vergne-Morell              Wilson Sonsini Goodrich & Rosati,
      Gunderson Dettmer Stough                  Professional Corporation
Villeneuve Franklin & Hachigian, LLP      8911 Capital of Texas Highway, Suite
     2700 Via Fortuna, Suite 300                          3350
         Austin, Texas 78746                    Austin, Texas 78759-7247
           (512) 732-8400                            (512) 338-5400
                                 ------------
        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]

   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                      CALCULATION OF REGISTRATION FEE
<TABLE>
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
<CAPTION>
                                                     Proposed       Proposed
                                       Amount        Maximum        Maximum       Amount Of
     Title of Each Class of            to be      Offering Price   Aggregate     Registration
   Securities to be Registered       Registered     Per Share    Offering Price     Fee(1)
---------------------------------------------------------------------------------------------
<S>                                <C>            <C>            <C>            <C>
Common stock, $0.0001 par
 value..........................     9,200,000        $18.00      165,600,000      $41,400
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>

(1) $39,600 of such fee has previously been paid.
                                 ------------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and we are not soliciting offers to buy these  +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                    SUBJECT TO COMPLETION, DATED     , 2001

                             8,000,000 Shares

[LOGO OF CHORUM TECHNOLOGIES]


                                  Common Stock

                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$16.00 and $18.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "CHOR."

  The underwriters have an option to purchase a maximum of 1,200,000 additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 7.

<TABLE>
<CAPTION>
                                            Price  Underwriting
                                              to   Discounts and     Proceeds to
                                            Public  Commissions  Chorum Technologies
                                            ------ ------------- -------------------
<S>                                         <C>    <C>           <C>
Per Share..................................  $         $                $
Total...................................... $         $                $
</TABLE>

  Delivery of the shares of common stock will be made on or about     , 2001.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

          Banc of America Securities LLC

                    CIBC World Markets

                                                      Thomas Weisel Partners LLC

                  The date of this prospectus is       , 2001.
<PAGE>



                                   [ART WORK]

                           [Inside Front Cover]

   The inside front cover page starts with the heading "THE DYNAMIC ALL-OPTICAL
NETWORK." Below this heading is the following text: "A new class of ultra-fast
and flexible networks where bandwith is managed and delivered all-optically,
reducing the costs and bottlenecks of today's electronics-based networks."

   Under the heading and text is a diagram of a dynamic all-optical network
with titles designating the following network segments: ACCESS NETWORKS, METRO
NETWORKS, LONG-HAUL NETWORKS, ULTRA LONG-HAUL NETWORKS.

   Below the left portion of the diagram is the company's PolarWave trademark.

   Under the right portion of the diagram is the heading " Providing all-
optical modules for next-generation optical networking systems," with the
following text below: "* Integrated Optical Subsystems * Optical Slicer(TM)
Filters * DWDM Routers * Optical Processors * Optical Switches"

   Below the company's PolarWave Trademark is the trademarked company logo.

<PAGE>

                                 ------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    3
Risk Factors........................    7
Special Note Regarding Forward-
 Looking Statements.................   21
Use of Proceeds.....................   22
Dividend Policy.....................   22
Capitalization......................   23
Dilution............................   24
Selected Consolidated Financial
 Data...............................   25
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   26
Business............................   32
Management..........................   44
</TABLE>
<TABLE>
<CAPTION>
                                    Page
                                    ----
<S>                                 <C>
Related Party Transactions.........  53
Principal Stockholders.............  54
Description of Capital Stock.......  57
Shares Eligible for Future Sale....  60
United States Federal Tax
 Consequences to Non-United States
 Holders...........................  62
Underwriting.......................  65
Notice to Canadian Residents.......  68
Legal Matters......................  69
Experts............................  69
Where You Can Find More
 Information.......................  69
Index to Consolidated Financial
 Statements........................ F-1
</TABLE>

                                 ------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.


                     Dealer Prospectus Delivery Obligation

   Until     , 2001 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including the financial statements and
notes, carefully.

                            Chorum Technologies Inc.

   We design, manufacture and market high performance fiber optic products for
next-generation, ultra-high capacity, dynamic optical networks. Dynamic optical
networks route, switch and process signals optically, rather than
electronically. Our products and technologies enable networks that are faster,
more flexible and more cost effective than today's networks. We believe that
our technology platform, fiber optic design expertise, network architecture
knowledge and scalable manufacturing capabilities will enable us to rapidly
deliver a new generation of fiber optic products in high volumes. We work
closely with our customers during their product development cycles to enable
them to deliver higher bandwidth, more flexible and lower cost network systems.
In the fiscal year ended September 30, 2000, Nortel Networks accounted for 100%
of our revenues. We have also shipped our products to other leading network
equipment vendors including Alcatel USA, Corvis, Fujitsu, Lucent Technologies,
Marconi, Pirelli Optical Systems Italia (a subsidiary of Cisco Systems), Qtera
(a subsidiary of Nortel Networks), Sycamore Networks and TyCom (US).

   Over the past decade, the volume of high-speed traffic carried over
communication networks has grown dramatically. This growth has been driven
principally by increases in the use of the Internet and commercial data
networks for more bandwidth-intensive applications, such as e-commerce and on-
demand, real-time, multimedia communications and services. Today's networks use
only a small fraction of the inherent capacity of an optical fiber and are a
hybrid of optical and electrical devices, with virtually all networking
functions being performed electrically. These networks are costly and capacity
constrained and, as a result, communications service providers are having
difficulty keeping pace with the increases in bandwidth demand in a cost-
effective manner.

   In order to address the dramatic increases in high-bandwidth traffic,
communications service providers are upgrading their existing networks to a new
generation of ultra-high capacity, dynamic optical networks that support
significantly higher data transmission rates and are able to route, switch,
restore and manage bandwidth, all optically. These capabilities are being
derived principally from innovations in materials, devices and subsystems.
Therefore, network equipment vendors are increasingly relying on suppliers of
innovative new products and technologies to deliver critical functions for
their next-generation network equipment.

   We are designing products based on technologies we have developed for
controlling the polarization of optical signals. An optical signal can be
described as an electromagnetic wave. Electromagnetic waves produce
electromagnetic energy fields. The orientation of these energy fields is called
polarization. By controlling the polarization of the optical signals, we can
switch and filter the optical signal, as well as manipulate the characteristics
of the optical signal. Our PolarWave family of products includes Optical Slicer
filters, DWDM Routers, Optical Processors and Optical Switches. Optical Slicer
filters combine and separate hundreds or thousands of high-bandwidth optical
channels onto and off of a single fiber, enabling very high capacity optical
networks. DWDM Routers are designed to integrate our Optical Slicer filters
with other filtering technologies to provide access to individual channels.
Optical Processors are designed to dynamically condition the properties of
optical signals to allow for more high bandwidth channels to be carried over
greater distances. Optical Switches are designed to replace conventional
electrical-based switching in optical networks and provide substantially
greater bandwidth and flexibility at a lower cost by reducing the frequent
optical-to-electrical-to-optical conversions found in networks today. In
addition, we have the capability to combine elements of these products into
functionally integrated subsystems. All of our revenues for the fiscal year
ended September 30, 2000 were recognized in the fourth quarter of the fiscal
year and were from the sale of Optical Slicer filters. The Optical Slicer
filter line of products is commercially available. Prototypes of our other
products have been delivered to customers for evaluation.

                                       3
<PAGE>


   In order to deliver our products in volume, we are substantially increasing
our production capacity. We use advanced information systems, manufacturing
process analysis and control and automation to scale our manufacturing. We also
use sophisticated design and simulation tools during development that allow us
to introduce products that integrate well into our manufacturing processes and
can be produced in high volumes. We believe this allows us to move from design
to large-scale manufacturing and customer delivery more quickly and cost
effectively.

   Our objective is to be a leading provider of advanced fiber optic products
for ultra-high capacity, dynamic optical networks. Key elements of our strategy
include:

  .  leveraging our technology platform to build a broad product portfolio;

  .  expanding our portfolio of technologies focused on next generation
     network functionality;

  .  expanding manufacturing capacity and improving process efficiencies;

  .  working closely with our customers to help them respond to new market
     opportunities; and

  .  pursuing strategic acquisitions to provide complementary technologies
     and expand the breadth and scale of our product portfolio and
     manufacturing capabilities.

   We were founded in January 1996 and were incorporated as MacroVision
Communications, Inc. in September 1997. We later changed our name to Chorum
Technologies Inc. In December 2000, we reorganized into a holding company
structure. As a result, all of our operating assets are now held by a wholly-
owned limited partnership. Our principal offices are located at 1303 East
Arapaho Road, Richardson, Texas 75081 and our telephone number is (214) 570-
3500. Our web site is www.chorumtech.com. The information contained on our web
site does not constitute a part of this prospectus.

   Chorum, PolarWave, Optical Slicer, Optical Slicing and Chorum's logo are our
trademarks and we have filed applications to register Chorum, PolarWave,
Optical Slicer and Optical Slicing. Trade names, service marks or trademarks of
other companies appearing in this prospectus are the property of their
respective holders.

                                       4
<PAGE>

                                  The Offering

<TABLE>
<S>                                   <C>
Common stock offered by us........... 8,000,000 shares

Common stock to be outstanding after
 the offering........................ 68,849,888 shares

Use of proceeds...................... General corporate purposes, capital
                                      expenditures and potential acquisitions.
                                      See "Use of Proceeds."

Proposed Nasdaq National Market
 symbol.............................. CHOR
</TABLE>

   The table above is based on the number of shares outstanding as of September
30, 2000. This number excludes:

  .  5,261,865 shares of common stock issuable upon exercise of outstanding
     options as of September 30, 2000 at a weighted average exercise price of
     $1.51 per share;

  .  7,640,519 shares of common stock available for future issuance under our
     equity plans; and

  .  414,598 shares of common stock issuable upon exercise of warrants at a
     weighted average exercise price of $2.65 per share issued to Comdisco
     and Imperial Bancorp in connection with equipment financings.

                                  ------------

   Except as otherwise indicated, information in this prospectus assumes:

  .  conversion of all outstanding shares of preferred stock into shares of
     common stock upon the completion of this offering; and

  .  no exercise of the underwriters' over-allotment option.

                                  ------------


                                       5
<PAGE>

                             Summary Financial Data
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Fiscal Years Ended
                                                      September 30,
                                                ---------------------------
                                                 1998      1999      2000
                                                -------  --------  --------
<S>                                             <C>      <C>       <C>
Consolidated Statement of Operations Data:
Revenues......................................  $   --   $    --   $  3,312
Gross profit (loss)...........................      --        --    (10,625)
Total operating expenses......................    2,770    10,914    34,818
Loss from operations..........................   (2,770)  (10,914)  (45,443)(1)
Net loss......................................   (2,672)  (10,357)  (43,765)(1)
                                                =======  ========  ========
Basic and diluted net loss per share..........  $ (2.77) $  (4.93) $ (13.16)
                                                =======  ========  ========
Weighted average shares used to compute basic
 and diluted net loss per share(2)............      966     2,102     3,325
                                                =======  ========  ========
Pro forma basic and diluted net loss per share
 (unaudited)(2)...............................                     $  (0.86)
                                                                   ========
Weighted average shares used to compute pro
 forma basic and diluted net loss per share
 (unaudited)(2)...............................                       50,994
                                                                   ========
</TABLE>

<TABLE>
<CAPTION>
                                                         As of September 30,
                                                                2000
                                                       -----------------------
                                                                  Pro Forma
                                                        Actual  As Adjusted(3)
                                                       -------- --------------
<S>                                                    <C>      <C>
Balance Sheet Data:
Cash and cash equivalents............................. $114,586    239,666
Working capital.......................................  107,851    232,931
Total assets..........................................  137,125    262,205
Note payable and capital lease obligations, net of
 current portion......................................    7,949      7,949
Total stockholders' equity............................  116,776    241,856
</TABLE>
--------------------
(1)  In fiscal 2000, the loss from operations and net loss include stock
     compensation expense of approximately $12.4 million.

(2)  See note 9 of Notes to Consolidated Financial Statements for an
     explanation of the determination of the weighted average shares used to
     compute net loss per share. The weighted average shares used to compute
     pro forma basic and diluted net loss per share assumes the conversion of
     the convertible preferred stock outstanding into 53,071,627 shares of
     common stock.

(3)  The pro forma as adjusted amounts above give effect to the conversion of
     our preferred stock into common stock and to the receipt of the estimated
     net proceeds from our sale of 8,000,000 shares of common stock upon
     completion of this offering at an assumed initial public offering price of
     $17.00 per share, after deducting estimated underwriting discounts,
     commissions and offering expenses payable by us.

                                       6
<PAGE>

                                  RISK FACTORS

   This offering and any investment in our common stock involve a high degree
of risk. You should carefully consider the risks described below and all of the
information contained in this prospectus, including our financial statements
and the related notes, before deciding whether to purchase our common stock.
Our business, operating results or financial condition could be materially
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks and you may lose all or part of your
investment.

                     Risks Related to our Financial Results

We have a history of net losses and expect to continue to incur net losses for
the foreseeable future, which may decrease the market price of our common
stock.

   We incurred net losses of $43.8 million for our fiscal year ended September
30, 2000 and $10.4 million for our fiscal year ended September 30, 1999. As of
September 30, 2000, we had an accumulated deficit of $56.8 million. We
recognized $3.3 million in revenues for the quarter ended September 30, 2000,
which was our first quarter with revenues from product sales. All of our
product revenues to date have come from sales of our Optical Slicer filter
products, and all other products we have shipped have been prototypes or
production units from which we have not recognized any revenues. We have not
achieved profitability and we expect to incur net losses for the foreseeable
future. To date, we have primarily funded our operations from the sale of
equity securities and have not generated cash from operations. We also expect
to incur significant product development, manufacturing start-up, sales and
marketing and administrative expenses, and, as a result, we will need to
significantly increase revenues to achieve profitability. Even if we achieve
profitability, given the competition in, and the evolving nature of, the
optical networking market, we may not be able to sustain or increase
profitability on a quarterly or annual basis. As a result, we will need to
generate significantly higher revenues while containing costs and operating
expenses if we are to become and remain profitable. However, we cannot be
certain that our revenues will grow in the future or that we will ever reach
sufficient revenue levels to achieve profitability.

Because of our limited operating history, we may not accurately forecast our
revenues or match our expenses to our revenues, which could cause fluctuations
in our quarterly operating results and may result in volatility or declines in
our stock price.

   As a result of our limited operating history, we may be unable to forecast
our revenues accurately. We forecast our revenues based in part on purchase
forecasts from our customers. These forecasts are revised periodically. We do
not have a long history with which to assess and respond to the accuracy of
these forecasts. Many of our expenses are fixed in the short term, and we may
not be able to quickly reduce spending if our revenues are lower than we
project. Major new product introductions will also result in increased
operating expenses in advance of generating revenues, if any. Therefore, net
losses in a given quarter could be greater than expected. Failure to forecast
our revenues and adjust our operating expenses to match our revenue levels
could cause quarterly fluctuations in our operating results and may result in
volatility or a decline in our stock price.

Sales to any single customer may vary significantly from quarter to quarter,
which may cause our results of operations to fluctuate.

   Customers in our industry tend to order large quantities of products on an
irregular basis. Delivery requirements under the agreements with our customers
can vary from week to week. This means that customers who account for a
significant portion of our revenues in one quarter may not place any orders in
succeeding quarters. This ordering pattern may result in significant quarterly
fluctuations in our revenues and results of operations.

                                       7
<PAGE>

   If current customers do not continue to place orders, we may not be able to
replace these orders with orders from other customers. None of our current
customers have any minimum purchase obligations, and they may reduce the size
of their orders or stop placing orders with us at any time, regardless of any
forecast they may have previously provided. For example, any downturn in our
customers' business could significantly decrease sales of our products to these
customers. A significant reduction in sales to these customers could adversely
affect our revenues.

   In addition, we expect to experience seasonality in the sales of our
products. Historically, the communications equipment market has higher sales in
the fourth quarter of the calendar year, due in part to customers' budgetary
cycles. In addition, we expect that sales may decline during summer months,
particularly in Europe, which we expect to represent a market for our products
in the foreseeable future. These seasonal variations in our sales may lead to
fluctuations in our quarterly results of operations.

We depend on a few key customers and the loss of, or a significant reduction
in, sales to these customers could decrease our revenues.

   In the fiscal year ended September 30, 2000, Nortel Networks accounted for
100% of our revenues. We anticipate that our results of operations will
continue to depend on sales to a relatively small number of customers. Due to
the high level of merger and acquisition activity in our customers' industry,
one or more of our customers could be acquired, causing a reduction in the
number of our customers. For example, one of our customers, Qtera, was acquired
by Nortel Networks. The loss of any significant customer or a significant
reduction in sales to any of these customers could decrease our revenues.

                Risks Related to the Optical Networking Industry

The optical networking industry is developing, unpredictable and characterized
by rapid technological changes and evolving standards. If this industry does
not develop and expand as we anticipate, demand for our products may fail to
grow or may decline, which would decrease our revenues.

   The optical networking industry is developing and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and continuously evolving industry standards. As a result, it is
difficult to predict its potential size and future growth rate. In addition,
evolving customer requirements and industry standards are uncertain. Our
success depends on the widespread adoption of next generation optical networks.
Communications service providers that have invested substantial resources in
their existing optical networks or other systems may be reluctant or slow to
develop and deploy next-generation optical networks. Our success in generating
revenues in this emerging market will depend on our ability to:

  .  maintain and enhance our relationships with our customers;

  .  convince our customers of the benefits of next-generation optical
     networks; and

  .  predict accurately, and develop our products to meet, evolving customer
     requirements and industry standards.

   If we fail to address changing market conditions, sales of our products may
fail to grow or may decline, which would decrease our revenues.

The optical networking equipment industry is experiencing declining average
selling prices, which could reduce our revenues and gross margins.

   The optical networking equipment industry is experiencing declining average
selling prices as a result of increasing competition and greater unit volumes
as communications service providers continue to deploy fiber optic networks. We
anticipate that average selling prices will continue to decrease in the future
in response to product introductions by competitors, price pressures from
significant customers and greater manufacturing

                                       8
<PAGE>


efficiencies. These average selling price declines may contribute to a decline
in our revenues and gross margins.

If our customers are unsuccessful in building next-generation optical network
equipment that is widely deployed by communications service providers, our
revenues could decline.

   If our customers are not successful in building their optical networking
equipment, promoting and selling their products to communications service
providers and accomplishing the many other requirements for the success of
their businesses, our future product sales and growth will be limited. In
addition to the effectiveness of our products, many factors influence the
success of our customers, and we do not have control over these factors. If our
customers are unsuccessful, our revenues could decline.

If the Internet and commercial data networks do not continue to expand and
next-generation optical networks are not deployed as rapidly as we anticipate,
sales of our products may decline, and our revenues may decrease.

   Our future success depends on the continued growth of the Internet and
commercial data networks for commerce and communications, the continuing
increase in the amount of data transmitted over communications networks and the
increasing adoption of, and improvements to, optical networks to meet the
increased demand for bandwidth. If data networks, including the Internet, do
not continue to expand as a widespread communications medium and commercial
marketplace, the need for significantly increased bandwidth across networks and
the market for optical networking products may not continue to develop. Future
demand for our products is uncertain and will depend to a great degree on the
continued growth and upgrading of optical networks. If this growth does not
continue, our product sales may fail to grow or may decline and our revenues
may decrease.

                         Risks Related to Our Business

We must achieve design wins with potential customers, or we may lose the
opportunity for significant sales to these customers for a lengthy period of
time, which could reduce our revenues.

   Once an optical network equipment vendor decides to use a particular
supplier's product or subsystem, that network equipment vendor will design the
product or subsystem into its system, which is known as a design win for the
supplier. Suppliers whose products or subsystems are designed into the network
equipment vendor's system will generally continue to make sales to that network
equipment vendor until the system is redesigned or discontinued. Even then, the
network equipment vendor may be reluctant to design new products into its new
systems, as doing so could involve significant and costly additional redesign
efforts. As a result, if we are unable to secure a design win in a potential
customer's particular system, we may be unable to sell our products to that
customer for a lengthy period of time. If we are unable to secure a sufficient
number of design wins, our revenues could be reduced.

If we are unable to develop and successfully introduce new and enhanced
products that meet the needs of our customers in a timely manner, our revenues
could decline.

   Our future success depends on our ability to anticipate our customers' needs
and develop products that address those needs. Technological change in the
optical networking industry is occurring at a rapid pace. As a result, we
expect there to be frequent new product introductions, changes in customer
requirements and evolving industry standards. We may not be able to develop new
products or enhancements to our existing products in a timely manner, or at
all. If we fail to introduce new or enhanced products in a timely manner, our
revenues could decline.

                                       9
<PAGE>


Although our research and development organization is currently developing many
potential optical networking products, we may not bring all of these products
into commercial production. If we do not bring these products into commercial
production, our revenues could decline.

   Our research and development organization is currently developing many
potential optical networking products. Although we have several products in
development, we may not bring all of these potential products into commercial
production due to:

  .  changes in customer demand;

  .  technological developments that make our products less competitive;

  .  evolving industry standards; or

  .  allocation of our limited resources to other products or technologies.

   If we incur significant expenses developing products that we do not produce
commercially, or if we select the wrong products or technologies to bring into
commercial production, our revenues could decline and we may not recover
significant research and development expenses.

We have limited product offerings, and if demand for these products declines or
fails to develop as we expect, our revenues will be reduced.

   During the fiscal year ended September 30, 2000, we derived all of our
revenues from our PolarWave Optical Slicer filters. We expect that revenues
from a limited number of products will continue to account for a substantial
portion of our total revenues. Continued and widespread market acceptance of
these products is critical to our future success. We cannot be certain that our
current products will achieve market acceptance at the rate at which we expect,
or at all, which could reduce our revenues.

Unless the optical networking industry accepts our technologies, our revenues
may fail to grow or be reduced.

   Many of our current products use polarization-based technology to manipulate
optical signals. Our technology is early in its development and there are
numerous competing technologies for the optical networking solutions that we
provide. It is uncertain whether our current polarization-based technology
solutions will continue to be accepted in the industry or with our target
customers. Additionally, we may not be able to develop products based on other
technologies. If our products and technologies are not rapidly adopted and
incorporated into next-generation optical networking systems, our revenues may
fail to grow or be reduced.

Competition is intense and will increase, which could reduce our revenues and
gross margins, or cause us to lose market share.

   Competition in the optical networking industry is intense. We face
competition from public companies, including Avanex, Corning, JDS Uniphase, New
Focus and Oplink Communications. In addition, several private companies are
developing optical networking technologies and have planned product
introductions. Additional new competitors may enter the market, and we are
likely to compete with new companies in the future. Certain of our competitors
are larger than we are, have longer operating histories and significantly
greater financial, technical, marketing and other resources than we have and
they may also have a wider range of technologies than we have. As a result,
these competitors are able to devote greater resources than we can to the
development, promotion, sale and support of their products. In addition,
several of our competitors have large market capitalizations or cash reserves
and longer operating histories, and therefore may be better positioned than we
are to acquire other companies in order to gain new technologies or products
that may displace our product lines. For example, JDS Uniphase acquired E-TEK
Dynamics and recently announced its agreement to acquire SDL. Acquisitions in
our industry, particularly acquisitions involving our customers, potential
customers or competitors, could significantly impact our business. If customers
acquire significant

                                       10
<PAGE>

competitors or competitors acquire significant customers, customers may reduce
the amount of products they purchase from us. Alternatively, some of our
customers or potential customers may spin off new competitor companies in the
optical networking products industry. For example, Lucent Technologies recently
announced that it will spin off its microelectronics business, which includes
its optoelectronics components and integrated circuits division. These
companies may compete more aggressively than their former parent companies due
to their greater dependence and focus on our industry. Many of our potential
competitors have more established sales and customer support organizations than
we do. In addition, many of our competitors have greater name recognition, more
extensive customer bases, better developed distribution channels and broader
product offerings than we have. These companies can leverage their customer
bases and broader product offerings and adopt aggressive pricing policies to
gain market share. We expect to encounter potential customers that, due to
existing relationships with our competitors, are committed to the products
offered by these competitors. As a result of the foregoing factors, competitive
pressures may result in price reductions, reduced gross margins, reduced
revenues and loss of market share.

The long sales cycles for our products may cause our revenues and results of
operations to vary from quarter to quarter, which could cause volatility or a
decline in our stock price.

   The timing of our revenues is difficult to predict in part because of the
length and variability of the sales and implementation cycles for our products.
We do not recognize revenue until a product has been shipped and there are no
significant uncertainties with respect to customer acceptance. Customers often
view the purchase of our products as a significant and strategic decision. As a
result, customers typically expend significant effort in evaluating, testing
and qualifying our products and our manufacturing processes. This customer
evaluation and qualification process frequently results in a lengthy initial
sales cycle of nine months or longer.

   Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to evaluating and confirming that our
products meet their exacting specifications. This customer evaluation process
determines whether our products meet the customers' quality, performance and
reliability standards. If problems with our products are discovered or delays
in qualification of our products occur, our customers may eliminate the product
from a long-term supply program, which would result in a significant lost
revenue opportunity over the term of that program.

   While our customers are evaluating our products and before they place an
order with us, we may incur substantial selling, research and development
expenses to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead time components, materials or capital equipment prior to receiving an
order. After the evaluation process, a potential customer may choose another
product developed by a competitor or may not order our products because of many
factors, including the failure of a customer to win a network equipment
contract with its own customer. Because of the evolving nature of the optical
networking industry, we cannot predict the length of these sales and
development cycles. As a result, these long sales cycles may cause our revenues
and results of operations to vary significantly and unexpectedly from quarter
to quarter, which could cause volatility or a decline in our stock price.

We must expand our research and development organization or our revenues may
fail to grow or decline.

   We will need to grow our research and development organization to continue
to develop new and enhanced optical networking products. Competition for
research and development personnel is intense, and we might not be able to hire
a sufficient number of qualified individuals. If we are unable to expand our
research and development organization adequately, we may not be able to
continue to improve our existing products or develop new products, which could
reduce our revenues.

                                       11
<PAGE>


We must expand our sales organization in order to increase market awareness and
sales of our products or our revenues may fail to grow or decline.

   The sale of our products requires long and involved sales efforts targeted
at several key departments within our prospective customers' organizations.
Sales of our products require the prolonged efforts of executive personnel and
specialized systems and applications engineers working together with a small
number of dedicated salespersons. We will need to grow our sales force in order
to increase market awareness and sales of our products. Competition for these
individuals is intense, and we might not be able to hire a sufficient number of
qualified sales personnel and applications engineers. If we are unable to
expand our sales operations, we may not be able to increase market awareness or
sales of our products, which could reduce our revenues.

Our products are deployed in large and complex systems and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation, cause us to lose customers and reduce our revenues and
gross margins.

   Our products are designed for large and complex optical networks. Therefore,
they can only be fully tested for reliability when deployed in networks for
long periods of time. Our products may contain undetected defects when first
introduced or as new versions are released, and our customers may discover
defects in our products only after they have been fully deployed and operated
under peak stress conditions. In addition, our products are combined with
products from other vendors. As a result, should problems occur, it may be
difficult to identify the source of the problem. If we are unable to fix
defects or other problems, we could experience, among other things:

  .  loss of customers;

  .  damage to our brand reputation;

  .  inability to attract new customers or achieve market acceptance;

  .  diversion of development and engineering resources; and

  .  legal actions by our customers.

   The occurrence of any one or more of these factors could reduce our revenues
and gross margins.

Any acquisitions that we make could dilute our stockholders' ownership,
increase our costs or reduce our margins.

   We anticipate that in the future, as part of our business strategy, we will
make strategic acquisitions of, and investments in, complementary companies,
products or technologies. In the event of any future acquisitions, we could
issue stock that would dilute our current stockholders' percentage ownership.
In addition, in connection with an acquisition, we may incur debt, assume
liabilities or incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets, which could increase our
costs or reduce our margins.

If we fail to integrate successfully any future acquisitions into our
organization, our operating expenses could increase and our margins could
decline.

   Future acquisitions also involve numerous risks regarding the integration of
any acquired business into our organization, including:

  .  problems combining the acquired operations, technologies or products;

  .  unanticipated costs or liabilities;

  .  diversion of management's attention from our core business;

  .  integration of new manufacturing operations;

                                       12
<PAGE>

  .  adverse effects on existing business relationships with suppliers and
     customers;

  .  risks associated with entering markets in which we have limited, or no,
     prior experience;

  .  potential loss of key employees, particularly those of the acquired
     organizations; and

  .  political and integration risks associated with acquiring foreign
     businesses.

   We cannot be certain that we will be able to integrate successfully any
businesses, products, technologies or personnel that we might acquire in the
future, and this may increase our operating expenses and reduce our margins.

We depend on key personnel to manage our business effectively in a rapidly
changing market, and if we are unable to hire additional qualified personnel or
retain existing personnel, our revenues and results of operations could be
reduced.

   Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term and these individuals may terminate their
employment at any time. In addition, we do not have "key person" life insurance
policies covering any of our employees. Furthermore, in order to implement our
business plan, we must hire a significant number of additional employees,
particularly engineering, research and development, sales and manufacturing
personnel. Competition for highly skilled personnel is intense. We may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, which could reduce our revenues and
results of operations.

If we fail to grow or fail to manage our growth effectively, our revenues could
fail to grow or be reduced.

   Our ability to offer our products and implement our business plan
successfully in a rapidly evolving market requires an effective planning and
management process. We continue to expand the scope of our operations and have
increased the number of our employees substantially in the past year. On
September 30, 1999, we had a total of 93 employees, and on September 30, 2000,
we had a total of 405 employees. In addition, we plan to hire a significant
number of employees over the next few quarters. In September 2000, we entered
into leases for approximately 109,000 additional square feet of space in
Richardson, Texas to facilitate our anticipated growth over the next twelve
months. We expect to outgrow our current facilities in Richardson, Texas and we
will need to locate and obtain additional space. The commercial real estate
market in the Dallas/Fort Worth metro area is competitive and we may not be
able to obtain additional needed space on reasonable terms, or at all. Our
failure to obtain additional space could adversely affect our ability to expand
our business and operations and increase our revenues. The increase in
employees and the growth in our operations have placed, and will continue to
place, a significant strain on our management systems and resources. We must
also successfully manage and coordinate multiple manufacturing facilities at
different sites. We will need to continue to improve our financial and
managerial controls, reporting systems and procedures and continue to expand,
train and manage our work force. The failure to effectively manage our growth
could adversely affect our ability to manufacture and sell our products and our
revenues could fail to grow or be reduced.

We face risks associated with international sales that could harm our results
of operations.

   We have not recognized revenues from sales of our products outside of the
United States and Canada. We plan to increase our international sales
activities. Our international sales will be limited if we cannot establish
relationships with international distributors, establish foreign operations,
expand international sales channel management, hire additional personnel and
develop relationships with international service providers.

                                       13
<PAGE>

Even if we are able to develop international operations successfully, we may
not be able to maintain or increase international market demand for our
products. Our international operations are subject to the following risks:

  .  greater difficulty in accounts receivable collection and longer
     collection periods;

  .  difficulties and costs of staffing and managing foreign operations;

  .  the impact of weakened economies outside the United States;

  .  unexpected changes in regulatory requirements;

  .  sudden and unexpected reductions in demand in particular countries in
     response to exchange rate fluctuations;

  .  certification requirements;

  .  reduced protection for intellectual property rights in some countries;

  .  potentially adverse tax consequences; and

  .  political and economic instability.

   Although we expect the substantial majority of our international revenues
and expenses to be denominated in U.S. dollars, a portion of our international
revenues and expenses may be denominated in foreign currencies in the future.
Accordingly, we could experience the risks of fluctuating currencies and may
choose to engage in currency hedging activities to reduce these risks.

We may be unable to grow our business if additional capital is unavailable.

   We have accelerated the expansion of our manufacturing capacity and our
capital expenditures in connection with this expansion, which has increased our
need for working capital. We believe that the anticipated net proceeds of this
offering, together with our existing cash balances, will be sufficient to meet
our capital requirements at least through the next 12 months. However, the
development and marketing of new and enhanced products and the expansion of our
manufacturing facilities and the associated personnel and capital expenditures
will require a significant commitment of resources. As a result, we may need to
raise substantial additional capital. If we must raise additional funds, we may
not be able to do so on favorable terms, or at all. If we cannot raise funds on
acceptable terms, we may not be able to further expand our manufacturing
capacity, develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated
requirements.

                  Risks Related to Manufacturing Our Products

If we are unable to expand our manufacturing capacity in a timely manner, or if
we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which will reduce our revenues or increase our
operating expenses.

   We currently manufacture substantially all of our products in our facilities
located in Richardson, Texas. In anticipation of our future growth, we are
substantially expanding our manufacturing capacity. We have limited experience
in rapidly increasing our manufacturing capacity or in manufacturing products
at high volumes. We will be required to hire, train and manage significant
numbers of additional manufacturing personnel in order to increase our
production capacity. There are numerous risks associated with rapidly
increasing capacity, including:

  .  the inability to procure and install the necessary equipment;

  .  lack of availability of manufacturing personnel;

                                       14
<PAGE>

  .  difficulties in achieving adequate yields from new manufacturing lines;
     and

  .  the inability to match future order volumes with capacity.

   If we are unable to expand our manufacturing capacity in a timely manner or
if we do not accurately project demand, we will have excess capacity or
insufficient capacity, either of which will reduce our revenues or increase our
operating expenses.

   Our planned manufacturing expansion and related capital expenditures are
being made in anticipation of a level of customer orders that may not be
realized or, if realized, may not be sustained over multiple quarters. If we do
not achieve and sustain anticipated levels of customer orders and we fail to
reduce our operating expenses accordingly, our gross margins and results of
operations may decline.

If our manufacturing yields are lower than expected, our ability to ship
products to our customers could be delayed and our revenues and gross margins
may be reduced.

   The manufacture of our products involves complex processes. We have
invested, and expect to continue to invest, heavily in manufacturing capacity
in anticipation of future revenue growth. The costs associated with this
manufacturing overhead are relatively fixed, and, thus, manufacturing yields
are critical to our results of operations. We cannot be certain that we will
achieve or sustain acceptable production yields in the future. In addition,
changes in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. Lower than expected production yields could
delay product shipments and impair our gross margins.

   In some cases, existing manufacturing techniques, which involve substantial
manual labor, may not allow us to cost-effectively meet our production goals so
that we maintain acceptable gross margins while meeting the price targets of
our customers. We will need to continue to develop new manufacturing processes
and techniques to increase our gross margins. We may not achieve production
quantities or manufacturing cost levels that will satisfy customer demands.

   Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development organization to our manufacturing group and coordinate our efforts
with those of our suppliers to rapidly achieve volume production. If we fail to
effectively manage this process or if we experience delays, disruptions or
quality control problems in our manufacturing operations, our shipments of
products to our customers could be delayed and our revenues and gross margins
may be reduced.

We depend on single or limited source suppliers for some of the key components
and materials in our products, which makes us susceptible to supply shortages
or price fluctuations that could reduce our revenues and margins.

   We typically purchase our components and materials through purchase orders,
and in general we do not have guaranteed supply arrangements with any of our
suppliers. We currently purchase several key components and materials used in
the manufacture of our products from single or limited source suppliers. If our
supply for key components or materials were disrupted, our ability to deliver
our products to our customers could be severely impaired. If any of our single
or limited source suppliers experience capacity constraints, financial
difficulties, work stoppages, or any other reduction or disruption in output,
they may not be able to meet our supply schedules or we may need to make
advance payments against future orders in order to secure supply. Alternate
suppliers may not be available to us in a timely manner, with acceptable
pricing terms, or at all, and delays in arranging alternative sources of supply
may cause us difficulties or delays in manufacturing our products. Any
interruption or delay in the supply of any of these components or materials, or
the inability to obtain these components and materials from alternate sources
at acceptable prices and within a reasonable amount of time, would impair our
ability to meet scheduled product deliveries to our customers and could cause
customers to cancel orders and eliminate our products from their network
systems.

                                       15
<PAGE>

   Additionally, our suppliers may:

  .  enter into exclusive arrangements with our competitors;

  .  be acquired and stop or reduce sales to us;

  .  stop selling their products or components to us at commercially
     reasonable prices or at any price; or

  .  be unable to obtain, or have difficulty obtaining, components for their
     products from their suppliers.

   If we are unable to obtain products in a timely manner at acceptable prices
from our suppliers, our revenues and margins could be reduced.

If any of our suppliers are unable to deliver sufficient quantities and
qualities of materials or subcomponents to us in a timely manner, we could
incur additional costs, or experience manufacturing delays, and our revenues
and margins could be reduced.

   Because many of our suppliers are small, they may not be able to increase
their scale of production to meet our needs. These small companies may not have
the financial resources to deliver sufficient quantities of materials or
subcomponents to meet our future needs or to institute the rigorous quality
control measures necessary for our products. Therefore, it may be necessary for
us to make significant capital equipment investments in our suppliers to enable
additional production. We cannot be certain that these investments will enable
us to increase supply and we could lose all or part of our investment. These
investments may also result in additional expenses and diversion of
management's attention from our core business.

   Additionally, some of our suppliers are located outside of the United
States. Currency exchange rate fluctuations, political and economic
instability, unexpected regulatory changes, transportation delays and forces of
nature could impact the pricing, general availability and timely delivery of
materials or subcomponents from our foreign suppliers. Any interruption in our
supply of key materials or subcomponents could reduce our revenues and margins.

Some of our competitors are also our suppliers and, if our supply relationship
with them deteriorates, it could reduce our gross margins.

   Some of our component and material suppliers are both our primary source for
those components and materials and major competitors in the market for optical
networking equipment. For example, a subsidiary of JDS Uniphase supplies a
significant portion of an important raw material used in some of our products.
We have a supply agreement obligating this subsidiary to continue to supply us
with this raw material on a purchase order basis, but either party for any
reason can terminate this supply agreement on 180 days notice. Our gross
margins could be reduced if these supply relationships were to deteriorate or
end.

Some of the optical components, raw materials and capital equipment used by us
are in short supply, and our inability to secure adequate materials and capital
equipment could impair our ability to manufacture and deliver our products.

   Due to rapidly increasing demands, there is currently an industry-wide
shortage of some optical components, raw materials and capital equipment that
we use in our products and to manufacture our products. For some of these
components, raw materials and capital equipment, there can be waiting periods
of six months or more between placement of an order and delivery. In the case
of some optical components, raw materials and capital equipment that are in
short supply, suppliers have imposed strict allocations limiting the quantities
of these components, materials and capital equipment that they will supply to a
given customer in a specified time period. These suppliers may choose to
increase prices, require advance payment to secure supply or increase
allocations to larger, more established companies, which could increase our
costs or reduce our allocations, impair our ability to manufacture and deliver
our products and reduce our revenues.

                                       16
<PAGE>


Unless we can deliver sufficient quantities of our products to attract and
retain major customers, our revenues could be reduced.

   Communications service providers and network equipment vendors typically
require that suppliers commit to provide specified quantities of products over
a given period of time. If we are unable to commit to deliver sufficient
quantities of our products to satisfy a customer's anticipated needs, we may
lose the order and the opportunity for significant sales to that customer for
an extended period of time. As we begin to increase our manufacturing capacity,
we anticipate receiving orders for significant quantities of products. We will
be unable to fulfill multiple large orders simultaneously if we do not develop
sufficient manufacturing capacity required to produce significant quantities of
our products, which could reduce our revenues.

If we fail to forecast component, material and capital equipment requirements
accurately for our manufacturing facilities, we could incur additional costs or
experience manufacturing delays and our revenues and gross margins could be
reduced.

   We use rolling forecasts based on anticipated product orders to determine
our component, material and capital equipment requirements. It is important
that we accurately predict both the demand for our products and the lead times
required to obtain the necessary components, materials and capital equipment.
Lead times for components, materials and capital equipment that we order vary
significantly and depend on factors such as specific supplier requirements, the
size of the order, contract terms and current market demand for the components,
materials or capital equipment at a given time. For substantial increases in
production levels, some suppliers may need six months or more lead time. If we
overestimate our component and material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component,
material or capital equipment requirements, we may have inadequate inventory or
equipment necessary for production, which could interrupt our manufacturing and
delay delivery of our products to our customers. Any of these occurrences would
reduce our revenues and gross margins.

We rely on outsourced manufacturers to perform material processing and produce
some of our optical subassemblies and our ability to manufacture and sell our
products would be harmed if they were unable to meet our increased demand or
were to stop meeting our manufacturing requirements.

   We rely on outsourced manufacturers to perform material processing and
produce some optical subassemblies used in our products. If for any reason,
these suppliers were to stop satisfying our requirements without providing
sufficient warning, we may be unable to secure an alternative source in a
timely manner and our ability to manufacture and sell our products would be
harmed. We generally do not have long-term contracts with our outsourced
suppliers. As a result, our suppliers are not required to supply products or
services to us for any specific period, in any specific quantity or at any
certain price, except as may be provided in a purchase order.

Our manufacturing lines must be qualified by our customers for volume
shipments, and our revenues could be reduced if we are not able to obtain or
maintain such customer qualification.

   Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. This customer qualification process determines whether our
manufacturing lines meet the customers' quality, performance and reliability
standards. Customers have and may continue to require that we become registered
under international quality standards, such as ISO 9001. Although we are
currently working toward such certification, we are not yet certified under ISO
9001. If there are substantial delays in qualification of our manufacturing
lines, our customers may not purchase our products, which would result in
significant lost revenue opportunity.


                                       17
<PAGE>


                   Risks Related to Our Intellectual Property

We may become involved in costly and time-consuming litigation that may
substantially increase our costs.

   We may from time to time become involved in various lawsuits and legal
proceedings. We intend to protect our intellectual property aggressively and
from time to time we may file lawsuits against parties that we believe are
infringing our intellectual property rights. Currently, we have filed patent
infringement lawsuits against Oplink Communications and E-TEK Dynamics (which
was acquired by JDS Uniphase). We may file similar actions against additional
companies. Even if we obtain a favorable result, any litigation which we
initiate, or to which we are subject, could result in significant expenses
being incurred by us, require significant involvement of our senior management,
may divert management's attention from our business and operations and could
subject us to counterclaims. Litigation is subject to inherent uncertainties,
and adverse results may negatively affect our operating results, financial
condition or reputation. For more information about current legal proceedings,
see "Business--Legal Proceedings."

We may become involved in intellectual property disputes and litigation which
could subject us to significant liability, divert time and attention of our
management and prevent us from selling our products, which could reduce our
revenues or increase our operating expenses.

   It is possible, based in part on the size and sophistication of our
competitors and the history of rapid technological advances in our industry,
that several competitors may have patent applications in progress in the United
States or in foreign countries that, if issued, could relate to the
technologies or processes used in our products. If such patents were to be
issued, the patent holders or licensees may assert infringement claims against
us or claim that we have violated other intellectual property rights. In
addition, we may have failed to discover existing domestic or international
patents that could apply to our product design or manufacturing process. These
claims and any resulting lawsuits, if successful, could subject us to
significant liability for damages and invalidate our proprietary rights. The
lawsuits, regardless of their merits, could be time-consuming and expensive to
resolve and would divert management time and attention. If we are unsuccessful
in defending a lawsuit, we could be forced to do one or more of the following,
any of which could adversely affect our business:

  .  stop selling, incorporating or using our products that use the disputed
     intellectual property;

  .  obtain from third parties a license to sell or use the disputed
     technology, which license may not be available on reasonable terms, or
     at all; or

  .  redesign our products that use the disputed intellectual property.

We may not be able to protect our proprietary technology, which would limit our
ability to use our proprietary technology to generate revenues.

   We regard substantial elements of our technology as proprietary and attempt
to protect them by relying on patent, trademark, service mark, copyright and
trade secret laws. We cannot be certain that our pending patent applications
will be approved, that any patents that may issue will protect our intellectual
property or that any issued patents will not be challenged by third parties.
Other parties may independently develop similar or competing technology or
design around patents that may be issued to us. Additionally, we cannot be
certain that the steps we have taken will prevent the misappropriation of our
intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. Such
misappropriations could reduce our ability to generate revenues. For a more
detailed discussion about our intellectual property, see "Business--
Intellectual Property."

   We also rely on confidentiality procedures and contractual provisions with
our employees, consultants and corporate partners. The steps we take to protect
our intellectual property may be inadequate, time-consuming and expensive.

                                       18
<PAGE>


                         Risks Related to This Offering

There has been no prior market for our common stock. An active public market
for our securities may not develop or be sustained, which could make it more
difficult for investors to sell our stock.

   Prior to this offering, there was no public market for our common stock. An
active public market for our common stock may not develop or be sustained after
this offering, and the market price for our stock might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade in the open
market after this offering. The initial public offering price will be
determined based on negotiations between us and the representatives of the
underwriters, based on factors that may not be indicative of future market
performance.

We expect to experience volatility in our share price, and investors may not be
able to resell shares of our common stock at or above the initial public
offering price.

   After completion of this offering, the market price of our common stock may
vary significantly from the initial public offering price. An investor in
shares of our common stock may not be able to resell those shares at or above
the initial public offering price. Our common stock price may fluctuate
significantly in the future due to:

  .  any deviations in our revenues, gross margins or net losses from levels
     expected by securities analysts;

  .  changes in financial estimates by securities analysts;

  .  changes in market valuations of other optical networking companies; and

  .  our future sales of common stock or other securities.

   In addition, The Nasdaq Stock Market's National Market has experienced
extreme volatility that has often been unrelated to the performance of
particular companies. Future market fluctuations may cause our stock price to
fall regardless of our performance.

Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in our corporate control and cause our
stock price to decline.

   Upon completion of this offering and assuming no exercise of the
underwriters' over-allotment option, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately 52.9%
of our outstanding common stock based on shares outstanding as of September 30,
2000. As a result, these stockholders will be able to continue to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could delay or prevent an outside party from acquiring or merging with us
and cause our stock price to decline. For a full presentation of the equity
ownership of these stockholders, see "Principal Stockholders."

Provisions of our charter documents, Delaware law and certain agreements with
our officers may have anti-takeover effects that could discourage or prevent a
change in control, which may suppress our stock price or cause it to decline.

   Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that our common stockholders may
consider favorable. These provisions include:

  .  authorizing our board of directors to issue preferred stock without
     stockholder approval;

  .  providing for a classified board of directors with staggered, three-year
     terms;

  .  prohibiting cumulative voting in the election of directors;


                                       19
<PAGE>

  .  requiring super-majority voting to effect significant amendments to our
     certificate of incorporation and bylaws;

  .  eliminating the ability of stockholders to call special meetings;

  .  prohibiting stockholder actions by written consent; and

  .  establishing advance notice requirements for nominations for election to
     the board of directors or for proposing matters that can be acted on by
     stockholders at stockholder meetings.

   Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Certificate of Incorporation and Bylaw Provisions." In
addition, we have agreements with our officers that have change of control
provisions, which may discourage, delay or prevent someone from acquiring or
merging with us. For more information about these agreements, see "Management--
Employment, Severance and Change of Control Arrangements"

There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.

   Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market beginning       , 2001. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. Some
of our current stockholders have "demand" and/or "piggyback" registration
rights in connection with future offerings of our common stock. Demand rights
enable the holders to demand that their shares be registered and may require us
to file a registration statement under the Securities Act at our expense.
Piggyback rights provide for notice to the relevant holders of our stock if we
propose to register any of our securities under the Securities Act, and grant
such holders the right to include their shares in the registration statement.
If a substantial amount of our common stock is sold after this offering, our
stock price could decline.

   Investors should read "Shares Eligible for Future Sale" for a discussion of
the shares that may be sold in the public market in the future.

Investors will experience immediate dilution since the initial public offering
price is substantially higher than the book value per share of our outstanding
common stock after the offering.

   The initial public offering price of our common stock is substantially
higher than the book value per share of our outstanding common stock upon
completion of the initial public offering. Accordingly, an investor in our
common stock in this offering will have immediate dilution of approximately
$13.49 in the book value per share of our common stock from the initial public
offering price paid for our common stock. See "Dilution."

We may be at risk of securities class action litigation due to the potential
volatility of our common stock price.

   In the past, securities class action litigation has often been brought
against companies after periods of volatility in the market price of their
securities. Securities litigation could result in substantial costs and divert
management attention from our business, which could adversely affect our
business.

                                       20
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, forward-
looking statements can be identified by terminology, for instance: may, will,
should, expect, plan, anticipate, believe, estimate, predict, potential or
continue, the negative of these terms or other comparable terminology. In
addition, these forward-looking statements include, but are not limited to,
statements regarding the following:

  .  anticipated development and release of new products;

  .  anticipated sources of future revenues;

  .  anticipated expansion of our manufacturing capacity;

  .  anticipated expenditures for research and development and selling,
     general and administrative expenses; and

  .  the adequacy of our capital resources to fund our future operations.

These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined in the "Risk Factors" section.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results or to changes in our expectations.

                                       21
<PAGE>

                                USE OF PROCEEDS

   Our net proceeds from the sale of the 8,000,000 shares of common stock we
are offering are estimated to be $125.0 million, after deducting underwriting
discounts, commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $144.0 million.

   We expect to use the net proceeds for general corporate purposes and
approximately $30.0 million of capital expenditures over the next 12 months,
primarily for the purchase of equipment and for the expansion of our operations
and manufacturing capacity. A portion of the net proceeds may also be used for
the acquisition of businesses, products and technologies that are complementary
to ours. Pending these uses, we will invest the net proceeds of this offering
in short-term, investment grade and interest-bearing securities.

                                DIVIDEND POLICY

   We have not paid any cash dividends since inception and do not currently
intend to pay any cash dividends.

                                       22
<PAGE>

                                 CAPITALIZATION

   The table below sets forth the following information as of September 30,
2000:

  .  our actual capitalization; and

  .  our pro forma as adjusted capitalization after giving effect to the
     conversion of all outstanding shares of preferred stock into 53,076,127
     shares of common stock and the receipt of the estimated net proceeds
     from our sale of 8,000,000 shares of common stock in this offering,
     after deducting the underwriting discounts, commissions and estimated
     offering expenses payable by us, the filing of an amended and restated
     certificate of incorporation and the application of our proceeds from
     this offering.

   You should read this table in conjunction with our financial statements and
the accompanying notes to our financial statements, Selected Financial Data and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                          As of September 30,
                                                                  2000
                                                          ---------------------
                                                                     Pro Forma
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                             (in thousands,
                                                           except share data)

<S>                                                       <C>       <C>
Cash and cash equivalents................................ $114,586   $239,666
                                                          ========   ========
Note payable and capital lease obligations, net of
 current portion......................................... $  7,949   $  7,949
Stockholders' equity:
  Series A through E convertible preferred stock: $.0001
   par value; 54,882,769 shares authorized, 53,627,904
   shares issued and 53,076,127 outstanding, actual;
   50,000,000 authorized, none issued and outstanding,
   pro forma as adjusted.................................  158,781        --
  Common stock: $.0001 par value; 100,000,000 shares
   authorized, 8,326,120 shares issued and 7,773,761
   outstanding, actual; 1,000,000,000 shares authorized,
   69,954,024  shares issued and 68,849,888 outstanding,
   pro forma as adjusted ................................        1          7
Additional paid-in capital...............................   64,984    348,839
Deferred compensation....................................  (49,998)   (49,998)
Note receivable from stockholder.........................      (90)       (90)
Accumulated deficit......................................  (56,832)   (56,832)
Treasury stock, at cost, 552,359 shares of common stock
 and 551,777 shares of Series A convertible preferred
 stock, actual; 1,104,136 shares of common stock, pro
 forma as adjusted.......................................      (70)       (70)
                                                          --------   --------
  Total stockholders' equity.............................  116,776    241,856
                                                          --------   --------
    Total capitalization................................. $124,725   $249,805
                                                          ========   ========
</TABLE>

   This table excludes the following shares:

  .  5,261,865 shares of common stock issuable upon exercise of stock options
     outstanding as of September 30, 2000 at a weighted average exercise
     price of $1.51 per share;

  .  7,640,519 shares of common stock available for issuance under our equity
     plans; and

  .  414,598 shares of common stock issuable upon the exercise of warrants
     outstanding as of September 30, 2000 at a weighted average exercise
     price of $2.65 per share to Comdisco and Imperial Bancorp in connection
     with equipment financings.

   See "Management--Equity Plans", and note 8 of Notes to Consolidated
Financial Statements for a description of our equity plans.

                                       23
<PAGE>

                                    DILUTION

   Our pro forma net tangible book value as of September 30, 2000 was
$117 million, or approximately $1.92 per share. Net tangible book value per
share represents the amount of stockholders' equity, less intangible assets,
divided by 60,849,888 shares of common stock outstanding after giving effect to
the conversion of all outstanding shares of preferred stock into shares of
common stock upon completion of this offering.

   Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common
stock immediately after completion of this offering. After giving effect to our
sale of 8,000,000 shares of common stock in this offering at an assumed initial
public offering price of $17.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, our
net tangible book value as of September 30, 2000 would have been $242 million
or $3.51 per share. This represents an immediate increase in net tangible book
value of $1.59 per share to existing stockholders and an immediate dilution in
net tangible book value of $13.49 per share to purchasers of common stock in
the offering, as illustrated in the following table:

<TABLE>
<S>                                                                <C>   <C>
Assumed initial public offering price per share...................       $17.00
 Pro forma net tangible book value per share as of September 30,
  2000............................................................ $1.92
 Increase per share attributable to new investors.................  1.59
                                                                   -----
Pro forma net tangible book value per share after the offering....         3.51
                                                                         ------
Dilution per share to new investors...............................       $13.49
                                                                         ======
</TABLE>

   The following table presents on a pro forma basis as of September 30, 2000,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock upon completion of this offering, the differences
between the existing stockholders and the purchasers of shares in the offering
with respect to the number of shares purchased from us, the total consideration
paid and the average price paid per share:

<TABLE>
<CAPTION>
                             Shares Purchased  Total Consideration
                            ------------------ ------------------- Average Price
                              Number   Percent   Amount    Percent   Per Share
                            ---------- ------- ----------- ------- -------------
<S>                         <C>        <C>     <C>         <C>     <C>
Existing stockholders...... 60,849,888   88.4  159,739,963   54.0     $ 2.63
New stockholders...........  8,000,000   11.6  136,000,000   46.0      17.00
                            ----------  -----  -----------  -----
  Totals................... 68,849,888  100.0  295,739,963  100.0
                            ==========  =====  ===========  =====
</TABLE>

   As of September 30, 2000, there were options outstanding to purchase a total
of 5,261,865 shares of common stock at a weighted average exercise price of
$1.51 per share. In addition, as of September 30, 2000, there were warrants
outstanding to purchase 414,598 shares of common stock at a weighted average
exercise price of $2.65 per share issued to Comdisco and Imperial Bancorp in
connection with equipment financings. To the extent outstanding options or
warrants are exercised, there will be further dilution to new investors. For a
description of our equity plans, please see "Management--Equity Plans" and note
8 of Notes to Consolidated Financial Statements.

                                       24
<PAGE>


                   SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected financial data should be read in conjunction with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. The statement of operations data for
the fiscal years ended September 30, 1998, 1999 and 2000 and the balance sheet
data as of September 30, 1999 and 2000 are derived from our audited financial
statements included elsewhere in this prospectus. The balance sheet data as of
September 30, 1998 are derived from our audited consolidated financial
statements not included herein. The statement of operations data for the period
from January 1, 1996 (inception) to September 30, 1996 and for the fiscal year
ended September 30, 1997 have been derived from our unaudited financial
statements, not included in this prospectus. The historical results are not
necessarily indicative of the operating results to be expected in the future.

<TABLE>
<CAPTION>
                          January 1, 1996   Fiscal Years Ended September 30,
                           (inception) to   ------------------------------------
                         September 30, 1996  1997     1998      1999      2000
                         ------------------ ------  --------  --------  --------
                                (in thousands, except per share data)
<S>                      <C>                <C>     <C>       <C>       <C>
Consolidated Statement
 of Operations Data:
Revenues................       $ --         $  --   $    --   $    --   $  3,312
Cost of revenues*.......         --            --        --        --     13,937
                               -----        ------  --------  --------  --------
Gross profit (loss).....         --            --        --        --    (10,625)
Operating expenses:
 Research and
  development...........         142           220     1,328     7,999    16,569
 Selling, general and
  administrative........          78           152     1,442     2,915     7,579
 Stock compensation
  expense*..............         --            --        --        --     10,670
                               -----        ------  --------  --------  --------
 Total operating
  expenses..............         220           372     2,770    10,914    34,818
                               -----        ------  --------  --------  --------
Loss from operations....        (220)         (372)   (2,770)  (10,914)  (45,443)
Total other income
 (expense)..............           8            (1)       97       557     1,678
                               -----        ------  --------  --------  --------
Net loss................       $(212)       $ (373) $ (2,673) $(10,357) $(43,765)
                               =====        ======  ========  ========  ========
Basic and diluted net
 loss per share.........       $ --         $(0.49) $  (2.77) $  (4.93) $ (13.16)
                               =====        ======  ========  ========  ========
Weighted average shares
 used to compute basic
 and diluted net loss
 per share (1)..........         --            767       966     2,102     3,325
                               =====        ======  ========  ========  ========
Pro forma basic and
 diluted net loss per
 share (unaudited)......                                                $  (0.86)
                                                                        ========
Weighted average shares
 used to compute pro
 forma basic and diluted
 net loss per share
 (unaudited)(1).........                                                  50,994
                                                                        ========
*Allocation of stock
 compensation expense:
 Cost of revenues.......                                                $  1,704
                                                                        ========
 Research and
  development...........                                                $  3,807
 Selling, general and
  administrative........                                                   6,863
                                                                        --------
   Total................                                                $ 10,670
                                                                        ========
</TABLE>

<TABLE>
<CAPTION>
                                                         As of September 30,
                                                       -----------------------
                                                        1998   1999     2000
                                                       ------ ------- --------
                                                           (in thousands)
<S>                                                    <C>    <C>     <C>
Balance Sheet Data:
Cash and cash equivalents............................. $4,225 $12,345 $114,586
Working capital.......................................  3,927  10,227  107,851
Total assets..........................................  5,432  17,215  137,125
Note payable and capital lease obligations, net of
 current portion......................................    693   3,211    7,949
Total stockholders' equity............................  4,228  11,237  116,776
</TABLE>
---------------------

(1) See note 9 of Notes to the Consolidated Financial Statements for an
explanation of the determination of the weighted average shares used to compute
net loss per share. The weighted average shares used to compute pro forma basic
and diluted net loss per share assumes the conversion of the convertible
preferred stock outstanding into 53,076,127 shares of common stock.

                                       25
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   The following discussion should be read in conjunction with the financial
statements and the notes to those statements that appear elsewhere in this
prospectus. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."

Overview

   We design, manufacture and market high performance fiber optic products,
under the PolarWave brand, for next-generation, ultra-high capacity, dynamic
optical networks. We were founded in January 1996 and initially performed
research and development work relating to advanced fiber optic technologies for
various government agencies. In 1998, we began development of our fiber optic
products for commercial applications. We began commercial production of our
first product in the second quarter of fiscal 2000 and first recognized revenue
from sales of this product in the fourth quarter of fiscal 2000. We report
financial results on a fiscal year basis ending on September 30.

   The optical networking industry is rapidly changing and the volume and
timing of orders are difficult to predict. Customers often view the purchase of
our products as a significant and strategic decision. As a result, customers
typically expend significant effort in evaluating, testing and qualifying our
products and our manufacturing processes. This customer evaluation and
qualification process frequently results in a lengthy initial sales cycle of
nine months or longer.

   Our products include Optical Slicer filters, DWDM Routers, Optical
Processors and Optical Switches. We market and sell our products worldwide
through our direct sales force and we have received orders from and shipped
prototype and production products to several customers.

   We recognize revenue when we ship products to our customers and there are no
uncertainties with respect to customer acceptance. We accrue for estimated
warranty costs and estimated returns at the time the related revenue is
recognized. For the fiscal year ended September 30, 2000, all revenue
recognized was from the sale of our Optical Slicer filter products to Nortel
Networks.

   We are engaged in continuing efforts to expand our manufacturing capacity
through the leasing of additional manufacturing facilities. Currently, we
perform manufacturing, final assembly, testing, quality assurance, engineering,
documentation control and repairs of our products at our Richardson facilities,
which occupy approximately 88,000 square feet. We have signed lease agreements
to occupy an additional 109,000 square feet of space adjacent to our existing
facilities, which will be used primarily to expand our manufacturing capacity.

   We believe we have an opportunity to become a major supplier to network
equipment vendors through strategic acquisitions. We intend to pursue strategic
acquisitions that will provide us with complementary technologies, strategic
products and qualified engineering and operating personnel to expand the
breadth and scale of our product portfolio.

   Our cost of revenues consists primarily of direct materials, labor and
manufacturing overhead associated with products sold and production start up
costs. As we expand our manufacturing capacity to meet demand and introduce new
products, we expect our cost of revenues to increase in absolute dollars.

   Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
materials costs and other expenses related to the design, development, testing
and enhancement of our fiber optic products. We expense our research and
development

                                       26
<PAGE>

costs as they are incurred. We have provided research and development services
under contracts with agencies of the United States government and the amounts
received from these contracts have been reflected as a reduction of research
and development expenses. The last of these government contracts expired in
June 2000 and we do not anticipate entering into similar contracts in the
future. We believe that research and development is critical to strategic
product development and expect to continue to devote substantial resources to
product research and development. We expect our research and development
expenses to continue to increase in absolute dollars.

   Selling, general and administrative expenses include salaries, benefits,
commissions, product promotion and administrative expenses. We expect these
expenses to increase as we continue to add personnel, expand operations,
initiate new marketing plans and incur additional costs related to the growth
of our business.

   In connection with the grant of stock options to our employees in fiscal
2000, we recorded deferred compensation of approximately $62.0 million through
September 30, 2000, representing the difference between the deemed fair value
of the common stock and the exercise price of these options at the date of
grant. These amounts are being amortized as charges to operations, using the
graded method, over the vesting period of the individual stock options, which
is generally four years.

   Total other income (expense) consists primarily of interest earned on our
cash and cash equivalents, partially offset by interest expense associated with
our lease financing arrangements.

   We have not been profitable in any quarter since our inception and we have
only recently begun to recognize revenues. As of September 30, 2000, we had an
accumulated deficit of $56.8 million. These losses have resulted primarily from
developing our products, increasing manufacturing capacity, promoting our
brand, developing our sales channels, establishing our management team and
amortizing deferred stock compensation.

   In December 2000, we reorganized into a holding company structure. As a
result, all of our operating assets are now held by a wholly-owned limited
partnership.

Results of Operations

Fiscal Years Ended September 30, 1998, 1999 and 2000

 Revenues and Cost of Revenues

   Prior to fiscal 2000, we were a development stage enterprise and had no
product revenues or related cost of revenues. We recognized revenues of $3.3
million in fiscal 2000 as a result of the initial sales of our fiber optic
products.

   The cost of revenues during fiscal 2000 was $13.9 million, which included
amortization of deferred stock compensation of $1.7 million. The cost of
revenues was primarily associated with an increase in the number of
manufacturing personnel and the commencement of commercial production of our
Optical Slicer filter product, in the second fiscal quarter of 2000. We have
hired manufacturing personnel in the third and fourth quarters of fiscal 2000
in advance of manufacturing capacity requirements in order to train these
employees prior to such production increases. The number of manufacturing
personnel has increased more than 500% from the end of fiscal 1999 to the end
of fiscal 2000.

 Operating Expenses

   Research and Development. Research and development expenses increased from
$1.3 million in fiscal 1998 to $8.0 million in fiscal 1999 and to $16.6 million
in fiscal 2000. The increases in research and development expense were
primarily attributable to the increase in the number of personnel.


                                       27
<PAGE>

   We were awarded contracts from agencies of the United States government to
provide research and development services. We received $712,000, $1.2 million
and $775,000 for fiscal 1998, 1999 and 2000, respectively, under the
contractual terms of these arrangements. These amounts have been reflected as a
reduction of research and development expenses. The last of these government
contracts expired in June 2000 and we do not anticipate entering into similar
contracts in the future.

   Selling, General and Administrative. Selling, general and administrative
expense increased from $1.4 million in fiscal 1998 to $2.9 million in fiscal
1999 and to $7.6 million in fiscal 2000. The increases were primarily
attributable to additional personnel in the sales, marketing, human resources,
finance and administration functions.

   Stock Compensation Expense. In connection with the grant of stock options in
fiscal 2000, we recorded deferred compensation of approximately $62.0 million
through September 30, 2000, representing the difference between the deemed fair
value of the common stock and the exercise price of these options at the date
of grant. These amounts are being amortized as charges to operations, using the
graded method, over the vesting period of the individual stock options,
generally four years. In fiscal 2000, we recorded expense associated with the
amortization of deferred compensation of $12.4 million, which was allocated
$1.7 million to cost of revenues, $3.8 million to research and development
expense and $6.9 million to selling, general and administrative expense. We
expect to incur stock compensation expense of at least $29.4 million in fiscal
2001. See note 8 of Notes to the Financial Statements for a description of our
deferred stock compensation expense.

 Total Other Income (Expense)

   Total other income (expense), which consists principally of interest income
and interest expense, increased from $97,000 in fiscal 1998 to $557,000 in
fiscal 1999 and to $1.7 million in fiscal 2000. Interest income increased from
$128,000 in fiscal 1998 to $774,000 in fiscal 1999 and to $2.5 million in
fiscal 2000. The increase in interest income was primarily due to additional
funds available for investment from the sale of our convertible preferred
stock. Interest expense increased from $31,000 in fiscal 1998 to $217,000 in
fiscal 1999 and to $824,000 in fiscal year 2000. The increase in interest
expense was primarily from the additional interest payments under the capital
lease facilities.

 Provision for Income Taxes

   No provision for federal or state income taxes has been recorded because we
experienced net losses through fiscal 2000. As of September 30, 2000, we had
federal and state net operating loss carryforwards of $39.0 million and federal
and state research and development tax credit carryforwards of $1.2 million.
The net operating loss and tax credit carryforwards will expire at various
dates beginning in fiscal 2017 through 2020, if not utilized. We have not
recognized any benefit from the future use of loss carryforwards for these
periods or for any other periods since inception. Utilization of the net
operating loss and tax credit carryforwards may be subject to substantial
annual limitations due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions.

   Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of the assets is more likely
than not. Based upon the weight of available evidence, which included our
historical operating performance and the reported cumulative net loss in all
prior years, we have provided a full valuation allowance against our net
deferred tax assets.

                                       28
<PAGE>

Quarterly Results of Operations

   The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The data has been derived from
our unaudited financial statements, and, in the opinion of our management, has
been prepared on substantially the same basis as the audited financial
statements and includes all normal recurring adjustments that are necessary for
a fair presentation of the results of operations for these periods. This
unaudited information should be read in conjunction with the financial
statements and notes included elsewhere in this prospectus. The operating
results in any quarter are not necessarily indicative of the results that may
be expected for any future period. We have incurred losses in each quarter
since inception and expect to continue to incur losses for the foreseeable
future.

<TABLE>
<CAPTION>
                                             Three Months Ended
                                ----------------------------------------------
                                December 31, March 31, June 30,  September 30,
                                    1999       2000      2000        2000
                                ------------ --------- --------  -------------
                                               (in thousands)
<S>                             <C>          <C>       <C>       <C>
Consolidated Statement of
 Operations Data:
Revenues.......................   $   --      $   --   $    --     $  3,312
Cost of revenues...............       --        1,803     3,778       8,356
                                  -------     -------  --------    --------
Gross profit (loss)............       --       (1,803)   (3,778)     (5,044)
Operating expenses:
  Research and development.....     2,356       3,477     4,897       5,839
  Selling, general and
   administrative..............     1,118       1,679     2,041       2,741
  Stock compensation expense...       639       1,427     2,919       5,685
                                  -------     -------  --------    --------
Total operating expenses.......     4,113       6,583     9,857      14,265
                                  -------     -------  --------    --------
Loss from operations...........    (4,113)     (8,386)  (13,635)    (19,309)
Total other income (expense)...       343         540       422         373
                                  -------     -------  --------    --------
Net loss.......................   $(3,770)    $(7,846) $(13,213)   $(18,936)
                                  =======     =======  ========    ========
</TABLE>

   We commenced commercial production of our products in the second quarter of
fiscal 2000, and first recognized revenue in the fourth quarter of fiscal 2000.
The cost of revenues and operating expenses increased in each of the quarters
in fiscal 2000, primarily due to increases in personnel, usage of material and
equipment, and selling, general and administrative expenses to support the
growth in our manufacturing capabilities and our operations.

   We have progressively increased spending levels each quarter to support
forecasted revenue levels, and we expect continuing increases during the next
several quarters. We plan to expand our manufacturing capabilities to meet
demand and introduce new products and commercially produce additional products.
We therefore expect our cost of revenues in absolute dollars to increase. We
also plan to increase our operating expenses significantly to fund greater
levels of research and development and expand our sales and marketing
operations. We also plan to expand our general and administrative capabilities
to address the increased reporting and other administrative demands that will
result from this offering and the expected growth of our business. As a result
of the above, we will incur substantial losses for the foreseeable future.

Liquidity and Capital Resources

   Since our inception in 1996, we have financed our operations primarily
through private sales of approximately $158.0 million of convertible preferred
stock. We have also financed our operations through equipment lease financing
agreements with Comdisco and Imperial Bancorp. As of September 30, 2000, we had
cash and cash equivalents totaling $114.6 million.

   Our cash used in operating activities in fiscal 1999 and fiscal 2000 was
$8.2 million and $26.1 million, respectively. The increase in cash used in
operating activities is primarily attributable to the increase in the net

                                       29
<PAGE>


loss from $10.4 million in fiscal 1999 to $31.4 million (net of the deferred
compensation amortization of $12.4 million), an increase in accounts receivable
of $1.6 million and an increase in inventory of $3.4 million, partially offset
by an increase in accounts payable and accrued expenses of $7.2 million. The
increase in accounts receivable, inventory, accounts payable and accrued
expenses is a result of our initial manufacturing of product and sale to
Nortel. The contract receivables at September 30, 1999 represented remaining
amounts due under contracts from agencies of the United States government where
by the Company provided contractual research and development services. There
was no inventory prior to fiscal 2000. The allowance for doubtful accounts
increased from $8,000 in fiscal 1999 to $220,000 in fiscal 2000. The increase
is primarily attributed to a provision for sales returns in fiscal 2000. No
such provision was necessary prior to fiscal 2000.

   Cash used in investing activities primarily relates to capital expenditures.
Equipment has been acquired through lease financing and cash payments, which
have been funded through the sale of our convertible preferred stock. Capital
expenditures were $4.4 million and $15.5 million for fiscal 1999 and fiscal
2000, respectively. Capital expenditures acquired through cash payments were
$448,000 and $5.4 million in fiscal 1999 and fiscal 2000, respectively. The
increase is primarily attributable to purchases of manufacturing and test
equipment, information systems equipment and office equipment. Capital
expenditures acquired through equipment lease financing were $4.0 million and
$10.1 million for fiscal 1999 and fiscal 2000, respectively. We have recently
signed lease agreements for additional space to expand our office and
production facilities. We anticipate significant capital expenditures will be
required to expand our facilities and to obtain additional manufacturing and
test equipment.

   Cash generated by financing activities in fiscal 1999 and fiscal 2000 was
$16.8 million and $133.7 million, respectively. Cash generated by financing
activities in fiscal 1999 was primarily due to proceeds of $17.1 million from
the sale of convertible preferred stock, partially offset by approximately
$417,000 of repayments under capital leases and notes payable. Cash generated
by financing activities in fiscal 2000 was primarily due to proceeds of $134.3
million from the sale of convertible preferred stock and proceeds of $1.3
million from the issuance of common stock through the exercise of employee
stock options. This increase was partially offset by approximately $1.9 million
of repayments under capital leases and notes payable.

   We entered into an equipment lease financing agreement and a promissory note
with Comdisco in September 1998 for $2.5 million of financing availability. In
January 1999, the agreement was amended to provide an additional $5.0 million.
In March 2000, the agreement was again amended to provide for an additional
$8.0 million of financing availability. We have financed equipment purchases
totaling $15.4 million under these agreements and have remaining lease finance
capacity of $100,000. The agreement expires in September 2001. The amount
outstanding under this capital lease obligation as of September 30, 2000 was
$10.9 million. The equipment we have obtained through these leasing agreements
secures the facility. In connection with this capital lease, in September 1998,
we granted Comdisco a warrant to purchase 75,385 shares of Series B-2 preferred
stock at an exercise price of $1.16 per share. In January 1999, we granted
Comdisco an additional warrant to purchase 176,472 shares of Series C preferred
stock at an exercise price of $1.42 per share in connection with an increase in
the lease line. In March 2000, we granted Comdisco an additional warrant to
purchase 77,088 shares of Series D preferred stock at an exercise price of
$4.67 per share in connection with an increase in the lease line. These
warrants expire at the earlier of seven years from the date of grant or three
years after the completion of this offering. Upon the completion of this
offering, the warrants become exercisable for an equivalent number of shares of
our common stock.

   We entered into an equipment lease financing agreement with Imperial Bancorp
in May 2000 for a maximum of $10.0 million, which is unused as of September 30,
2000. The Company entered into this lease equipment financing agreement in
order to acquire additional manufacturing equipment and plans to use this
equipment lease financing as funds available under other financing agreements
are exhausted. The agreement expires in May 2004. The agreement requires that a
minimum of $5.0 million be drawn against the facility by December 31, 2000. The
facility will be secured by the equipment financed. In connection with this
capital

                                       30
<PAGE>

lease, in June 2000, we granted Imperial Bancorp a warrant to purchase 85,653
shares of Series D preferred stock at an exercise price of $4.67 per share.
This warrant expires on June 1, 2007. Upon completion of this offering, the
warrant becomes exercisable for an equivalent number of shares of our common
stock.


   We expect to incur approximately $30.0 million of capital expenditures over
the next twelve months to purchase equipment and to expand our operations and
manufacturing capacity. We believe that the anticipated net proceeds from this
offering, together with our current cash and cash equivalents, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. Despite our expectations, we
may need to raise additional capital before that time. We may need to raise
additional funds in order to fund anticipated growth, including significant
increases in personnel, facilities and computer systems and to acquire or
invest in complementary businesses, technologies, services or products.

Recent Accounting Pronouncements

   In December 1999, the Securities and Exchange Commission issued SAB 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Our current revenue
recognition practices comply with SAB 101.

   In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion 25." Interpretation No. 44 is
effective July 1, 2000. Interpretation No. 44 clarifies the application of APB
Opinion 25 for certain matters, specifically (a) the definition of an employee
for purposes of applying APB Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and (d) the accounting for an exchange of stock compensation
awards in a business combination. We adopted Interpretation No. 44, which did
not have a material impact on our financial position or results of operations.

Qualitative and Quantitative Disclosures about Market Risk

 Interest Rate Sensitivity

   We maintain our cash and cash equivalents primarily in money market funds.
We do not have any derivative financial instruments. As of September 30, 2000,
all of our investments mature in less than three months. Accordingly, we do not
believe that our investments have significant exposure to interest rate risk.

 Exchange Rate Sensitivity

   We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, we currently have no material exposure to
foreign currency rate fluctuations. A portion of our international revenues and
expenses may be denominated in foreign currencies in the future. Accordingly,
we could experience the risks of fluctuating currencies and may choose to
engage in currency hedging activities to reduce these risks.

                                       31
<PAGE>

                                    BUSINESS

Overview

   We design, manufacture and market high performance fiber optic products for
next-generation, ultra-high capacity, dynamic optical networks. Dynamic optical
networks route, switch and process signals optically, rather than
electronically. Our products and technologies enable networks that are faster,
more flexible and more cost-effective than today's networks. We are developing
a family of products that filter hundreds or thousands of high data rate
optical channels and dynamically process and switch optical channels, all in
the optical domain. We are designing products based on technologies we have
developed for controlling the polarization of optical signals. An optical
signal can be described as an electromagnetic wave. Electromagnetic waves
produce electromagnetic energy fields. The orientation of these energy fields
is called polarization. By controlling the polarization of the optical signal,
we can switch and filter the optical signal, as well as manipulate the
characteristics of the optical signal. Our PolarWave family of products
includes Optical Slicer filters, DWDM Routers, Optical Processors and Optical
Switches. We are using advanced information systems and automation technology
to increase production capacity. We use sophisticated design and simulation
tools in product development to introduce products that can be integrated into
our manufacturing processes and produced in high volumes. In the fiscal year
ended September 30, 2000, Nortel Networks accounted for 100% of our revenues.
We have also shipped prototype and commercially available products to other
leading network equipment vendors including Alcatel USA, Corvis, Fujitsu,
Lucent Technologies, Marconi, Pirelli Optical Systems Italia (a subsidiary of
Cisco Systems), Qtera (a subsidiary of Nortel Networks), Sycamore Networks and
TyCom (US).

Industry Background

 Aggressive Growth in Network Traffic

   Over the past decade, the volume of high-speed data traffic carried over
communications networks has grown dramatically. This growth has been driven
principally by an increase in the use of the Internet and commercial data
networks for more bandwidth-intensive applications, such as e-commerce and on-
demand, real-time, multimedia communications and services. As a result, data
traffic has surpassed voice traffic transmitted over today's communications
networks. According to RHK, a leading telecom market research and consulting
firm, Internet carrying capacity will increase from 350,000 terabytes, or
trillions of bits, per month at the end of 1999 to over 15 million terabytes
per month in 2003. Fiber optics and optical networking have become key
technologies for building high bandwidth communications networks. In order to
address the large increases in high-bandwidth data traffic, communications
service providers need new optical products and technologies to quickly and
cost effectively build next-generation optical networks. According to RHK, the
optical component market is expected to grow from $6.6 billion in 1999 to $23.0
billion in 2003.

 Historical Developments in Optical Networks

   To satisfy increasing demand for bandwidth, communications service providers
began deploying fiber optic based networks in the 1980s. Prior to the
introduction of these fiber optic systems, data and voice traffic was delivered
by electrical signals over copper wires or coaxial cables. By contrast, optical
networks use lasers to create and transmit high-speed pulses of light over
hair-thin glass fibers. Because of the superior transmission properties of
optical signals, optical networks can carry many times more information over
far greater distances than can be achieved using electrical signals. The
ability to carry more information over greater distances at a lower cost has
been the fundamental driver behind the large-scale deployment of optical
networks.

   In the mid-1990s, fiber optic networks were dramatically changed with the
commercial introduction of a new optical transport technique called dense
wavelength division multiplexing. Dense wavelength division multiplexing
technology enabled a number of non-interfering optical signals to be
transmitted

                                       32
<PAGE>


simultaneously over a single fiber, with each optical signal carried at a
different wavelength, or channel. This technique dramatically increased the
bandwidth that could be carried over an individual glass fiber and at the same
time significantly reduced the cost to transmit information. Early dense
wavelength division multiplexing systems increased the bandwidth transmitted
over a fiber by as much as 4,000% over conventional single-channel fiber optic
systems. Since its introduction, dense wavelength division multiplexing has
been widely deployed in communications networks, changing how networks are
designed and built.

 The Demand for Next-Generation Optical Networking Systems

   We believe that another series of fundamental changes is about to occur in
the way fiber optic networks are built. Legacy fiber optic networks have been
deployed in an effort to keep pace with bandwidth demands thus far. However,
there are important limitations associated with today's fiber optic systems
that must be overcome in order to provide carriers with a new generation of
more cost-effective and higher capacity optical networks. Two of these
limitations are the lack of scalability and flexibility.

   Current systems make use of only a small fraction of the inherent capacity
of an optical fiber to transmit data. To meet the increasing demand for
bandwidth, fiber optic systems must scale to even higher capacities and span
even greater distances. Fiber optic systems can scale by increasing the number
of optical dense wave length division multiplexing channels carried on a single
fiber, increasing the rate at which data is transmitted on each channel, or
both. In systems deployed to date, dozens of optical channels are carried on a
single optical fiber. We believe that hundreds or thousands of channels will
soon be required. Likewise, data rates carried over each channel are limited
today to 2.5 to 10 billion bits per second. We believe that rates of 40 billion
bits per second and higher will be required in the near future. Taking into
account both channel counts and data rates, systems have been commercially
deployed that support overall transmission rates of approximately 800 billion
bits per second. However, even this data rate represents only a small fraction
of the total capacity inherent in most optical fibers. New ultra-high capacity
systems that scale to far higher transmission rates and make more effective use
of the inherent capacity of the optical fiber are being developed for
deployment.

   Today's networks are also costly, capacity constrained and inflexible
primarily because they are not all optical, but are instead a hybrid of optical
and electrical devices, with virtually all networking functions being performed
electrically. In today's networks, fiber optics are only used for the simple
function of transmitting bits from one end of a fiber to the other. Networking
functions such as routing, switching, signal restoration and bandwidth
management require that each optical signal be terminated, converted into an
electrical signal, processed electrically and then restored back to an optical
signal. This process is repeated a number of times as the signal is transmitted
through a network. It is not uncommon for a signal to be converted from optical
to electrical and then back to optical a dozen or more times as it traverses a
typical network. Every optical-electrical-optical conversion adds cost to the
network in terms of additional electrical and optical components. Optical-
electrical-optical conversions are also bandwidth limiting because optical
fibers are able to carry 1,000 billion bits per second or more, but the
companion electronics can effectively only process 10 billion bits per second--
a bandwidth gap of 100 to 1. Finally, each optical-electrical-optical
conversion reduces network flexibility because, while fiber is inherently data
rate and signal format independent, the associated electronics are not. In
general, a wide variety of optical signals can be carried on any fiber, but the
associated electronics to perform routine networking functions are specific to
the type of signal and the data rate being transmitted, thereby limiting many
of the benefits of optics.

   To effectively scale their networks to handle increasing communications
traffic, communications service providers need optical networking systems that
are both faster (more channels and higher data rates per channel) and more
dynamic (able to route, switch, restore and manage bandwidth, all optically).
We believe that there is demand for next-generation optical systems that will
increase bandwidth and reduce the cost and complexity of optical networks. As a
result, network equipment vendors are seeking ways to develop and introduce
systems with the capability to support hundreds or thousands of channels and to
dynamically process and switch signals optically, reducing the need for costly,
bandwidth limiting and inflexible optical-electrical-optical conversions
associated with existing optical networking equipment.

                                       33
<PAGE>

The Chorum Opportunity

   The exponential growth in demand for bandwidth has resulted in growing
demand for next-generation fiber optic systems. To build the next-generation of
ultra-high capacity, dynamic optical networks, network equipment vendors
require new all-optical products that enable more channels, at higher data
rates per channel and provide dynamic processing and switching of optical
signals. We believe there is a clear opportunity for next-generation optical
networking products to perform these functions.

   Historically, optical product innovations have driven the introduction of
new types of optical networking equipment and fundamental shifts in the way
communications networks are built. For example, with the invention of
technology capable of separating light into different specified wavelengths for
transmission in an optical fiber, network equipment vendors began developing
dense wavelength division multiplexing systems. Innovations in optical
technologies are continuing to drive the introduction and expansion of
capabilities of next generation optical networking equipment. As a result,
network equipment vendors are looking to innovative supply partners for a new
generation of technologies that:

  .  increase network bandwidth by allowing more optical channels that
     operate at higher data rates per channel;

  .  simplify and reduce the cost of networks with dynamic all-optical
     switching, routing and processing; and

  .  increase the reach of optical networks to reduce or eliminate the need
     for costly optical-electrical-optical signal regeneration.

   In addition to gaining access to leading new optical technologies, network
equipment vendors need to offer end-to-end solutions to their customers and
need to minimize their own time to market for new products. This has led to an
increasing reliance on their suppliers for higher functionality and more
integrated modules and subsystems. As network equipment vendors place more of
their development programs into the hands of their key suppliers, they require
that these suppliers:

  .  are able to scale their manufacturing operations to deliver these new
     products in high volumes;

  .  have the technology breadth to continue to introduce leading-edge
     solutions which will enable equipment vendors to develop competitive
     optical networking systems; and

   .  possess the ability to provide integrated modules and subsystems.

The Chorum Solution

   We design, manufacture and market high performance fiber optic products for
next-generation, ultra-high capacity, dynamic optical networks. Our products
and technologies enable networks that are faster, more flexible and more cost
effective than today's networks. We believe that our technology platform, fiber
optic design expertise, network architecture knowledge and scalable
manufacturing capabilities will enable us to rapidly deliver a new generation
of fiber optic products in high volumes.

   We offer high-density, all-optical filtering products that combine and
separate optical channels at finer spacings and support greater channel counts
and higher data rates than have historically been deployed. We are developing
high performance optical processing products that dynamically adjust key
parameters of the optical signal to correct for impairments such as optical
power and polarization. We are also developing all-optical switching products
with no moving parts that will switch and route optical channels without
expensive optical-electrical-optical conversions. Our products are based on our
polarization processing technologies and marketed under the PolarWave brand
name. Our optical products and technologies allow:

   Increased channel counts and higher data rates. Our products allow network
equipment vendors to design and build systems supporting terabits per second of
capacity. For example, our optical filtering products

                                       34
<PAGE>

and technologies are designed to support hundreds or thousands of optical
channels on a single fiber operating at higher data rates than have been
deployed to date.

   Dynamic all-optical conditioning of optical signals. Our optical processors
require no moving parts and are designed to dynamically adjust optical signal
power, polarization and other parameters of the optical signal, enabling more
channels to be combined, at higher data rates, over longer distances with low
signal degradation.

   Dynamic all-optical switching of optical signals. Our optical switching
products are designed to dynamically route, restore and protect hundreds of
channels on a fiber without requiring costly optical-electrical-optical
conversions. Our products have excellent performance characteristics in terms
of key optical performance parameters. Compared with electronic switching
solutions, we believe that our products provide higher capacity, faster
switching, less complexity and more cost-effective solutions for routing
optical traffic.

   Extended optical network reach. By dynamically adjusting and correcting
optical signal power parameters to maintain the integrity of the optical
signal, our optical processing products and technologies extend the distance,
or reach, over which an optical signal can travel before it degrades. By
extending the reach of the optical network, our products reduce the need for,
and expense associated with, complex optical-electrical-optical-based
amplification and regeneration equipment.

   Products designed for manufacturability. From the earliest stages of product
development, we use sophisticated design and simulation tools to design
products that can be integrated into our manufacturing processes and be
produced in volume. We also apply our expertise in fabrication methodologies,
test systems, automation and design processes to improve our product designs
and manufacturing yields. We believe this allows us to move from design to
large-scale manufacturing and customer delivery quickly and cost-effectively.

   Technology platform and breadth to introduce new products. Through the
extensive experience of our senior management team and research and development
organization, we understand the challenges and requirements of next-generation
optical networks. Our expertise in optical materials, product design, product
packaging and assembly has allowed us to deliver products that are enabling the
next-generation of optical networks.

   Ability to provide integrated modules and subsystems. Network equipment
vendors are under pressure to provide end-to-end solutions to their customers
and minimize their time to market with new products and are increasing their
reliance on suppliers to integrate functions into modules and subsystems. We
believe that our technology and product breadth, combined with advanced module
design and networking system design knowledge, allow us to develop solutions
that meet our customers' requirements for integrated product solutions.

The Chorum Strategy

   We believe that our technology platform and our fiber optic product design
and network expertise, combined with our manufacturing capabilities will enable
us to deliver new leading-edge solutions in volume to the marketplace. Our
objective is to be a leading provider of advanced fiber optics products for
ultra-high capacity, dynamic optical networks. Key elements of our strategy
include:

   Leveraging our technology platform to broaden our product portfolio. We have
developed significant technological expertise in controlling the polarization
of fiber optic signals to filter, condition and switch these signals, all in
the optical domain. We believe that the ability to control polarization will be
increasingly important for dynamic next-generation networks with higher channel
counts, increased data rates and extended network reach. We believe that our
expertise and knowledge of polarization processing and control positions us
well to capitalize on future industry trends to produce new products that will
aid in the creation of higher performance, higher capacity optical networking
systems. In developing these and other new products, we will continue to focus
on high-performance solutions that are reliable, cost-effective, scalable and
flexible.

                                       35
<PAGE>

   Expanding our technology portfolio. We intend to capitalize on our expertise
in optical design, packaging and manufacturing techniques to expand into other
optical technologies. We intend to continue to invest substantial resources in
research and development to extend our technological leadership in these areas
to new applications and product lines. We will also continue to focus our
research and development efforts to develop new technologies that will help
create and support ultra-high capacity, dynamic optical networks.

   Expanding manufacturing capacity and improving process efficiencies. We
intend to continue to dedicate significant resources to expand further our
manufacturing capacity and improve manufacturing processes. We will continue to
invest in new facilities, fixtures, tools, production equipment and processes
to substantially increase our manufacturing capacity. We will also continue to
focus on improving our process efficiencies and manufacturing yields through
the use of simulation, design-for-manufacturability and automation. We believe
that our focus on designing products for volume manufacturing will be a key
differentiator in the marketplace. In addition, we will continue to outsource
manufacturing of certain components whenever it is cost-effective to do so and
there is minimal risk of compromising our proprietary technologies and
processes. We believe that outsourcing will allow us to further scale our
manufacturing capacity, improve speed to market of our products and reduce
costs.

   Collaborating with leading and emerging optical equipment manufacturers. We
have focused our sales and marketing, as well as research and development
efforts on the leading, incumbent network equipment vendors and emerging
companies that we believe are well positioned for growth in the industry. We
will continue to focus our resources and efforts on both segments of the market
and specifically on those opportunities that we believe will result in high
volumes of business and rapid acceptance and adoption of new technologies. We
are intimately involved with our customers during their design processes to
customize products that meet their needs and are designed into their new
systems. We will continue to collaborate with our customers to assist them in
identifying and responding to new market opportunities based on new enabling
technologies. We believe that this collaboration will allow us to gain valuable
insights into next-generation systems and technologies and to develop new
products for future system architectures.

   Pursuing strategic acquisitions. We believe we have an opportunity to become
a major supplier to network equipment vendors not only through internal growth
and development, but also through strategic acquisitions. We intend to
aggressively pursue acquisitions that will provide us with complementary
technologies, strategic products and qualified engineering and operating
personnel to expand the breadth and scale of our product portfolio and
manufacturing capabilities.

Products

   Our PolarWave family of optical networking products is targeted toward
network equipment vendors and their next-generation development programs. The
PolarWave family includes the following product lines: high performance Optical
Slicer filters, high-density DWDM Routers, dynamic Optical Processors and
dynamic Optical Switches. In addition, we have the capability to combine
elements of these products into functionally integrated subsystems.

 Optical Slicer Filters

   In optical networks based on dense wavelength division multiplexing
technology, multiple optical channels are combined and launched into a single
optical fiber. This optical combination process is called multiplexing. At the
receiving end of the fiber, the combined optical channels are separated into
individual channels and are processed or routed elsewhere in the network. This
process is called demultiplexing. Our Optical Slicer filters perform high-
density, high-performance multiplexing and demultiplexing of all optical
channels simultaneously rather than one channel at a time. This enables the
fundamental function of optical multiplexing and demultiplexing to be done more
efficiently and cost effectively and allows for much higher capacity to be
supported on a single fiber. The technology we have developed to perform this
filtering function is based upon manipulating the polarization state of an
optical signal.

                                       36
<PAGE>


   By designing our Optical Slicer filter products into next-generation system
architectures, network equipment vendors gain several significant benefits. The
performance specifications of our products support hundreds or thousands of
optical channels at high data rates, such as 2.5, 10 or 40 billion bits per
second. This performance also enables the creation of ultra-long haul systems
that extend the distance optical signals travel and that increase the number of
network equipment locations that the optical signals can pass through before
they must be electronically regenerated. Our Optical Slicer filter products
offer excellent filtering performance as measured by technical parameters such
as dispersion. Dispersion is the undesirable effect that occurs when an optical
signal pulse spreads out during transmission along the fiber. The spreading
pulse then interacts with other pulses, making it difficult to recover the
information being transmitted. Our filtering technology produces low dispersion
and the technology does not require active temperature control and electronics.
Our Optical Slicer filter products also provide a simple mechanism for adding
or dropping additional optical channels to an existing optical system.

   We produce standard and custom products, depending upon customer
requirements, and are currently shipping commercially available Optical Slicer
filter products to customers.

<TABLE>
<CAPTION>
                                                                     Stage of
  Optical Slicer Filters Description                               Development
-------------------------------------------------------------------------------
  <C>                    <S>                                    <C>
  100 GHz Series         Supports optical channels spaced 100      Commercially
                         GHz apart                                  Available
-------------------------------------------------------------------------------
  50 GHz Series          Supports optical channels spaced 50       Commercially
                         GHz apart                                  Available
-------------------------------------------------------------------------------
  Custom Series          Supports customer defined channel
                         spacings and filtering                    Commercially
                         characteristics                            Available
-------------------------------------------------------------------------------
  BQ Series              50 and 100 GHz filters with enhanced
                         manufacturability and smaller               Customer
                         package size                              Evaluations
-------------------------------------------------------------------------------
  AQ Series              High performance filters supporting
                         channel spacing down to 12.5 GHz and        Customer
                         below                                     Evaluations
</TABLE>


 DWDM Routers

   Optical networking systems incorporate multiplexers and demultiplexers to
combine and separate individual optical channels. To support high channel
counts and high data rates, high performance multiplexers/demultiplexers are
required.

   We have integrated our Optical Slicer filters with other filtering
technologies to produce high performance multiplexers/demultiplexers, or DWDM
Routers. Our Optical Slicing technology allows us to support a wide range of
channel counts, data rates and channel spacings. We are working closely with
customers on DWDM Router opportunities and have delivered prototypes to several
customers for evaluation.

 Optical Processors

   Optical Processors include products that condition optical signals to
improve overall optical network performance. The Dynamic Variable Attenuator is
the first product we have developed in the Optical Processor line. In an
optical network, it is important for each optical channel to operate at the
same power level. If some channels operate at higher power levels than others,
then the channels will interact with each other. The result is a degradation in
the performance of the system that results in a reduction in distance that a
signal can travel optically before electrical regeneration is required, raising
the cost to transport traffic.

   Our Dynamic Variable Attenuator product is designed to dynamically adjust
optical signal power levels to maintain the integrity of the optical signal,
increase the reach of the signal and allow more channels to be

                                       37
<PAGE>


combined on each fiber. Applications include amplifier power regulation,
receiver input power regulation and system power fluctuation suppression. In
dynamic optical networks, optical signals are constantly being switched and
routed throughout the network. As channels are added to a fiber or dropped from
a fiber in real-time, the power levels of other channels are affected. Our
Dynamic Variable Attenuator continuously tunes and adjusts the optical power
levels to minimize the disruption to the optical signals. Because the tuning is
continuous, reliability is an important customer requirement. Our Dynamic
Variable Attenuator is based upon dynamic polarization control technology using
liquid crystal and does not require temperature control. Liquid crystal is a
material that exhibits both liquid and crystalline properties. Liquid crystal
molecules can change the properties of optical signals traveling through them.
Thus, by using liquid crystal to control the polarization of an optical signal,
no moving parts are required. The elimination of moving parts and active
temperature control enhances product reliability and simplifies system designs.
We have delivered prototype units to customers for evaluation.

 Optical Switches

   We have designed and delivered a number of optical switch configurations to
leading network equipment vendors for evaluation. We are designing optical
switches to replace electronic products for protection and restoration of voice
and data traffic in the event of fiber or equipment outages and to provision
new services. We are also designing optical switches with no moving parts that
add and drop channels without requiring a conversion of the optical signal to
an electrical signal. To be adopted by network equipment vendors, we believe
that optical switches must deliver fast switching speeds, have stable
performance over a range of temperatures and have excellent optical
performance. We have delivered prototype optical switches for protection,
restoration, and add/drop applications. We have developed technology in the
area of liquid crystal materials, processing and architectures that we believe
will allow us to produce optical switching products with speeds of less than 10
milliseconds and stable performance over a wide range of temperatures with high
performance.

Technology

   Since inception, we have invested heavily in research and development to
refine and commercialize a number of key technologies and capabilities for
ultra-high capacity, dynamic, next-generation optical networks. Some of our
areas of expertise include:

 Polarization Processing

   We have developed a technology platform based on controlling the
polarization of optical signals to filter, condition and switch these signals
with high optical performance. As with electronic signals, optical signals have
two fundamental properties that are important to transmission--frequency and
amplitude. In addition, optical signals possess a third important property of
transmission--polarization. An optical signal is an electromagnetic wave that
can be separated into two waves with perpendicular electric fields, or states
of polarization. We believe that the ability to control polarization is
increasingly important for dynamic, next generation networks with higher
channel counts and increased data rates over longer distances.

   We manipulate polarization to increase optical channel counts, data rates
and transmission distances. Effectively manipulating polarization requires an
understanding of material properties, state-of-the-art production processes,
sophisticated modeling tools and advanced optical packaging designs. With our
expertise in polarization processing and control, we believe that we are well
positioned to produce products that capitalize on industry shifts towards
higher performance, higher capacity, dynamic fiber optic systems.

 Optics Packaging

   The environmental robustness requirements for fiber optic applications are
extremely stringent. Products must survive for long periods of time under harsh
environmental conditions. We have developed expertise in

                                       38
<PAGE>


the design of advanced optical packaging technologies, including sealed
assemblies, materials processing, assembly, thermal management and control and
optical package design. We believe that this core expertise will be applicable
to complementary technology platforms as well, such as semiconductor-based and
optical fiber-based technologies. All of our products are designed to surpass
reliability standards developed by Telcordia, a company that provides
centralized research and standard coordination for Regional Bell Operating
Companies.

 High Volume Optics Manufacturing

   Optical networking products have extremely stringent performance criteria.
As a result, production processes must address and maintain key performance
parameters. Our fabrication processes, packaging processes and material
subsystems have been developed over the last several years and we believe they
will enable us to deliver quality, high performance products in volume. Like
optical packaging, we believe these capabilities are also applicable to other
optical technologies.

 Process Automation and Control

   We believe that automation and rigorous process control should be used to
scale manufacturing and improve product quality. We have employed advanced
manufacturing characterization tools to accelerate optical assembly and improve
overall performance. These enhancements reduce labor content in the production
process and improve overall quality levels. We are making additional
investments in advanced optical assembly and production techniques for both
current and future product lines.

 Materials Expertise

   We have developed expertise in the preparation and use of high-performance
optical materials for optical filtering, processing and switching. We
understand how optical materials perform under various environmental and
operational conditions. We have developed optical architectures that overcome
historic limitations of these materials including temperature dependence,
performance and modulation speed. We are applying this expertise to a range of
product solutions in the areas of optical filtering, processing and switching.

 Optical Simulation and Performance Tools

   We have developed and use simulation tools that allow us to evaluate and
design optical products in advance of building prototypes and create highly
manufacturable designs through detailed performance analysis. These methods
enable us to predict performance of a particular product based upon the
simulation results. This is a valuable capability for helping customers improve
optical network designs and for the rapid development of highly manufacturable
new product designs.

 Expertise in Network Architecture and System Design

   Our research and development organization possesses substantial expertise in
the design and evolution of optics at the network level. Many of our current
employees have worked with network equipment vendors and communications service
providers, and we place significant emphasis on understanding the systems and
network-level implementation of optical networks. We use this knowledge to
direct our product planning and product and technology development programs. As
a result, we believe we are well positioned to deliver innovative new products
to our customers for next-generation networks.

Customers

   We sell our fiber optic products principally to network equipment vendors
for next-generation applications. We have shipped prototype and commercially
available products to leading network equipment vendors, including Alcatel USA,
Corvis, Fujitsu. Lucent Technologies, Marconi, Nortel Networks, Pirelli Optical
Systems Italia (a subsidiary of Cisco Systems), Qtera (a subsidiary of Nortel
Networks), Sycamore Networks

                                       39
<PAGE>


and TyCom (US). For the fiscal year ended September 30, 2000, Nortel Networks
accounted for 100% of our revenues. We expect a small number of customers to
make up a large percentage of our revenues for the foreseeable future.

   In October 2000, we entered into an OEM Purchase and Sale Agreement with
Nortel Networks under which Nortel Networks will purchase our products on a
purchase order basis. The agreement establishes terms regarding product pricing
and specifications, product qualification and acceptance by Nortel Networks,
changes or modifications to our products, quality control standards, order and
delivery procedures, annual minimum purchase requirements, payment terms and
procedures, warranty terms, repair and replacement procedures and technical
assistance and marketing support. The agreement may be terminated by either
party in the event that insolvency, receivership or bankruptcy proceedings are
initiated by or against the other party. The agreement or any purchase order
thereunder may also be terminated, in whole or in part:

  .  by Nortel, if we are acquired and the acquiror does not provide a
     written guaranty of performance to Nortel within 30 business days of
     such acquisition; or

  .  by either party, in the event that the other party fails to execute any
     material obligation under the agreement and fails to cure such default
     within a certain number of days.

Sales, Marketing and Customer Support

   We market and sell our fiber optic products primarily through a direct sales
force, with the support of third party distributors in the United Kingdom and
Italy. The account managers and channel managers in our direct sales
organization are supported by a combination of sales, engineering, product line
management and marketing resources who provide business and technical support
on our major accounts.

   Our direct sales account managers work on an assigned account basis. Our
sales operations group, consisting of sales operations and customer service,
provides support to the customer regarding shipping schedules, technical
support and product returns. Our technical support engineers and product line
managers provide customers with technical and product-related information as
well as application support relating to the use of our products in the
customer's applications. These product line managers also help to define the
features that are required for our products to be successful in specific
applications.

Manufacturing and Facilities

   We manufacture our products in Richardson, Texas. We outsource selected
optical subassemblies and fabrication processes. Our facilities support the
full range of manufacturing capabilities, including material processing,
assembly and testing. We are currently expanding manufacturing facilities to
increase production capacity.

   Our manufacturing processes require stringent quality controls, including
incoming material inspection, in-process testing and final testing. We perform
in-house reliability testing to industry accepted standards, including those
developed by Telcordia.

   We have the capability to produce prototypes through development production
lines dedicated to prototype and engineering development. Simulation tools help
us to design new products and reduce the need to build multiple cycles of
prototypes. We believe these capabilities result in reduced development times
for new products and support yields and capacity improvement efforts within
manufacturing.

                                       40
<PAGE>

Research and Development

   We have 92 employees in our research, development and engineering
organization with experience in several key industries, including fiber optics,
semiconductor-based optics, storage devices, optical computing and
telecommunications. Our technical resources have expertise not only in
polarization control optics, but also in a wide range of other optical
technologies. We have resources dedicated to both near-term product development
programs as well as advanced technology research. Our product development
includes design evaluation and testing as part of our overall qualification
processes. We believe this results in higher product quality and improved
designs for manufacturability. We also dedicate significant resources to new
advanced technologies for future product development initiatives. We have made,
and will continue to make, substantial investments in research and development.
Our gross research and development expenses totaled $17.3 million for the
fiscal year 2000.

Competition

   Our competitors include stand-alone optical component and subsystem
suppliers as well as divisions within larger network equipment vendors. Our key
public company competitors include Avanex, Corning, JDS Uniphase, New Focus and
Oplink Communications. In addition, several private companies are developing
optical networking technologies and have planned product introductions.
Additionally, new competitors may enter the market, and we are likely to
compete with new companies in the future. Some of our current and potential
customers are also competitors through their internal component divisions. To
date, our product overlap with the component divisions of network equipment
vendors has been limited; however, competitive conflicts could occur in the
future as they or we expand into new businesses and product lines.

   Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we have and
may also have a wider range of technologies than we do. As a result, these
competitors are able to devote greater resources than we can to the
development, promotion, sale and support of their products. In addition,
several of our competitors have large market capitalizations or cash reserves
and longer operating histories, and therefore may be better positioned than we
are to acquire other companies in order to gain new technologies or products
that may displace our product lines. For example, JDS Uniphase acquired E-Tek
Dynamics and recently announced its agreement to acquire SDL. Acquisitions in
our industry, particularly acquisitions involving our customers, potential
competitors or competitors, could significantly impact our business. If
customers acquire significant competitors or competitors acquire significant
customers, customers may reduce the amount of products they purchase from us.
Alternatively, some of our customers or potential customers may spin-out new
competitor companies in the optical networking products market. For example,
Lucent Technologies announced that it will spin-off its microelectronics
business, which includes the optoelectronics components and integrated circuits
division. These companies may compete more aggressively than their former
parent companies due to their greater dependence and focus on our industry.
Many of our potential competitors have more established sales and customer
support organizations than we do. In addition, many of our competitors have
much greater name recognition, more extensive customer bases, better developed
distribution channels and broader product offerings than we have. These
companies can leverage their customer bases and broader product offerings and
adopt aggressive pricing policies to gain market share. We expect to encounter
potential customers that, due to existing relationships with our competitors,
are committed to the products offered by these competitors.

   The principal factors upon which we compete are:

   .  innovation, performance, features and specifications of our fiber optic
      products;

   .  ability to meet customer volume and delivery requirements;

   .  product quality and reliability;

   .  ability to rapidly develop and introduce new products;

   .  responsive customer service and support; and

   .  overall customer value.

                                       41
<PAGE>

Intellectual Property

   Our success and ability to compete depends substantially upon our
technology. We pursue patent protection in the United States and abroad, and as
of September 30, 2000 we have been granted 12 U.S. patents and have made 29
U.S. utility filings, of which two have been allowed by the U.S. Patent and
Trademark Office, four U.S. provisional filings and 61 overseas filings in
various stages of prosecution. We intend to continue to file new domestic and
international patent applications.

   While we rely on patent, copyright, trade secret and trademark laws to
protect our technology, we also believe that factors such as our existing
contracts with equipment manufacturers, future licensing agreements with
companies and universities, the technological and creative skills of our
personnel, new product developments and frequent product enhancements are
essential to establishing and maintaining a technology leadership position. We
cannot assure you that others will not develop technologies that are similar or
superior to our technologies.

   We enter into confidentiality agreements in the ordinary course of business
with our employees, consultants and corporate partners, and generally control
access to and distribution of our proprietary information. Our confidentiality
agreements generally prohibit the disclosure or use of the technology being
evaluated or licensed. Substantial litigation regarding intellectual property
rights exist in the optical networking industry. We expect that participants in
the optical networking industry may be increasingly subject to third-party
infringement claims as the number of competitors grows and the functionality of
products in different industry segments overlaps.

Employees

   At September 30, 2000, we had a total of 405 employees located in the United
States. Of the total, 281 were in manufacturing, 92 were in research and
development and engineering, 32 were engaged in sales, marketing and
administration. Thirty-five of our employees have Ph.D degrees and an
additional 40 employees have other advanced and Masters degrees. None of our
employees are subject to a collective bargaining agreement and we believe that
our relations with our employees are good.

Facilities

   Our corporate headquarters and manufacturing facilities occupy approximately
88,000 square feet in adjacent buildings in Richardson, Texas. Our leases on
these facilities expire between May 2003 and December 2004 and we have options
to extend each lease for additional terms. We have leased an additional 109,000
square feet of engineering and manufacturing facilities in Richardson. The
leases on these additional facilities expire between September 2005 and August
2007 and we have options to extend these leases for additional terms.

Development of Our Business

   We believe that our current cash position, which includes the proceeds from
the sale of our preferred stock in September and October 2000, proceeds of this
offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the next
12 months. However, our future long-term capital needs will be highly dependent
on the speed at which we increase our manufacturing capacity. During this time,
we expect to incur expenses related to the continued increase in our
manufacturing capacity including additional lease expenses for manufacturing
facilities, capital expenditures for manufacturing and testing equipment and
salaries for additional manufacturing personnel. This capacity expansion
program will result in a material increase in our number of employees as we
staff our new manufacturing facilities and add additional personnel in research
and development, operations and administration, marketing and sales.

                                       42
<PAGE>

Legal Proceedings

   On February 29, 2000, we filed a complaint against Oplink Communications and
its subsidiary, Telelight Communications, in the U.S. District Court for the
Northern District of Texas, Dallas Division, alleging Oplink and Telelight have
infringed two of our U.S. patents relating to fiber optic interleaver filters.
We have also alleged that Oplink's use of the name "True Slicer" is confusingly
similar to our "Slicer" and "Optical Slicer" trademarks, and therefore violates
Section 43(a) of the Lanham Act and various Texas state laws. In this lawsuit,
we are seeking actual and exemplary damages, injunctive relief, attorney fees
and other forms of relief.

   On June 16, 2000, we filed a complaint against E-TEK Dynamics (a subsidiary
of JDS Uniphase) in the U.S. District Court for the Northern District of Texas,
Dallas Division, alleging that E-TEK Dynamics has infringed two of our U.S.
patents relating to fiber optic interleaver filters. In this lawsuit, we are
seeking actual and exemplary damages, injunctive relief, attorney fees and
other forms of relief.

   The outcomes of the foregoing lawsuits and any future lawsuits are
inherently uncertain. Our prosecution of these lawsuits, regardless of their
eventual outcomes, will likely be costly and time consuming, could divert the
efforts and attention of our management and technical personnel and could
subject us to counterclaims. Patent litigation is highly complex and can extend
for a protracted period of time, which can substantially increase the cost of
litigation. Accordingly, any expenses and diversion of resources associated
with any of these matters could adversely affect our business and financial
condition.

                                       43
<PAGE>

                                  MANAGEMENT

   Our executive officers and directors and their ages and positions as of
September 30, 2000 are as follows:

<TABLE>
<CAPTION>
Name                            Age Position
----                            --- --------
<S>                             <C> <C>
Scott C. Grout.................  38 President, Chief Executive Officer and
                                    Director
Jian-Yu Liu, Ph.D. ............  38 Chief Technical Officer and Director
S. Kent Coker..................  47 Chief Financial Officer and Chief Operating
                                    Officer
Michael P. Decelle.............  40 Senior Vice President of Corporate
                                    Development
Robert J. Paluck(1)(2).........  52 Director and Chairman of the Board
Jon W. Bayless, Ph.D.(2).......  60 Director
Philip T. Gianos(1)............  50 Director
Edward E. Olkkola(1)(2)........  40 Director
</TABLE>
--------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Executive Officers and Directors

   Scott C. Grout has served as our President, Chief Executive Officer and a
Director since May 1998. Prior to joining us, Mr. Grout held various positions
at Lucent Technologies, a telecommunications network vendor, including most
recently as the Vice President of the Optical Networking Group and a Director
of the Access and Optical Networking Group, from June 1984 to May 1998. Mr.
Grout received his BS in Engineering from the University of Wisconsin at
Madison and his MBA from the Sloan School of Management at the Massachusetts
Institute of Technology.

   Jian-Yu Liu, Ph.D., one of our founders, has served as a Director since our
inception. Dr. Liu has served as our Chief Technical Officer since May 1998.
Dr. Liu served as our President and Chief Executive Officer from September
1997 to May 1998. Prior to founding Chorum, Dr. Liu was a researcher at
Colorado University's Opto-Electronic Computing Systems Center from January
1992 to January 1996. Dr. Liu received his BSEE from Tankang University in
Taiwan and his Ph.D. in Electrical Engineering from the University of
Colorado, Boulder.

   S. Kent Coker has served as our Chief Financial Officer since April 1999
and as our Chief Operating Officer since February 2000. Mr. Coker also served
as our Secretary from April 1999 until October 2000. Prior to joining us, Mr.
Coker served as Vice President of Finance for the telecommunications solutions
division of Compaq Computer, a computer manufacturer, from 1997 to 1999. In
addition, Mr. Coker served in various financial positions with DSC
Communications, a telecommunications equipment provider, from 1986 to 1996.
Mr. Coker received his BBA in Marketing and his MS in Accounting from Texas
Tech University.

   Michael P. Decelle has served as our Senior Vice President of Corporate
Development since September 2000. Prior to joining us, Mr. Decelle served as
Vice President of Marketing for the Open Network Solutions Group at Lucent
Technologies. In 1999, Mr. Decelle was Vice President of Product Management
and Marketing for Lucent's Operations Support Systems business. From 1996 to
1999, Mr. Decelle was Vice President of Sales for several of Lucent's largest
accounts, including NYNEX, MCI, and WorldCom. Mr. Decelle received his BSEE
from the University of New Hampshire and his MSEE from Cornell University.

   Robert J. Paluck has served as a Director and Chairman of the board of
directors since September 1997. Mr. Paluck has been a general partner at
CenterPoint Ventures, a venture capital firm, since October 1996. Prior to
joining CenterPoint, Mr. Paluck served at Convex Computer from September 1982
to March 1996, most recently as its Chief Executive Officer. Mr. Paluck serves
as a director of several private companies. Mr. Paluck received his BSEE from
the University of Illinois and his MBA from Southern Methodist University.


                                      44
<PAGE>

   Jon W. Bayless, Ph.D. has served as a Director since September 1997. Dr.
Bayless is currently the Chief Executive Officer of Xtera, an optical systems
company. Dr. Bayless has been partner of various venture capital funds
associated with Sevin Rosen Funds since 1981. Dr. Bayless also served as
President and Chairman of the Board of Ciena, an optical networks systems
company from April 1994 to March 1999. Dr. Bayless currently serves as a
director of several private companies. Dr. Bayless is also Chairman of the
Board of Directors of Shared Resource Exchange, a telecommunications equipment
provider. Shared Resource Exchange filed for reorganization under Chapter 11 of
the United States Bankruptcy Code in August 1996. A plan under Chapter 11 has
been approved. Dr. Bayless received his BSEE from the University of Oklahoma,
his MSEE from the University of Alabama and his Ph.D. in Electrical Engineering
from Arizona State University.

   Philip T. Gianos has served as a Director since September 1997. Mr. Gianos
has been a general partner at InterWest Partners, a venture capital firm, since
1982. Prior to joining InterWest, Mr. Gianos was with IBM, a computer hardware,
software and services provider, for eight years, managing both chip design and
systems integration for several IBM office automation products. Mr. Gianos also
serves as director of Ramp Networks, Xilinx, the Western Association of Venture
Capitalists and several private companies. Mr. Gianos received his BSEE and his
MSEE from Stanford University and his MBA from Harvard University Graduate
School of Business.

   Edward E. Olkkola has served as a Director since October 1998. Mr. Olkkola
has been a general partner at Austin Ventures, a venture capital firm, since
September 1998. Prior to joining Austin Ventures, Mr. Olkkola was the Vice
President of Business Development and Strategic Technology Planning at Compaq
Computer from August 1993 to September 1998. Mr. Olkkola received his BS in
Finance and Information Systems from the University of Massachusetts and his
MBA from Northeastern University.

Board of Directors

   We currently have authorized six directors. Upon the completion of the
offering, the board of directors will be divided into three classes: Class I,
whose term will expire at the annual meeting of the stockholders following the
2001 fiscal year; Class II, whose term will expire at the annual meeting of
stockholders following the 2002 fiscal year; and Class III, whose term will
expire at the annual meeting of stockholders following the 2003 fiscal year.
The Class I directors will be Mr. Gianos and Mr. Olkkola; the Class II
directors will be Dr. Liu and Dr. Bayless; and the Class III directors will be
Mr. Grout and Mr. Paluck. At each annual meeting of stockholders after the
initial classification, each elected director will serve from the time of his
election and qualification until the third annual meeting following his
election. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management. All of our officers
serve at the discretion of the board of directors.

 Board Committees

   The board of directors has a compensation committee and an audit committee.

   Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
our employees. As part of these responsibilities, the compensation committee
also administers our 1997 Stock Plan, 2000 Equity Incentive Plan, Employee
Stock Purchase Plan and 2000 Director Option Plan. The current members of the
compensation committee are Mr. Gianos, Mr. Olkkola and Mr. Paluck.

   Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external
audits, including our internal audit and control functions, the results and
scope of the annual audit and other services provided by our independent
auditors and our compliance with legal matters that have a significant impact
on our financial reports. The audit committee also

                                       45
<PAGE>

consults with management and our independent auditors before the presentation
of financial statements to stockholders and, as appropriate, initiates
inquiries into aspects of our financial affairs. In addition, the audit
committee has the responsibility to consider and recommend the appointment of,
and to review fee arrangements with, our independent auditors. The current
members of the audit committee are Dr. Bayless, Mr. Olkkola and Mr. Paluck.

Director Compensation

   Under our 2000 Director Option Plan, each non-employee director will receive
an automatic option grant of 40,000 shares of our common stock upon the
completion of this offering. Each non-employee director joining the board of
directors after the completion of this offering will receive an automatic
option grant of 40,000 shares of our common stock on the date when he or she
initially becomes a director. Each non-employee director who will continue to
be a director following an annual meeting of stockholders will receive an
annual automatic option grant of 10,000 shares at each annual meeting under our
2000 Director Option Plan, beginning at the 2001 annual meeting. See
"Management--Equity Plans--2000 Director Option Plan" for more details.

Compensation Committee Interlocks and Insider Participation

   The compensation committee of the board of directors currently consists of
Mr. Gianos, Mr. Olkkola and Mr. Paluck. No interlocking relationship exists
between any member of our board of directors or our compensation committee and
any member of the board of directors or compensation committee of any other
company, and no interlocking relationship has existed in the past. For
disclosure of any related party transactions between the members of the
compensation committee and us, see "Related Party Transactions."

Indemnification

   Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of our directors and officers for
monetary damages for breach of fiduciary duty as a director or officer, except
for liability:

  .  for any breach of the director's or officer's duty of loyalty to us or
     our stockholders;

  .  for acts or omissions not in good faith or that involve intentional
     misconduct or a knowing violation of law;

  .  under Section 174 of the Delaware General Corporation Law regarding
     unlawful dividends and stock purchases; or

  .  for any transaction from which the director or officer derived an
     improper personal benefit.

   Our bylaws provide that:

  .  we must indemnify our directors and officers to the fullest extent
     permitted by Delaware law;

  .  we may indemnify our other employees and agents to the same extent that
     we indemnified our officers and directors; and

  .  we must advance expenses, as incurred, to our directors and officers in
     connection with a legal proceeding to the fullest extent permitted by
     Delaware law.

   We have also entered into indemnification agreements with our directors and
officers containing provisions that may require us to indemnify our directors
and officers against liabilities that may arise by reason of their status or
service as directors or officers, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.

                                       46
<PAGE>

Executive Compensation

 Summary Compensation Table

   The following table presents compensation information for fiscal year 2000
paid by us for services by our chief executive officer and our two other
highest-paid executive officers whose total salary and bonus for the fiscal
year exceeded $100,000:

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                Long-Term
                                                               Compensation
                                                               ------------
                                                                  Awards
                                                               ------------
                                                   Annual
                                                Compensation      Securities
                                              ----------------    Underlying
Name and Principal Position(1)                 Salary   Bonus      Options
------------------------------                -------- ------- ----------------
<S>                                           <C>      <C>     <C>          <C>
Scott C. Grout............................... $187,500 $75,000  1,000,000
 President and Chief Executive Officer
Jian-Yu Liu, Ph.D. ..........................  169,615  25,000        --
 Chief Technical Officer
S. Kent Coker................................  164,808  40,000    406,440
 Chief Financial Officer and Chief Operating
 Officer
</TABLE>
---------------------
(1)  Michael P. Decelle commenced service with us as Senior Vice President of
     Corporate Development on September 25, 2000, and his annual base salary is
     currently $199,000. Mr. Decelle will receive a bonus on his sixth, twelfth
     and eighteenth month of employment.

 Option Grants in Last Fiscal Year

   The following table designates each grant of stock options during fiscal
2000 to our chief executive officer and our two other highest-paid executive
officers. No stock appreciation rights have been granted to these individuals.

   The figures representing percentages of total options granted to employees
in the last fiscal year are based on a total of 7,259,367 option shares granted
to our employees under our 1997 Stock Plan during fiscal year 2000.

   The exercise price of each option granted is equal to the fair market value
of our common stock as valued by our board of directors on the date of grant.
The exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by lending the optionee sufficient funds to pay the exercise
price for the purchased shares.

   Each of the options in the table is immediately exercisable. We have the
right to repurchase all unvested shares at the original exercise price if the
optionee's service terminates. The term of the option is 10 years, subject to
earlier termination if the optionee's service terminates. Generally, the option
shares vest 25% after the first 12 months of service, 2.083% after each of the
next 36 months, for a total vesting period of 48 months. Mr. Grout's option
granted in fiscal 2000 vests as to the first 2.083% of the option shares when
he completes 6 months of service and an additional 2.083% of the option shares
when he completes each month of service thereafter.

   The amount listed in the column entitled "Exercise Price" was equal to the
fair market value of our common stock as determined by our board of directors
on the date of grant. In determining this fair market value, the board of
directors took into account many factors, including the purchase price paid by
investors for shares of our preferred stock (taking into account the
liquidation preferences and other rights, privileges and preferences associated
with such preferred stock) and an evaluation by the board of directors of our
revenues, operating history and prospects.

                                       47
<PAGE>

   The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed according to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant appreciates
at the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price. Information on how we determined the fair market value of
our common stock is disclosed in the preceding paragraph. The price to the
public in this offering is higher than the estimated fair market value on the
date of grant. Therefore, the potential realizable value of the option grant
would be significantly higher than the numbers shown in the column if future
stock prices were projected to the end of the option term by applying the same
annual rates of stock price appreciation to the public offering price.

                       Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                                        Individual Grants
                         -----------------------------------------------
                                                                          Potential Realizable
                                                                            Value at Assumed
                         Number of                                        Annual Rates of Stock
                         Securities Percent of Total                     Price Appreciation for
                         Underlying Options Granted                            Option Term
                          Options     To Employees   Exercise Expiration -----------------------
Name (1)                  Granted    In Fiscal Year   Price      Date        5%          10%
--------                 ---------- ---------------- -------- ---------- ----------- -----------
<S>                      <C>        <C>              <C>      <C>        <C>         <C>
Scott C. Grout(2)....... 1,000,000         14%       $0.4663    3/1/10   $   293,254 $   743,162
Jian-Yu Liu, Ph.D.......       --         --             --        --            --          --
S. Kent Coker(3)........   406,440          6         0.4663    2/7/10       119,190     302,051
</TABLE>

---------------------
(1) Mr. Decelle was granted an option to purchase 690,000 shares of our common
    stock on September 25, 2000 at an exercise price of $3.68 per share.

(2) Mr. Grout was granted an option to purchase 1,000,000 shares of our common
    stock on March 1, 2000.

(3) Mr. Coker was granted an option to purchase 406,440 shares of our common
    stock on February 7, 2000.

 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
 Values

   The following table sets forth for each of our chief executive officer and
our two other highest-paid executive officers the number of options exercised
during the fiscal year ended September 30, 2000 and the number and value of
securities underlying unexercised options that were held by each of these
officers as of September 30, 2000. No stock appreciation rights were exercised
by our named executive officers in fiscal year 2000, and no stock appreciation
rights were outstanding at the end of that year.

   The numbers in the column entitled "Value Realized" are equal to the fair
market value of the purchased shares on the option exercise date minus the
exercise price paid for the shares.

   The stock options were immediately exercisable. We have the right to
repurchase all unvested option shares at the original exercise price when the
optionee's service terminates. The heading "Vested" refers to shares no longer
subject to our right of repurchase; the heading "Unvested" refers to shares
subject to our right of repurchase as of September 30, 2000.

                Aggregated Option Exercises in Last Fiscal Year
<TABLE>
<CAPTION>
                                                Number of
                                               Securities
                                               Underlying         Value of
                                               Unexercised      Unexercised
                                               Options at       in-the-Money
                                              September 30,      Options at
                                                  2000       September 30, 2000
                                             --------------- ------------------
                         Shares
                       Acquired on   Value
Name                    Exercise   Realized  Vested Unvested Vested   Unvested
----                   ----------- --------- ------ -------- ------- ----------
<S>                    <C>         <C>       <C>    <C>      <C>     <C>
Scott C. Grout........       --       --     20,832 979,168  $66,948 $3,146,752
Jian-Yu Liu, Ph.D.....       --       --        --      --       --         --
S. Kent Coker.........   406,440     $ 0        --      --       --         --
</TABLE>


                                       48
<PAGE>

Equity Plans

 2000 Equity Incentive Plan

   Our board of directors adopted our 2000 Equity Incentive Plan on October 11,
2000. We have obtained stockholder approval of this plan. This plan becomes
effective upon the date of this prospectus. We have reserved 3,900,000 shares
of our common stock for issuance under the 2000 Equity Incentive Plan, plus any
shares remaining available for issuance under our 1997 Stock Plan. As of
September 30 of each year, starting in 2001 and continuing through 2006, the
number of shares reserved for issuance under our 2000 Equity Incentive Plan
will be increased automatically by 5% of the total number of shares of common
stock then outstanding or, if less, by 2,000,000 shares. No options have yet
been granted under the 2000 Equity Incentive Plan.

   Under the 2000 Equity Incentive Plan, the persons eligible to receive awards
are:

  .  employees;

  .  non-employee members of the board of directors; and

  .  consultants.

   The types of awards that may be made under the 2000 Equity Incentive Plan
are:

  .  options to purchase shares of common stock;

  .  stock appreciation rights;

  .  restricted shares; and

  .  stock units.

   Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code or
nonstatutory stock options not designed to qualify for favorable tax treatment.
With limited restrictions, if shares awarded under the 2000 Equity Incentive
Plan are forfeited, those shares will again become available for new awards
under the 2000 Equity Incentive Plan.

   The compensation committee of our board of directors administers the 2000
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 2000 Equity
Incentive Plan. The committee has the discretion to determine which eligible
individuals are to receive any award, and to determine the type, number,
vesting requirements and other features and conditions of each award.

   The exercise price for incentive stock options granted under the 2000 Equity
Incentive Plan may not be less than 100% of the fair market value of our common
stock on the option grant date. The exercise price for non-statutory options
granted under the 2000 Equity Incentive Plan may not be less than 85% of the
fair market value of our common stock on the option grant date.

   Our 2000 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 1,500,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 2,000,000 shares in the first year of
employment.

   The exercise price may be paid with:

  .  cash;

  .  outstanding shares of common stock;

  .  the cashless exercise method through a designated broker;

                                       49
<PAGE>

  .  a pledge of shares to a broker; or

  .  a promissory note.

   The purchase price for newly issued restricted shares awarded under the 2000
Equity Incentive Plan may be paid with:

  .  cash;

  .  a promissory note; or

  .  the rendering of past services.

   The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.

   If a change in control occurs, an option or other award under the 2000
Equity Incentive Plan will become fully exercisable and fully vested if the
option or award is not assumed by the surviving corporation or its parent or
subsidiary or if the surviving corporation or its parent or subsidiary does not
substitute comparable awards for the awards granted under the 2000 Equity
Incentive Plan. If a change in control occurs and an officer is involuntarily
or constructively terminated within 24 months following this change in control,
then the vesting of options and other awards held by the officer will
accelerate and the officer will become fully vested.

   A change in control includes:

  .  a merger or consolidation after which our then-current stockholders own
     less than 50% of the surviving corporation;

  .  a sale of all or substantially all of our assets;

  .  a proxy contest that results in replacement of more than one-half of our
     directors over a 24-month period; or

  .  an acquisition of 50% or more of our outstanding stock by a person other
     than a person related to us, including a corporation owned by our
     stockholders.

   If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
2000 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we are the surviving corporation, shall
have accelerated vesting and then expire early, or shall be cancelled for a
cash payment.

   Our board of directors may amend or terminate the 2000 Equity Incentive Plan
at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by an applicable law. The 2000 Equity
Incentive Plan will continue in effect indefinitely unless the board decides to
terminate the plan.

 Employee Stock Purchase Plan

   Our Employee Stock Purchase Plan was adopted by the board of directors on
October 11, 2000. We have obtained stockholder approval of this plan. This plan
becomes effective upon the date of this prospectus. We have reserved 1,000,000
shares of our common stock for issuance under our Employee Stock Purchase Plan.
As of September 30 each year, starting in 2001 and continuing through 2006, the
number of shares reserved for issuance under our Employee Stock Purchase Plan
will be increased automatically by 1% of the total number of shares of common
stock then outstanding or, if less, by 1,000,000 shares. Our Employee Stock
Purchase Plan is intended to qualify under Section 423 of the Internal Revenue
Code.


                                       50
<PAGE>

   Eligible employees may begin participating in the Employee Stock Purchase
Plan at the start of an offering period. Each offering period lasts 24 months.
New offering periods will start on February 1 and August 1 of each calendar
year. However, the first offering period will start on the effective date of
this offering and end on January 31, 2003. Purchases of our common stock will
occur on approximately January 31 and July 31 of each calendar year during an
offering period.

   Our Employee Stock Purchase Plan will be administered by the compensation
committee of our board of directors. Each of our employees is eligible to
participate if he or she is employed by us for more than 20 hours per week and
for more than five months per year.

   Our Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15% of the employee's cash compensation. The initial purchase period
during which payroll deductions may be contributed will begin on the effective
date of this offering and end on July 31, 2001. Each participant may purchase
up to 2,000 shares on any purchase date.

   The price of each share of common stock purchased under our Employee Stock
Purchase Plan will be 85% of the lower of:

  (A)  the fair market value per share of common stock on the date
       immediately before the first date of the applicable offering period;
       or

  (B)  the fair market value per share of common stock on the purchase date.

   In the case of the first offering period, the price per share under the plan
will be 85% of the lower of:

  (A)  the price offered to the public in this offering; or

  (B)  the fair market value per share of common stock on the purchase date.

   Employees may end their participation in the Employee Stock Purchase Plan at
any time. Participation ends automatically upon termination of employment with
us.

   If a change in control occurs, our Employee Stock Purchase Plan will end and
shares will be purchased with the payroll deductions accumulated to date by
participating employees, unless this plan is assumed by the surviving
corporation or its parent. Our board of directors may amend or terminate the
Employee Stock Purchase Plan at any time. If our board increases the number of
shares of common stock reserved for issuance under the Employee Stock Purchase
Plan, it must seek the approval of our stockholders.

 2000 Director Option Plan

   Our board of directors adopted our 2000 Director Option Plan on October 11,
2000. We have obtained stockholder approval of this plan. This plan becomes
effective upon the date of this prospectus. We have reserved 300,000 shares of
our common stock for issuance under the plan. As of September 30 of each year,
starting in 2001 and continuing through 2006, the number of shares reserved for
issuance under our 2000 Director Option Plan will be increased automatically by
50,000 shares. In general, if options granted under the 2000 Director Option
Plan are forfeited, then those options will again become available for grants
under the plan. The 2000 Director Option Plan will be administered by the
compensation committee of our board of directors, although all grants under the
plan are automatic and non-discretionary.

   Only the non-employee members of our board of directors will be eligible for
option grants under the 2000 Director Option Plan. Under our 2000 Director
Option Plan, each non-employee director will receive an automatic option grant
of 40,000 shares of our common stock upon the completion of this offering. Each
non-employee director joining the board of directors after the completion of
this offering will receive an automatic option grant of 40,000 shares of our
common stock on the date when he or she initially becomes a director. At

                                       51
<PAGE>

the time of each of our annual stockholders' meetings, beginning in 2001, each
non-employee director who will continue to be a director after that meeting
will automatically be granted an annual option for 10,000 shares of our common
stock. However, a non-employee director who is receiving the initial option
will not receive the annual option in the same calendar year. The options vest
in equal monthly installments over the four-year period following the date of
grant.

   The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. A director
may pay the exercise price by using cash, shares of common stock that the
director already owns, or an immediate sale of the option shares through a
broker designated by us. The non-employee directors' options have a 10-year
term, except that they expire one year after a director leaves the board, if
earlier. If a change in control occurs, a non-employee director's option
granted under the 2000 Director Option Plan will become fully vested.

   Our board of directors may amend or terminate the 2000 Director Option Plan
at any time. If our board of directors amends the plan, it does not need to ask
for stockholder approval of the amendment unless applicable law requires it.
The 2000 Director Option Plan will continue in effect indefinitely, unless the
board of directors decides to terminate the plan.

Employment, Severance and Change of Control Arrangements

   In April 1998, we entered into a severance agreement with Mr. Grout, our
President and Chief Executive Officer. If Mr. Grout is terminated without cause
or is constructively terminated, the agreement provides for payments of his
base salary and payment of medical and life insurance, as of the date of such
termination until the earlier to occur of six months from the date of
termination or Mr. Grout obtaining full-time employment or a consulting
position with another entity. If Mr. Grout is terminated for cause, the
agreement provides only for payments owed through the date of termination.

   If a change in control occurs, an option or other award under the 1997 Stock
Plan or 2000 Equity Incentive Plan will become fully exercisable and fully
vested if the option or award is not assumed by the surviving corporation or
its parent or subsidiary or if the surviving corporation or its parent or
subsidiary does not substitute comparable awards for the awards granted under
the 2000 Equity Incentive Plan. In addition, all of our officers have entered
into agreements that provide that if the officer's employment is involuntarily
terminated or constructively terminated within twenty-four (24) months
following a change in control, then his options will become fully vested.

                                       52
<PAGE>

                           RELATED PARTY TRANSACTIONS

   Equity Financings. Since our inception, we have financed our growth
primarily through the sale of preferred stock, resulting in the issuance of an
aggregate of 11,160,000 shares of Series A Preferred Stock at an effective
purchase price of $0.1666 per share in September 1997, 6,212,259 shares of
Series B-1 Preferred Stock at a purchase price of $0.3333 per share in October
1997, 9,732,510 shares of Series B-2 Preferred Stock at a purchase price of
$0.50 per share in June 1998, 12,098,664 shares of Series C Preferred Stock at
a purchase price of $1.4166 per share in November 1998, 9,093,843 shares of
Series D Preferred Stock at a purchase price of $4.6633 per share in November
1999 and 5,341,460 shares of Series E Preferred Stock at a purchase price of
$17.24 per share in September and October 2000. The buyers of our Series A
Preferred Stock, Series B-1 Preferred Stock, Series B-2 Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
included the following directors, executive officers and 5% stockholders:

<TABLE>
<CAPTION>
                                     Series    Series
                          Series A     B-1       B-2    Series C  Series D  Series E
                          --------- --------- --------- --------- --------- --------
<S>                       <C>       <C>       <C>       <C>       <C>       <C>
Entities Affiliated with
 Directors and 5%
 Stockholders
Entities associated with
 CenterPoint
 Ventures(1)............        --  1,791,048 2,805,969 1,599,135   429,009 220,418
Entities associated with
 InterWest Partners(2)..        --  1,791,048 2,805,969 1,599,135 1,072,521 174,014
Entities associated with
 Sevin Rosen Funds(3)...        --  1,791,048 2,805,969 1,599,135 1,071,621 116,009
Entities associated with
 Austin Ventures(4).....        --        --        --  2,470,587   643,512 261,021
Liu-Wang Partners,
 Ltd.(5)................  6,960,000       --        --        --        --      --
</TABLE>
---------------------
(1) Robert J. Paluck, one of our directors, is a general partner of venture
    funds associated with CenterPoint Ventures.
(2) Philip T. Gianos, one of our directors, is a general partner of venture
    funds associated with InterWest Partners.
(3) Jon W. Bayless, one of our directors, is a general partner of venture funds
    associated with Sevin Rosen Funds.
(4) Edward E. Olkkola, one of our directors, is a general partner of venture
    funds associated with Austin Ventures.
(5) Jian-Yu Liu, our Chief Technical Officer and one of our directors, is a
    general partner of Liu-Wang Partners, Ltd. On September 13, 2000, Liu-Wang
    Partners, Ltd. contributed 551,777 shares of Series A Preferred Stock to
    our treasury stock.

   Employment Agreements and Bonuses. In April 1998, we entered into a
severance agreement with Mr. Grout, our President and Chief Executive Officer.
If Mr. Grout is terminated without cause or constructively terminated, the
agreement provides for payments of his base salary and payment of medical and
life insurance, as of the date of such termination until the earlier to occur
of six months from the date of termination or Mr. Grout obtaining full-time
employment or a consulting position with another entity. If Mr. Grout is
terminated for cause, the agreement provides for payments owed through the date
of termination.

   All of our executive officers have entered into agreements that provide that
all stock options and/or restricted stock held by that person will fully vest
if such person's employment is involuntarily or constructively terminated
within 24 months following a change in control.

   Loans. On October 15, 1998, Mr. Grout exercised an option to purchase
2,438,430 shares of our common stock. He paid for those shares with a full
recourse promissory note with an original principal amount of approximately
$81,200 bearing 5.12% annual interest secured by the purchased shares. The
largest aggregate indebtedness outstanding during the fiscal year and the
amount outstanding on September 30, 2000 was approximately $89,500.

   Indemnification. We have entered into an indemnification agreement with each
of our officers and directors. See "Management--Indemnification" for a
description of the indemnification available to our officers and directors
under our Amended and Restated Certificate of Incorporation and our bylaws. We
have also purchased a directors' and officers' insurance policy.

                                       53
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table presents selected information regarding beneficial
ownership of our outstanding common stock as of September 30, 2000, and as
adjusted to reflect the sale of the common stock being sold in this offering
for:

  .  each of our directors, our chief executive officer and our two other
     highest-paid executive officers named on the Summary Compensation Table;

  .  all of our directors and executive officers as a group; and

  .  each other person known by us to own beneficially more than 5% of our
     common stock.

   Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options or warrants that are
exercisable within 60 days of September 30, 2000. Shares issuable under stock
options exercisable within 60 days are deemed outstanding for computing the
percentage of the person holding the options but are not outstanding for
computing the percentage of any other person. Accordingly, the following table
includes information regarding shares issuable under stock options exercisable
within 60 days.

   Percentage ownership calculations are based on 60,849,888 shares of common
stock outstanding as of September 30, 2000 as adjusted to reflect the
conversion of all outstanding shares of preferred into common stock upon the
completion of this offering. To the extent that any shares are issued upon
exercise of options, warrants or other rights to acquire our capital stock that
are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, there will be further dilution to new public
investors.

   The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option.

   Unless otherwise indicated, the address for each listed stockholder is: c/o
Chorum Technologies Inc., 1303 East Arapaho Road, Richardson, Texas 75081. To
our knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons or entities identified in this
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.

<TABLE>
<CAPTION>
                                                             Percent of Shares
                                                                Outstanding
                                                            --------------------
                                          Number of Shares  Before the After the
Name                                     Beneficially Owned  Offering  Offering
----                                     ------------------ ---------- ---------
<S>                                      <C>                <C>        <C>
Directors and Executive Officers
Scott C. Grout(1).......................     3,438,430          5.7%      5.0%
Jian-Yu Liu, Ph.D.(2)...................     6,382,323         10.5       9.3
S. Kent Coker(3)........................       877,440          1.4       1.3
Michael P. Decelle(4)...................       690,000          1.1       0.9
Robert J. Paluck(5).....................     6,857,180         11.2      10.0
Jon W. Bayless, Ph.D.(6)................     7,383,782         12.1      10.7
Philip T. Gianos(7).....................     7,442,687         12.2      10.8
Edward E. Olkkola(8)....................     3,375,120          5.5       4.9
</TABLE>


                                       54
<PAGE>

<TABLE>
<CAPTION>
                                                          Percent of Shares
                                                             Outstanding
                                                         --------------------
                                       Number of Shares  Before the After the
Name                                  Beneficially Owned  Offering  Offering
----                                  ------------------ ---------- ---------
<S>                                   <C>                <C>        <C>
5% Stockholders
Entities associated with CenterPoint
 Ventures(5).........................      6,857,180        11.2%     10.0%
 Two Galleria Tower
 13455 Noel Road, Suite 1670
 Dallas, Texas 75240
Entities associated with Sevin Rosen
 Funds(6)............................      7,383,782        12.1      10.7
 Two Galleria Tower
 13455 Noel Road, Suite 1670
 Dallas, Texas 75240
Entities associated with InterWest
 Partners(7).........................      7,442,687        12.2      10.8
 3000 Sand Hill Road, #3-255
 Menlo Park, California 94025
Entities associated with Austin
 Ventures(8).........................      3,375,120         5.5       4.9
 701 North Brazos Street, Suite 1400
 Austin, Texas 78701
Liu-Wang Partners, Ltd.(2)...........      6,382,323        10.5       9.3
All executive officers and directors
 as a group (8 persons)(9)...........     36,447,862        58.3      52.9
</TABLE>
---------------------
(1) Includes 2,438,430 shares of Common Stock held by the Grout Family
    Partnership Ltd. and 1,000,000 shares of Common Stock issuable pursuant to
    options exercisable within 60 days of September 30, 2000.
(2) Includes 6,382,323 shares of Series A Preferred Stock held by Liu-Wang
    Partners, Ltd. Dr. Liu is a general partner of Liu-Wang Partners, Ltd.
(3) Includes 10,810 shares of our Common Stock held by JTC Investment 2000
    Trust, 10,810 shares of our Common Stock held by CAC Investment 2000 Trust
    and 10,810 shares of our Common Stock held by JKC Investment 2000 Trust.
(4) Includes 690,000 shares of Common Stock issuable pursuant to options
    exercisable within 60 days of September 30, 2000.
(5) Includes 6,196,152 shares held by CenterPoint Venture Partners L.P. and
    661,028 shares held by CenterPoint Venture Fund II, L.P. Mr. Paluck, one of
    our directors, is a general partner of Paluck Associates, L.P. which is the
    general partner of CenterPoint Venture Partners L.P. and is a managing
    member of CenterPoint Associates Management II, L.L.C., which is the
    general partner of CenterPoint Associates II, L.P., which is the general
    partner of CenterPoint Venture Fund II, L.P. Mr. Paluck disclaims
    beneficial ownership of the shares held by CenterPoint Venture Partners
    L.P. and CenterPoint Venture Fund II, L.P., except to the extent of his
    pecuniary interest therein arising from his partnership interest in
    CenterPoint Venture Partners L.P. and CenterPoint Venture Fund II, L.P., as
    the case may be.
(6) Includes 5,118,192 shares held by Sevin Rosen Fund V L.P., 218,817 shares
    held by Sevin Rosen V Affiliates Fund L.P., 1,027,131 shares held by Sevin
    Rosen Fund VI L.P., 80,886 shares held by Sevin Rosen VI Affiliates Fund
    L.P., 885,243 shares held by Sevin Rosen Fund VII L.P., 34,013 shares held
    by Sevin Rosen VII Affiliates Fund L.P. and 19,500 shares held by Sevin
    Rosen Bayless Management Company. Dr. Bayless, one of our directors, is a
    general partner of SRB Associates V L.P., which is the general partner of
    Sevin Rosen Fund V L.P. and Sevin Rosen V Affiliates Fund L.P., is a
    general partner of SRB Associates VI L.P., which is the general partner of
    Sevin Rosen Fund VI L.P. and Sevin Rosen VI Affiliates Fund L.P. and is a
    general partner of SRB Associates VII L.P., which is a general partner of
    Sevin Rosen Fund VII L.P. and Sevin Rosen VII Affiliates Fund L.P. Dr.
    Bayless disclaims beneficial ownership of the shares held by Sevin Rosen
    Fund V L.P., Sevin Rosen V Affiliates Fund L.P., Sevin Rosen Fund VI L.P.,
    Sevin Rosen VI Affiliates Fund L.P., Sevin Rosen Fund VII L.P. and Sevin
    Rosen VII Affiliates Fund L.P., except to the extent of his pecuniary
    interest therein arising from his partnership interest, as the case may be.

                                       55
<PAGE>

(7) Includes 6,323,454 shares held by InterWest Partners VI, L.P., 194,454
    shares held by InterWest Investors VI, L.P., 884,244 shares held by
    InterWest Partners VII, L.P. and 40,535 shares held by InterWest Investors
    VII, L.P. Mr. Gianos, one of our directors, is the managing member of
    InterWest Management Partners VI, L.L.C., which is the general partner of
    InterWest Partners VI, L.P., InterWest Investors VI, L.P., InterWest
    Partners VII, L.P. and InterWest Investors VII, L.P. Mr. Gianos disclaims
    beneficial ownership of the shares held by InterWest Partners VI, L.P.,
    InterWest Investors VI, L.P., Interwest Partners VII, L.P. and InterWest
    Investors VII, L.P., except to the extent of his pecuniary interest therein
    arising from his partnership interest in InterWest Partners VI, L.P.,
    InterWest Investors VI, L.P., InterWest Partners VII, L.P. or InterWest
    Investors VII, L.P., as the case may be.
(8) Includes 3,214,400 shares held by Austin Ventures V, L.P. and 160,720
    shares held by Austin Ventures V Affiliates Fund, L.P. Mr. Olkkola, one of
    our directors, is a general partner of AV Partners V, L.P., which is the
    general partner of Austin Ventures V, L.P. and Austin Ventures V Affiliates
    Fund, L.P. Mr. Olkkola disclaims beneficial ownership of the shares held by
    Austin Ventures V, L.P. and Austin Ventures V Affiliates Fund, L.P., except
    to the extent of his pecuniary interest therein arising from his
    partnership interest in AV Partners V, L.P., as the case may be.
(9) Includes 1,690,000 shares of Common Stock issuable pursuant to options
    exercisable within 60 days of September 30, 2000.

                                       56
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon the completion of this offering, we will be authorized to issue
1,000,000,000 shares of common stock, $.0001 par value, and 50,000,000 shares
of undesignated preferred stock, $.0001 par value. The following is a summary
description of our capital stock. Our Amended and Restated Certificate of
Incorporation and our bylaws provide further information about our capital
stock.

Common Stock

   As of September 30, 2000, there were 60,849,888 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
preferred stock into common stock upon the completion of this offering, that
were held of record by approximately 350 stockholders. There will be 68,849,888
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and assuming no exercise after September 30, 2000 of
outstanding options or warrants, after giving effect to the sale of the shares
of common stock to the public offered in this prospectus.

   The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive dividends, if any, as may be declared from time to time
by the board of directors out of funds legally available. In the event of our
liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued in
this offering will be fully paid and nonassessable.

Preferred Stock

   The board of directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of the series. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any of
our preferred stock.

Warrants

   Immediately following the completion of this offering, there will be
outstanding warrants to purchase a total of 414,598 shares of common stock at a
weighted average exercise price of $2.65 per share. Warrants to purchase a
total of 328,945 shares of common stock will expire three years after the date
of this offering and warrants to purchase a total of 85,653 shares of common
stock will expire in June 2007.

Registration Rights

   After this offering, the holders of 53,076,127 shares of common stock will
be entitled to rights with respect to the registration of these shares under
the Securities Act. Under the terms of the agreement between us and the holders
of these registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of registration and are entitled to include their shares
of common

                                       57
<PAGE>

stock in the registration. Holders of approximately 42,467,000 shares of the
registrable securities are also entitled to specified demand registration
rights under which they may require us to file registration statements under
the Securities Act at our expense with respect to our shares of common stock,
and we are required to use our best efforts to effect these registrations. All
of these registration rights are subject to conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in the registration and our right not to effect a requested
registration within 180 days following the effective date of an offering of our
securities pursuant to a registration statement, including the offering made by
this prospectus.

Delaware Anti-Takeover Law and Certain Certificate of Incorporation and Bylaw
Provisions

   Selected provisions of Delaware Law, and our certificate of incorporation
and bylaws could make it more difficult to acquire us by means of a tender
offer or a proxy contest and the removal of incumbent officers and directors.
These provisions, summarized below, are expected to discourage particular types
of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging these proposals
because, among other things, negotiation of these proposals could result in an
improvement of their terms. However, these provisions could have the effect of
discouraging others from making tender offers for our shares and, as a
consequence, they may also inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts.

   Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. Generally, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

  .  before the date of the business combination, the transaction is approved
     by the board of directors of the corporation,

  .  upon consummation of the transaction which resulted in the stockholder
     becoming an interested stockholder, the interested stockholder owns at
     least 85% of the outstanding stock, or

  .  on or after the date the business combination is approved by the board
     and by the affirmative vote of at least 66 2/3% of the outstanding
     voting stock which is not owned by the interested stockholder.

   A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by our board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by stockholders.

   Stockholder Meetings. Under our bylaws, only our board of directors, the
Chairman of the Board and the Chief Executive Officer may call special meetings
of stockholders.

   Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a related committee.

                                       58
<PAGE>

   Classified Board of Directors. Our certificate of incorporation provides
that our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, only one of the three classes
of our board of directors will be elected each year. The classification system
of electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
incumbency of our board of directors by increasing the difficulty of replacing
a majority of the directors.

   Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.

   Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to acquire control of us. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or our
management.

   Amendment of Restated Charter. The amendment of any of the above provisions
would require approval by holders of at least 66 2/3% of our outstanding common
stock.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C..

Nasdaq National Market Listing

   We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "CHOR."

                                       59
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Upon completion of this offering, we will have 68,849,888 shares of common
stock outstanding, assuming no exercise of options or warrants after September
30, 2000. Of these shares, the 8,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, except that any shares held by persons that directly or
indirectly control, or are controlled by, or are under common control with us,
may generally only be sold in compliance with the limitations of Rule 144
described below.

Sales of Restricted Shares

   The remaining 60,849,888 shares of common stock are deemed restricted shares
under Rule 144. The number of shares of common stock available for sale in the
public market is limited by restrictions under the Securities Act and lock-up
agreements described in "Underwriting." On the date of this prospectus, no
shares other than the 8,000,000 shares being sold in this offering will be
eligible for sale. Beginning 181 days after the date of this prospectus, or
earlier with the consent of Credit Suisse First Boston Corporation,
restricted shares will become available for sale in the public market subject
to the limitations of Rule 144 of the Securities Act.

   In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock,
approximately 688,000 shares after giving effect to this offering, and the
average weekly trading volume of our common stock on The Nasdaq Stock Market's
National Market during the four calendar weeks preceding this sale. Sales under
Rule 144 of the Securities Act are subject to restrictions relating to manner
of sale, notice and the availability of current public information about us. A
person who is not our affiliate at any time during the 90 days preceding a
sale, and who has beneficially owned shares for at least two years, would be
entitled to sell these shares immediately following this offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent may
require an opinion of counsel that a proposed sale of shares comes within the
terms of Rule 144 of the Securities Act before effecting a transfer of these
shares.

   Before this offering, there has been no public market for our common stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
these shares in the public market, or the perception that these sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through an offering of our equity
securities.

Options

   As of September 30, 2000, options to purchase a total of 5,261,865 shares of
common stock under the 1997 Stock Plan, were outstanding and exercisable.
of the shares subject to options are subject to the lock-up agreements
described in "Underwriting." An additional 2,440,519 shares of common stock
were available as of September 30, 2000 for future option grants or direct
issuances under the 1997 Stock Plan. In addition, in October 2000, 3,900,000
shares were reserved for issuance under our 2000 Equity Incentive Plan,
1,000,000 shares were reserved for issuance under our Employee Stock Purchase
Plan and 300,000 shares were reserved for issuance under our 2000 Director
Option Plan. See "Management--Equity Plans--2000 Equity Incentive Plan," "--
Employee Stock Purchase Plan," and "--2000 Director Option Plan" and note 8 of
Notes to Consolidated Financial Statements.

   Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after

                                       60
<PAGE>

the date of this prospectus, subject to all provisions of Rule 144 except its
one-year minimum holding period. We intend to file one or more registration
statements on Form S-8 under the Securities Act to register all shares of
common stock subject to outstanding stock options and common stock issued or
issuable under our 2000 Equity Incentive Plan, our Employee Stock Purchase Plan
and our 2000 Director Option Plan. We expect to file the registration statement
covering shares offered under our 2000 Equity Incentive Plan, our Employee
Stock Purchase Plan and 2000 Director Option Plan approximately 30 days after
the completion of this offering. These registration statements are expected to
become effective upon filing. Shares covered by these registration statements
will then be eligible for sale in the public markets, subject to the lock-up
agreements described in "Underwriting," if applicable.

Warrants

   As of September 30, 2000, we had outstanding warrants to purchase 414,598
shares of our preferred stock. These warrants shall automatically convert into
warrants to purchase 414,598 shares of our common stock upon completion of this
offering. When these warrants are exercised and the exercise price paid in
cash, the shares must be held for at least one year before they can be sold
under Rule 144. Warrants to purchase 328,945 shares contain "net exercise
provisions." These provisions allow a holder to exercise a warrant for a lesser
number of shares of common stock in lieu of paying cash. The number of shares
that would be issued would be based on the market price of the common stock at
the time of the net exercise. If a warrant with a net exercise provision had
been held for at least one year, the shares of common stock obtained upon
exercise could be publicly sold under Rule 144. When the lock-up agreements
described in "Underwriting" expire on the date 180 days after this prospectus,
warrants with net exercise provisions to purchase 328,945 shares of our common
stock will have been outstanding for at least one year.

                                       61
<PAGE>

               UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS

   The following general discussion summarizes some of the material United
States Federal income and estate tax consequences of the ownership and
disposition of our common stock by a non-U.S. holder of common stock. A "non-
U.S. holder" generally is a holder of common stock that is not, for United
States Federal income tax purposes, any of the following:

  .  a citizen or resident of the United States;

  .  a corporation, partnership or other entity created or organized in or
     under the laws of the United States or any of its political
     subdivisions;

  .  an estate, the income of which is subject to U.S. Federal income
     taxation regardless of its source; or

  .  a trust whose administration is subject to the primary supervision of a
     U.S. court, and which has one or more U.S. persons who have the
     authority to control all substantial decisions of the trust.

   If you are an individual, you may, in many cases, be deemed to be a resident
alien, as opposed to a nonresident alien, by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). A resident alien is subject
to United States Federal income tax as if such individual was a citizen of the
United States.

   If a partnership is a beneficial owner of our common stock, the tax
treatment of a partner will generally depend upon the status of the partner and
upon the activities of the partnership. If you are a partner of a partnership
holding common stock, you should consult your tax advisor about the U.S. tax
consequences of holding and disposing of shares of our common stock.

   This discussion is limited to non-U.S. holders who hold the common stock as
a capital asset. This discussion does not consider all aspects of U.S. Federal
income and estate taxation or the specific facts and circumstances that may be
relevant to particular non-U.S. holders in light of their personal
circumstances, such as insurance companies, tax-exempt organizations, financial
institutions, broker-dealers or certain U.S. expatriates, and does not address
the treatment of those holders under the laws of any state, local or foreign
taxing jurisdiction. In addition, this discussion does not address any special
tax provisions which may apply to you if you relinquished United States
citizenship or residence. Further, the discussion is based on provisions of the
United States Internal Revenue Code of 1986, as amended, or the Internal
Revenue Code, Treasury regulations under the Internal Revenue Code, and
administrative and judicial interpretations of the Internal Revenue Code. This
discussion is based on the provisions of the Internal Revenue Code as they are
in effect on the date of this prospectus. All of these provisions are subject
to change or different interpretation on a possibly retroactive basis.

   Each prospective holder is urged to consult its tax advisor with respect to
the United States federal income and estate tax consequences of acquiring,
holding and disposing of common stock, as well as any tax consequences that may
arise under the laws of any state, local or foreign taxing jurisdiction.

Dividends

   Dividends paid to a non-U.S. holder of common stock generally will be
subject to United States Federal withholding tax at a 30% rate or a lower rate
as may be specified by an applicable income tax treaty. Dividends that are
effectively connected with the non-U.S. holder's conduct of a trade or business
within the United States (and if an income tax treaty applies, are attributable
to a United States permanent establishment of such non-U.S. holder) will not be
subject to withholding tax provided that such non-U.S. holder complies with
applicable

                                       62
<PAGE>

certification and disclosure requirements. Instead, the "effectively connected"
dividends will be subject to U.S. Federal income tax on a net basis at
applicable graduated rates in the same manner as dividends paid to United
States citizens, resident aliens and domestic United States corporations. Any
effectively connected dividends received by a corporate non-U.S. holder may
also be subject to an additional "branch profits tax" at a 30% rate or a lower
rate as may be specified by an applicable income tax treaty.

   Under currently effective United States Treasury regulations (the
"Withholding Regulations"), a non-U.S. holder of common stock who wishes to
claim the benefit of an applicable treaty rate is required to satisfy
applicable certification requirements. In addition, in the case of common stock
held by a foreign partnership, (1) the certification requirements are generally
applied to the partners of the partnership and (2) the partnership is required
to comply with certain certification requirements and to provide information,
including a United States taxpayer identification number. The Withholding
Regulations provide look-through rules for tiered partnerships.

   The foregoing rules apply to distributions to shareholders out of our
current or accumulated earnings and profits. Different withholding rules will
apply to any distributions that we pay in excess of our current or accumulated
earnings and profits.

   A non-U.S. holder of common stock that is eligible for a reduced rate of
United States withholding tax under a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the United States Internal Revenue Service.

Gain On Disposition Of Common Stock

   A non-U.S. holder generally will not be subject to United States Federal
income tax for gain recognized on a sale or other disposition of common stock
unless one of the following conditions is satisfied:

  .  the gain is effectively connected with a trade or business conducted by
     the non-U.S. holder in the United States (and, if an income tax treaty
     applies, is attributable to a permanent establishment maintained in the
     United States by such non-U.S. holder). The non-U.S. holder will, unless
     an applicable treaty provides otherwise, be taxed on its net gain
     derived from the sale or other disposition under regular graduated U.S.
     Federal income tax rates. Effectively connected gains realized by a
     corporate non-U.S. holder may also be subject to an additional "branch
     profits tax" at a 30% rate or a lower rate as may be specified by an
     applicable income tax treaty;

  .  in the case of a non-U.S. holder who is an individual and holds the
     common stock as a capital asset, the holder is present in the United
     States for 183 or more days in the taxable year of the sale or other
     disposition and other conditions exist;

  .  we are or have been a "United States real property holding corporation"
     for U.S. Federal income tax purposes within the shorter of the five-year
     period preceding such disposition or such non-U.S. holder's holding
     period. We believe that we are not currently, and are not likely to
     become, a "United States real property holding corporation" for U.S.
     Federal income tax purposes. If we were to become a "United States real
     propety holding corporation," under currently effective United States
     Treasury regulations, any gain recognized by a non-U.S. holder still
     would not be subject to U.S. Federal income tax if the shares were
     considered to be "regularly traded on an established securities market,"
     and the non-U.S. holder did not hold, directly or indirectly at any time
     during the shorter of the periods described above, more than 5% of our
     common stock; or

  .  the non-U.S. holder is subject to tax under provisions of the Internal
     Revenue Code applicable to U.S. expatriates.

Federal Estate Tax Consequences

   Common stock held by an individual non-U.S. holder at the time of death will
be included in such holder's gross estate for U.S. Federal estate tax purposes,
and may be subject to U.S. Federal estate tax, unless an applicable estate tax
treaty provides otherwise.

                                       63
<PAGE>

Information Reporting and Backup Withholding

   We must report annually to the United States Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld.
This information may also be made available to the tax authorities in the non-
U.S. holder's country of residence. Dividend payments generally will be subject
to additional information reporting requirements and backup withholding at a
rate of 31% unless applicable certification requirements are satisfied. See the
discussion above with respect to the rules applicable to foreign partnerships
under the Withholding Regulations.

   In general, United States information reporting and backup withholding
requirements will generally not apply to a payment made outside the United
States of the proceeds of a sale of common stock to or through an office
outside the United States of a non-United States broker. However, United States
information reporting, but not backup withholding, requirements will apply to a
payment made outside the United States of the proceeds of a sale of common
stock through an office outside the United States of a broker that, for United
States Federal Income tax purposes, is a United States person, a "controlled
foreign corporation," or a foreign person that derives 50% or more of its gross
income for the periods from the conduct of a trade or business in the United
States, or a foreign partnership that at any time during its tax year either is
engaged in the conduct of a trade or business in the United States or has as
partners one or more United States persons that, in the aggregate, hold more
than 50% of the income or capital interest in the partnership, unless the
broker has documentary evidence in its records that the holder or beneficial
owner is a non-United States person or the holder or beneficial owner otherwise
establishes an exemption. Payment of the proceeds of the sale of common stock
to or through a United States office of a broker is subject to both United
States backup withholding and information reporting unless the holder certifies
its non-United States status under penalties of perjury or otherwise
establishes an exemption.

   Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
such non-U.S. holder's Federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue Service.

                                       64
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to conditions contained in an underwriting
agreement, we have agreed to sell to the underwriters named below, for whom
Credit Suisse First Boston Corporation, Banc of America Securities LLC, CIBC
World Markets Corp. and Thomas Weisel Partners LLC are acting as
representatives, the following respective number of shares of common stock:

<TABLE>
<CAPTION>
                                                                        Number
        Underwriter                                                    of Shares
        -----------                                                    ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation.............................
   Banc of America Securities LLC.....................................
   CIBC World Markets Corp............................................
   Thomas Weisel Partners LLC.........................................
                                                                       ---------
     Total............................................................ 8,000,000
                                                                       =========
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,200,000 additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $   per share. The
underwriters and selling group members may allow a discount of $   per share on
sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

   The following table summarizes the compensation and estimated expenses we
will pay:

<TABLE>
<CAPTION>
                                    Per Share                       Total
                          ----------------------------- -----------------------------
                             Without          With         Without          With
                          Over-allotment Over-allotment Over-allotment Over-allotment
                          -------------- -------------- -------------- --------------
<S>                       <C>            <C>            <C>            <C>
Underwriting Discounts
 and
 Commissions paid by
 us.....................       $              $              $              $
Expenses payable by us..       $              $              $              $
</TABLE>

   The representatives have informed us that the underwriters do not expect
discretionary sales to exceed 5% of the shares of common stock being offered.

   We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a

                                       65
<PAGE>


period of 180 days after the date of this prospectus, except for the filing of
a registration statement on Form S-8 under the Securities Act, grants of
employee stock options to purchase shares of common stock under the plans
disclosed in this prospectus and existing on the date of this prospectus,
issuances of shares of common stock pursuant to the exercise of employee stock
options outstanding on the date of this prospectus or issuances of common stock
pursuant to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants, in each case outstanding on the date of
this prospectus.

   Our officers, directors and substantially all of our stockholders and
optionholders have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, enter into a transaction that would have the
same effect, or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of our
common stock, whether any of these transactions are to be settled by delivery
of our common stock or other securities, in cash or otherwise, or publicly
disclose the intention to make any offer, sale, pledge or disposition, or to
enter into any similar transaction, swap, hedge or other arrangement, without,
in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.

   The underwriters have reserved for sale, at the initial public offering
price, up to 400,000 shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.

   We have applied to list our shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "CHOR."

   Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between the
representatives and us. The principal factors to be considered in determining
the public offering price include:

  .  the information set forth in this prospectus and otherwise available to
     the underwriters;

  .  the history and the prospects for the industry in which we will compete;

  .  the ability of our management;

  .  the prospects for our future earnings;

  .  the present state of our development and our current financial
     condition;

  .  the general condition of the securities markets at the time of this
     offering; and

  .  the recent market prices of, and the demand for, publicly traded common
     stock of generally comparable companies.

   We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will
develop and continue after this offering.

   In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.

  .  Stabilizing transactions permit bids to purchase the underlying security
     so long as the stabilizing bids do not exceed a specified maximum.

                                       66
<PAGE>

  .  Over-allotment involves sales by the underwriters of shares in excess of
     the number of shares the underwriters are obligated to purchase, which
     creates a syndicate short position. The short position may be either a
     covered short position or a naked short position. In a covered short
     position, the number of shares over-allotted by the underwriters is not
     greater than the number of shares that they may purchase in the over-
     allotment option. In a naked short position, the number of shares
     involved is greater than the number of shares in the over-allotment
     option. The underwriters may close out any short position by either
     exercising their over-allotment option and/or purchasing shares in the
     open market.

  .  Syndicate covering transactions involve purchases of the common stock in
     the open market after the distribution has been completed in order to
     cover syndicate short positions. In determining the source of shares to
     close out the short position, the underwriters will consider, among
     other things, the price of shares available for purchase in the open
     market as compared to the price at which they may purchase shares
     through the over-allotment option. If the underwriters sell more shares
     than could be covered by the over-allotment option--a naked short
     position--the position can only be closed out by buying shares in the
     open market. A naked short position is more likely to be created if the
     underwriters are concerned that there could be downward pressure on the
     price of the shares in the open market after pricing that could
     adversely affect investors who purchase in the offering.

  .  Penalty bids permit the representatives to reclaim a selling concession
     from a syndicate member when the common stock originally sold by the
     syndicate member is purchased in a stabilizing or syndicate covering
     transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.

   Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker/dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has acted as a lead manager or co-
manager on numerous public offerings of equity securities. Thomas Weisel
Partners LLC does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.

   A prospectus in electronic format will be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations. Credit Suisse First Boston Corporation may
effect an on-line distribution through its affiliate, DLJdirect, Inc., an on-
line broker/dealer, as a selling group member.

                                       67
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Any resale of the common stock in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice before any resale of the common
stock.

Representations of Purchasers

   By purchasing common stock in Canada and accepting a purchase confirmation,
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:

  .  the purchaser is entitled under applicable provincial securities laws to
     purchase the common stock without the benefit of a prospectus qualified
     under those securities laws,

  .  where required by law, the purchaser is purchasing as principal and not
     as agent, and

  .  the purchaser has reviewed the text above under Resale Restrictions.

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

   Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchasers under relevant Canadian legislation.

                                       68
<PAGE>

                                 LEGAL MATTERS

   The validity of the common stock being offered will be passed upon for us by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Austin, Texas
and for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Austin, Texas. As of the date of this prospectus, a partnership
affiliated with Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
beneficially owned an aggregate of 210,197 shares of our stock.

                                    EXPERTS

   Ernst & Young LLP, independent auditors, have audited our financial
statements at September 30, 2000 and 1999, and for each of the three years in
the period ended September 30, 2000, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
being offered. This prospectus does not contain all of the information
presented in the registration statement and the exhibits to the registration
statement. For further information with respect to us and the common stock we
are offering, reference is made to the registration statement and the exhibits
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to may be only summaries of these documents. The exhibits to this
registration statement should be referenced for the complete contents of these
contracts and documents. Each statement is qualified in all respects by
reference to the exhibit. The registration statement, including the exhibits,
may be inspected without charge at the public reference facilities maintained
by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part may be obtained from this office after payment of
fees prescribed by the Commission. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the site is http://www.sec.gov.

                                       69
<PAGE>

                            CHORUM TECHNOLOGIES INC.

                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Chorum Technologies Inc.

   We have audited the accompanying consolidated balance sheets of Chorum
Technologies Inc. and subsidiaries as of September 30, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Chorum Technologies Inc. and subsidiaries at September 30, 1999 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States.

                                          /s/ Ernst & Young LLP

Dallas, Texas
October 20, 2000

                                      F-2
<PAGE>

                            CHORUM TECHNOLOGIES INC.

                        CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  Unaudited Pro
                                                                      Forma
                                                                  Stockholders'
                                            September 30,            Equity
                                      --------------------------  September 30,
                                          1999          2000          2000
                                      ------------  ------------  -------------
<S>                                   <C>           <C>           <C>
               ASSETS
Current assets:
  Cash and cash equivalents.........  $ 12,344,674  $114,585,593
  Contract receivables..............       303,341           --
  Accounts receivable, net of
   allowance for returns and
   doubtful accounts of $8,000 and
   $220,000 at
   September 30, 1999 and 2000......       322,821     1,954,680
  Inventories.......................           --      3,428,964
  Prepaid expenses and other current
   assets...........................        22,576       281,613
                                      ------------  ------------
    Total current assets............    12,993,412   120,250,850
Property and equipment, net.........     4,221,661    16,845,917
Other...............................           --         27,741
                                      ------------  ------------
    Total assets....................  $ 17,215,073  $137,124,508
                                      ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................  $    997,924  $  4,085,687
  Accrued expenses..................       700,774     4,802,179
  Current portion of capital lease
   obligations......................       897,384     3,319,089
  Current portion of note payable...       170,713       192,976
                                      ------------  ------------
    Total current liabilities.......     2,766,795    12,399,931
Capital lease obligations...........     2,649,737     7,580,619
Note payable........................       561,137       368,161
Commitments and contingencies
Stockholders' equity:
  Series A through E convertible
   preferred stock, par value
   $.0001:
   Authorized shares--54,882,769
   Issued shares--39,203,433 and
    53,627,904 at
    September 30, 1999 and 2000
   Outstanding shares--39,203,433
    and 53,076,127 at September 30,
    1999 and 2000
   Liquidation value--$25,935,694
    and $160,240,310 at September
    30, 1999 and 2000...............    24,502,689   158,780,667           --
  Common stock, par value $.0001:
   Authorized shares--100,000,000
   Issued shares--5,330,619 and
    8,326,120 at
    September 30, 1999 and 2000
   Outstanding shares--5,214,994 and
    7,773,761 at
    September 30, 1999 and 2000
   Issued shares, pro forma--
    61,954,024 at September 30,
    2000............................           534           833         6,196
Additional paid-in capital
 (deficit)..........................      (110,719)   64,983,709   223,759,013
Deferred compensation...............           --    (49,997,756)  (49,997,756)
Note receivable from stockholder....       (85,201)      (89,539)      (89,539)
Accumulated deficit.................   (13,066,618)  (56,832,004)  (56,832,004)
Treasury stock, at cost, 65,625
 shares of common stock at September
 30, 1999, 552,359 shares of common
 stock and 551,777 shares of Series
 A convertible preferred stock at
 September 30, 2000.................        (3,281)      (70,113)      (70,113)
                                      ------------  ------------  ------------
    Total stockholders' equity......    11,237,404   116,775,797   116,775,797
                                      ------------  ------------  ------------
    Total liabilities and
     stockholders' equity...........  $ 17,215,073  $137,124,508  $137,124,508
                                      ============  ============  ============
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                            CHORUM TECHNOLOGIES INC.

                   CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                          Fiscal Years Ended September 30,
                                        ---------------------------------------
                                           1998          1999          2000
                                        -----------  ------------  ------------
<S>                                     <C>          <C>           <C>
Revenues..............................  $       --   $        --   $  3,311,584
Cost of revenues......................          --            --     12,233,528
Stock compensation--cost of revenues..          --            --      1,703,350
                                        -----------  ------------  ------------
    Total cost of revenues............          --            --     13,936,878
                                        -----------  ------------  ------------
Gross profit (loss)...................          --            --    (10,625,294)
Operating expenses:
  Research and development............    1,327,161     7,998,994    16,569,423
  Selling, general and
   administrative.....................    1,442,458     2,915,401     7,579,224
  Stock compensation expense:
   Research and development...........          --            --      3,806,445
   Selling, general and
    administrative....................          --            --      6,863,078
                                        -----------  ------------  ------------
    Total operating expenses..........    2,769,619    10,914,395    34,818,170
                                        -----------  ------------  ------------
Loss from operations..................   (2,769,619)  (10,914,395)  (45,443,464)
Other income (expense):
  Interest income.....................      128,262       774,250     2,502,144
  Interest expense....................      (31,071)     (217,171)     (824,066)
                                        -----------  ------------  ------------
    Total other income (expense)......       97,191       557,079     1,678,078
                                        -----------  ------------  ------------
    Net loss..........................  $(2,672,428) $(10,357,316) $(43,765,386)
                                        ===========  ============  ============
Basic and diluted net loss per share..  $     (2.77) $      (4.93) $     (13.16)
                                        ===========  ============  ============
Weighted average shares used to
 compute basic and diluted net loss
 per share............................      965,827     2,101,693     3,324,638
                                        ===========  ============  ============
Pro forma basic and diluted net loss
 per share (unaudited)................                             $      (0.86)
                                                                   ============
Weighted average shares used to
 compute pro forma basic and diluted
 net loss per share (unaudited).......                               50,994,328
                                                                   ============
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                           CHORUM TECHNOLOGIES INC.

             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                            Additional
                     Common Stock       Preferred Stock       Paid-In
                   ---------------- -----------------------   Capital    Accumulated     Deferred     Note from
                    Shares   Amount   Shares      Amount     (Deficit)     Deficit     Compensation  Stockholders
                   --------- ------ ---------- ------------ -----------  ------------  ------------  ------------
<S>                <C>       <C>    <C>        <C>          <C>          <C>           <C>           <C>
Balance at
October 1, 1997..    767,439  $ 77  11,160,000 $    530,109 $  (534,904) $    (36,874) $        --     $(11,000)
 Repayments of
 notes from
 stockholders....        --    --          --           --          --            --            --       11,000
 Exercise of
 stock options
 for cash........    381,000    38         --           --       12,940           --            --          --
 Issuance of
 Series B-1
 preferred
 stock...........        --    --    6,212,259    2,025,753         --            --            --          --
 Issuance of
 Series B-2
 preferred
 stock...........        --    --    9,732,510    4,856,254         --            --            --          --
 Issuance of
 detachable
 warrants........        --    --          --           --       38,446           --            --          --
 Issuance of
 stock options to
 non-employees...        --    --          --           --        8,803           --            --          --
 Net loss........        --    --          --           --          --     (2,672,428)          --          --
                   ---------  ----  ---------- ------------ -----------  ------------  ------------    --------
Balance at
September 30,
1998.............  1,148,439  $115  27,104,769 $  7,412,116 $  (474,715) $ (2,709,302) $        --     $    --
 Exercise of
 stock options
 for note........  2,438,430   244         --           --       81,037           --            --      (81,200)
 Interest earned
 on note from
 stockholder.....        --    --          --           --          --            --            --       (4,001)
 Exercise of
 stock options
 for cash........  1,743,750   175         --           --      121,619           --            --          --
 Purchase of
 treasury stock..        --    --          --           --          --            --            --          --
 Issuance of
 Series C
 preferred
 stock...........        --    --   12,098,664   17,090,573         --            --            --          --
 Issuance of
 detachable
 warrants........        --    --          --           --      160,590           --            --          --
 Issuance of
 stock options to
 non-employees...        --    --          --           --          750           --            --          --
 Net loss........        --    --          --           --          --    (10,357,316)          --          --
                   ---------  ----  ---------- ------------ -----------  ------------  ------------    --------
Balance at
September 30,
1999.............  5,330,619  $534  39,203,433 $ 24,502,689 $  (110,719) $(13,066,618) $        --     $(85,201)
 Interest earned
 on note from
 stockholder.....        --    --          --           --          --            --            --       (4,338)
 Exercise of
 stock options
 for cash........  2,995,501   299         --           --    1,347,953           --            --          --
 Purchase of
 treasury stock..        --    --          --           --          --            --            --          --
 Issuance of
 Series D
 preferred
 stock...........        --    --    9,093,843   42,377,952         --            --            --          --
 Issuance of
 detachable
 warrants........        --    --          --           --    1,375,846           --            --          --
 Issuance of
 Series E
 preferred
 stock...........        --    --    5,330,628   91,900,026         --            --            --          --
 Issuance of
 stock options to
 non-employees...        --    --          --           --      395,056           --            --          --
 Deferred
 compensation
 related to stock
 options.........        --    --          --           --   61,975,573           --    (61,975,573)        --
 Amortization of
 deferred
 compensation....        --    --          --           --          --            --     11,977,817         --
 Net loss........        --    --          --           --          --    (43,765,386)          --          --
                   ---------  ----  ---------- ------------ -----------  ------------  ------------    --------
Balance at
September 30,
2000.............  8,326,120  $833  53,627,904 $158,780,667 $64,983,709  $(56,832,004) $(49,997,756)   $(89,539)
                   =========  ====  ========== ============ ===========  ============  ============    ========
<CAPTION>
                     Treasury Stock
                   -------------------
                    Shares    Amount      Total
                   --------- --------- -------------
<S>                <C>       <C>       <C>
Balance at
October 1, 1997..        --  $    --   $    (52,592)
 Repayments of
 notes from
 stockholders....        --       --         11,000
 Exercise of
 stock options
 for cash........        --       --         12,978
 Issuance of
 Series B-1
 preferred
 stock...........        --       --      2,025,753
 Issuance of
 Series B-2
 preferred
 stock...........        --       --      4,856,254
 Issuance of
 detachable
 warrants........        --       --         38,446
 Issuance of
 stock options to
 non-employees...        --       --          8,803
 Net loss........        --       --     (2,672,428)
                   --------- --------- -------------
Balance at
September 30,
1998.............        --  $    --   $  4,228,214
 Exercise of
 stock options
 for note........        --       --             81
 Interest earned
 on note from
 stockholder.....        --       --         (4,001)
 Exercise of
 stock options
 for cash........        --       --        121,794
 Purchase of
 treasury stock..     65,625   (3,281)       (3,281)
 Issuance of
 Series C
 preferred
 stock...........        --       --     17,090,573
 Issuance of
 detachable
 warrants........        --       --        160,590
 Issuance of
 stock options to
 non-employees...        --       --            750
 Net loss........        --       --    (10,357,316)
                   --------- --------- -------------
Balance at
September 30,
1999.............     65,625 $ (3,281) $ 11,237,404
 Interest earned
 on note from
 stockholder.....        --       --         (4,338)
 Exercise of
 stock options
 for cash........        --       --      1,348,252
 Purchase of
 treasury stock..  1,038,511  (66,832)      (66,832)
 Issuance of
 Series D
 preferred
 stock...........        --       --     42,377,952
 Issuance of
 detachable
 warrants........        --       --      1,375,846
 Issuance of
 Series E
 preferred
 stock...........        --       --     91,900,026
 Issuance of
 stock options to
 non-employees...        --       --        395,056
 Deferred
 compensation
 related to stock
 options.........        --       --            --
 Amortization of
 deferred
 compensation....        --       --     11,977,817
 Net loss........        --       --    (43,765,386)
                   --------- --------- -------------
Balance at
September 30,
2000.............  1,104,136 $(70,113) $116,775,797
                   ========= ========= =============
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                            CHORUM TECHNOLOGIES INC.

                   CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                         Fiscal Years Ended September 30,
                                       ---------------------------------------
                                          1998          1999          2000
                                       -----------  ------------  ------------
<S>                                    <C>          <C>           <C>
Operating Activities
Net loss.............................  $(2,672,428) $(10,357,316) $(43,765,386)
Adjustments to reconcile net loss to
 net cash used in operating
 activities:
  Non-cash charges from equity
   transactions......................        8,803           750       395,056
  Loss on disposal of equipment......        8,451         8,034        79,697
  Interest income on note receivable
   from stockholder..................          --         (4,001)       (4,338)
  Depreciation and amortization......      183,186     1,142,642     2,772,458
  Amortization of discount on capital
   lease obligations.................          --         63,555       298,589
  Amortization of deferred
   compensation......................          --            --     11,977,817
  Changes in assets and liabilities:
    Accounts receivable..............          --       (322,821)   (1,631,859)
    Contract receivables.............     (109,938)     (112,320)      303,341
    Inventory........................          --            --     (3,428,964)
    Prepaid expenses and other
     assets..........................      (43,859)       21,283      (286,778)
    Accounts payable and accrued
     expenses........................      258,408     1,327,044     7,189,168
                                       -----------  ------------  ------------
Net cash used in operating
 activities..........................   (2,367,377)   (8,233,150)  (26,101,199)
Investing Activities
Proceeds from sale of equipment......          --          8,650           --
Additions to property and equipment..     (901,800)     (448,215)   (5,341,641)
                                       -----------  ------------  ------------
Net cash used in investing
 activities..........................     (901,800)     (439,565)   (5,341,641)
Financing Activities
Repayment of note payable to
 stockholders........................      (37,000)          --            --
Proceeds from note payable...........    1,445,165           --            --
Repayment of note payable............     (574,482)     (138,834)     (170,713)
Repayment of capital lease
 obligations.........................          --       (277,813)   (1,704,926)
Net proceeds from issuance of
 preferred stock.....................    6,583,022    17,090,573   134,277,978
Net proceeds from issuance of common
 stock...............................       12,978       121,875     1,348,252
Payment of notes receivable from
 stockholders........................       11,000           --            --
Payments for treasury stock..........          --         (3,281)      (66,832)
                                       -----------  ------------  ------------
Net cash provided by financing
 activities..........................    7,440,683    16,792,520   133,683,759
                                       -----------  ------------  ------------
Net increase in cash and cash
 equivalents.........................    4,171,506     8,119,805   102,240,919
Cash and cash equivalents at
 beginning of period.................       53,363     4,224,869    12,344,674
                                       -----------  ------------  ------------
Cash and cash equivalents at end of
 period..............................  $ 4,224,869  $ 12,344,674  $114,585,593
                                       ===========  ============  ============
Supplemental disclosure of cash flow
 information:
  Cash paid during the period for
   interest..........................  $    36,966  $    153,616  $    519,348
                                       ===========  ============  ============
Supplemental disclosure of non-cash
 financing activities:
  Warrants issued for capital lease
   financing.........................  $    38,446  $    160,590  $  1,375,846
                                       ===========  ============  ============
  Purchases of property and equipment
   under capital leases..............  $       --   $  3,960,415  $ 10,134,770
                                       ===========  ============  ============
  Note receivable from stockholder...  $       --   $     81,200  $        --
                                       ===========  ============  ============
</TABLE>

                             See accompanying notes

                                      F-6
<PAGE>

                            CHORUM TECHNOLOGIES INC.

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

 The Company

   Chorum Technologies Inc. (the Company), a Delaware corporation, was founded
in January 1996. The Company designs, manufactures and markets high performance
fiber optic products for dynamic optical networks and distributes these
products both domestically and internationally. During 2000, the Company moved
from a development-stage company to a fully operational company with revenues
from the sale of optical communication products. The Company currently operates
in a single industry segment.

   The Company was incorporated as MacroVision Communications, Inc., on
September 10, 1997, and later changed its name to Chorum Technologies Inc. The
Company was formed pursuant to the transfer of all the membership interests of
MacroVision Communications, LLC (the LLC), which had been formed on January 1,
1996, to the Company in exchange for company stock, followed by a liquidation
of the LLC on September 18, 1997. The formation resulted in the ownership by
the Company of all the assets and liabilities previously owned by the LLC.

 Basis of Presentation

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated. In 1999, the Company changed
its fiscal year end from September 30 to the fifty-two or fifty-three week
period ending on the Friday nearest to September 30. For convenience, the
accompanying financial statements have been shown as ending on the latest day
of the calendar month.

 Cash and Cash Equivalents

   Cash equivalents consist primarily of highly liquid money market fund
investments which have original maturities of 90 days or less. The carrying
amount of cash and cash equivalents approximates fair value. The money market
fund investments are comprised of the following types of securities:
certificates of deposit, short-term bank notes, time deposits, and commercial
paper from financial institutions.

 Concentration of Credit Risk

   Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of accounts receivable. Products are sold to
customers involved in the manufacture of telecommunication and data
communication technologies and products. Ongoing credit evaluations are
performed of customers and generally collateral is not required. Reserves are
provided for potential credit losses, however, such losses have not been
significant and have been within management's expectations.

   One customer accounted for all revenues for the fiscal year ended September
30, 2000 and as of September 30, 2000 all accounts receivable were from three
customers.

 Inventories

   Inventories are stated at the lower of cost or market on a first-in, first-
out basis. Inventories consist of the following as of September 30, 2000:

<TABLE>
<CAPTION>
                                                                   September 30,
                                                                       2000
                                                                   -------------
     <S>                                                           <C>
     Raw materials................................................  $1,070,644
     Work in process..............................................   1,903,092
     Finished goods...............................................     455,228
                                                                    ----------
       Total......................................................  $3,428,964
                                                                    ==========
</TABLE>


                                      F-7
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Property and Equipment

   Property and equipment are recorded at cost and are depreciated using the
straight-line method over average useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser
of the estimated useful life of the asset or the lease term.

   Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.

 Revenue Recognition

   The Company recognizes revenue when the product has been shipped and there
are no uncertainties with respect to customer acceptance. The Company warrants
its products against defects in materials and workmanship for one year. When
revenue is recognized, an allowance is provided for the estimated cost of
warranty obligations to repair products and for the estimated return of
defective products.

 Unaudited Pro Forma Stockholders' Equity

   If the offering contemplated by the Company is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 53,076,127 shares of common stock based on the
shares of convertible preferred stock outstanding at September 30, 2000. The
unaudited pro forma stockholders' equity reflects such conversion.

 Research and Development

   Research and development costs are expensed when incurred. The Company has
been awarded contracts from agencies of the United States government whereby
the Company has obligations to provide contractual research and development
services. These contracts commit the Company to provide a prescribed level of
effort, in the form of technical data, subject to contract guidelines and
specifications, within certain time periods. Amounts received under the
contractual terms of these arrangements of $712,953, $1,151,345 and $775,356
for the fiscal years ended September 30, 1998, 1999 and 2000, respectively have
been reflected as a reduction of research and development expense in the
accompanying consolidated statements of operations.

 Advertising Costs

   Advertising costs are included in selling, general and administrative
expense. These expenses relate primarily to promotions, trade shows, direct
mailings, and various media costs, and are expensed as incurred. Advertising
costs were $7,822, $305,515 and $851,619 for the fiscal years ended September
30, 1998, 1999 and 2000, respectively.

 Stock-Based Compensation

   Stock-based awards to employees are accounted for under the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123) has been adopted.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

                                      F-8
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Comprehensive Loss

   Comprehensive net loss was the same as net loss for the fiscal years ended
September 30, 1998, 1999 and 2000.

 Income Taxes

   Income taxes are presented under the asset and liability method of
accounting for income taxes whereby a deferred tax asset or liability is
recognized for estimated future tax effects attributable to temporary
differences and carryforwards. The measurement of deferred income tax assets is
adjusted by a valuation allowance, if necessary, to recognize future tax
benefit only to the extent, based on available evidence, it is more likely than
not such benefit will be realized.

 Recent Accounting Pronouncements

   In December 1999, the Securities and Exchange Commission issued SAB 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Our current revenue recognition practices comply with SAB
101.

   In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation--and interpretation of APB Opinion 25." Interpretation No. 44 is
effective July 1, 2000. Interpretation No. 44 clarifies the application of APB
Opinion 25 for certain matters, specifically (a) the definition of an employee
for purposes of applying APB 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. We adopted interpretation No. 44, which did not have a
material impact on our financial position or results of operations.

2. Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                            September 30,
                                                       ------------------------
                                                          1999         2000
                                                       -----------  -----------
     <S>                                               <C>          <C>
     Equipment........................................ $ 4,858,939  $17,792,126
     Furniture and fixtures...........................     290,840    1,171,032
     Leasehold improvements...........................     447,031    1,465,265
                                                       -----------  -----------
                                                         5,596,810   20,428,423
     Less accumulated depreciation....................  (1,375,149)  (3,582,506)
                                                       -----------  -----------
                                                       $ 4,221,661  $16,845,917
                                                       ===========  ===========
</TABLE>

   Depreciation expense and capital lease related amortization expense totaled
$183,186, $1,142,642 and $2,772,458 for the fiscal years ended September 30,
1998, 1999 and 2000, respectively. The Company entered into capital leases for
equipment of approximately $3,960,000 and $10,135,000 during fiscal years 1999
and 2000, respectively.

                                      F-9
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3. Accrued Expenses

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                               September 30,
                                                            -------------------
                                                              1999      2000
                                                            -------- ----------
     <S>                                                    <C>      <C>
     Compensation and payroll taxes........................ $499,210 $1,860,062
     Deferred revenue......................................      --   1,249,971
     Employee benefits.....................................   72,362    327,016
     Franchise, property and use taxes.....................  116,202    257,679
     Other.................................................   13,000  1,107,451
                                                            -------- ----------
                                                            $700,774 $4,802,179
                                                            ======== ==========
</TABLE>

4. Related Party Transaction

   On October 15, 1998, an officer exercised an option to purchase 2,438,430
shares of common stock in exchange for a full-recourse promissory note payable
for interest and principal totaling $81,200. The note bears interest at 5.12%,
is also collateralized by a pledge of the Company's stock, and matures,
together with all accrued interest on the note, on October 15, 2005. The
balance due under this note was $85,201 and $89,539 at September 30, 1999 and
2000, respectively.

5. Note Payable

   A note payable of $731,850 and $561,137 is outstanding at September 30, 1999
and 2000, respectively. The note bears interest at 13.04% and is collateralized
by certain equipment, software, and leasehold improvements. The note is payable
in monthly installments of principal and interest of $20,955 plus an additional
payment of $130,602 due on October 1, 2002. Future maturities under this note
payable are as follows: 2001--$192,976; 2002--$218,143 and 2003--$150,018.

6. Employee Benefit Plans

   On February 1, 1999, the Company began a defined contribution 401(k) plan.
The 401(k) plan covers all full-time employees who are at least 18 years of age
and have completed three months of service. Participants may contribute up to
15% of pre-tax compensation, subject to certain limitations. Company
contributions are discretionary and no contributions have been made to date.

   During 1998, the Company maintained a SIMPLE IRA defined contribution plan
under section 408(p) of the Internal Revenue Code of 1996 (the Plan). The Plan
covered all employees who were reasonably expected to receive at least $5,000
of compensation for a given calendar year. Plan participants could make pre-tax
contributions to the Plan up to $6,000 for a given calendar year, subject to
future cost-of-living increases. The Company was required to contribute a match
for all employee contributions to the Plan, subject to an annual cap of 3% of
each participant's annual compensation for a calendar year. The Plan was
terminated December 31, 1998. Company contributions to the Plan were $22,112
and $20,853 for the fiscal years ended September 30, 1998 and 1999,
respectively.

                                      F-10
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7. Income Taxes

   The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to loss before
provision for income taxes is explained below:

<TABLE>
<CAPTION>
                                          Fiscal Years Ended September 30,
                                         ------------------------------------
                                           1998        1999          2000
                                         ---------  -----------  ------------
   <S>                                   <C>        <C>          <C>
   Tax (benefit) at federal statutory
    rate...............................  $(935,350) $(3,625,061) $(15,317,885)
   State tax benefit (net of federal)..        --           --       (906,901)
   Research tax credits................    (62,706)    (363,523)     (800,016)
   Nondeductible equity-based
    compensation.......................        --           --      4,466,078
   Other...............................      1,705       (2,713)     (267,212)
   Increase in valuation allowance.....    996,351    3,991,297    12,825,936
                                         ---------  -----------  ------------
     Total provision...................  $     --   $       --   $        --
                                         =========  ===========  ============
</TABLE>

   Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                            September 30,
                                                        -----------------------
                                                           1999        2000
                                                        ----------  -----------
   <S>                                                  <C>         <C>
   Deferred tax assets
     Net operating loss carryforwards.................. $4,227,158  $14,780,519
     Depreciation......................................    237,395      474,486
     Research and development carryforwards............    426,229    1,226,245
     Accrued expenses..................................    227,008    1,380,114
     Other.............................................      3,224       85,586
                                                        ----------  -----------
   Deferred tax assets.................................  5,121,014   17,946,950
     Deferred tax assets valuation allowance........... (5,121,014) (17,946,950)
                                                        ----------  -----------
   Net deferred tax assets............................. $      --   $       --
                                                        ==========  ===========
</TABLE>

   The valuation allowance increased by $3,991,297 and $12,825,936 during the
fiscal years ended September 30, 1999 and 2000, respectively.

   Deferred tax assets are recognized if realization of such assets is more
likely than not. Based on the weight of available evidence, which included the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.

   As of September 30, 2000, the Company had federal and state net operating
loss carryforwards of approximately $38,968,000. As of September 30, 2000, the
Company also had federal and state research and development tax credit
carryforwards of approximately $1,226,000. The net operating loss and tax
credit carryforwards will expire at various dates beginning in fiscal 2017
through 2020, if not utilized.

   Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitations may result in the expiration of net operating losses and
tax credit carryforwards before utilization.

                                      F-11
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. Stockholders' Equity

 Stock Split

   In January 2000, the Board of Directors and stockholders approved a three-
for-one stock split of the common and preferred stock. All preferred stock,
common stock, common stock equivalent shares, and per share amounts have been
adjusted retroactively to give effect to the stock split.

 Preferred Stock

   The Company has six series of preferred stock outstanding at September 30,
2000. Series A Preferred Stock (Series A), Series B-1 Preferred Stock (Series
B-1), Series B-2 Preferred Stock (Series B-2), Series C Preferred Stock (Series
C), Series D Preferred Stock (Series D) and Series E Preferred Stock (Series E)
were authorized, issued and outstanding at September 30, 2000. Collectively,
Series A, Series B-1, Series B-2, Series C, Series D and Series E are referred
to as the "Preferred Stock." Preferred stock consists of the following:

<TABLE>
<CAPTION>
                                                          Shares
                                             ---------------------------------
     Series    Date of Issuance  Share Price Authorized   Issued   Outstanding
     ------    ----------------  ----------- ----------   ------   -----------
     <S>      <C>                <C>         <C>        <C>        <C>
     A        September 19, 1997  $ 0.1666   11,160,000 11,160,000 10,608,223
     B-1      October 9, 1997       0.3333    6,212,259  6,212,259  6,212,259
     B-2      June 3, 1998          0.5000    9,810,510  9,732,510  9,732,510
     C        November 4, 1998      1.4166   12,600,000 12,098,664 12,098,664
     D        November 10, 1999     4.6633    9,600,000  9,093,843  9,093,843
     E        September 5, 2000    17.2400    5,500,000  5,330,628  5,330,628
                                             ---------- ---------- ----------
                                             54,882,769 53,627,904 53,076,127
                                             ========== ========== ==========
</TABLE>

   Upon conversion of the LLC interest into the Company on September 19, 1997
(See Note 1), Series A was issued to the equity holders of the LLC for its
$530,109 equity interest. This equity interest was converted to 11,160,000
shares of Series A, which has liquidation value of $0.1666 per share.

   The shares of preferred stock are convertible at the option of the holder
but are subject to automatic conversion upon the closing of a firm underwritten
public offering commitment pursuant to a registration statement on Form S-1 or
Form SB-2 filed under the Securities Act of 1933, as amended, in which the
aggregate offering proceeds of such securities equals at least $20 million or
upon the affirmative vote of the holders of at least 51% of the outstanding
shares of the preferred stock, excluding outstanding Series A. The conversion
rate is initially one share of common stock for each share of preferred stock,
but is subject to adjustment as set forth in the Certificate of Incorporation.
Holders of preferred stock have voting rights equal to the number of common
shares they would have upon conversion of the preferred stock. In addition,
holders of preferred stock have certain additional voting rights as set forth
in the Certificate of Incorporation.

   Holders of Series B-1, B-2, C, D and E are entitled to receive dividends
when and if declared by the Board of Directors, prior to and in preference to
any declaration or payment of any dividend on the Series A or common stock of
the Company, at a per share rate of $0.0333, $0.05, $0.1417, $0.4663 and
$1.724, respectively, per annum, or, if greater, an amount equal to that paid
on any other shares of the Company. After the dividend has been paid on Series
B-1, B-2, C, D, and E, holders of Series A are entitled to receive dividends
prior to and in preference to any declaration or payment of any dividend on the
common stock at the rate of $0.0167 per share per annum, or, if greater, an
amount equal to that paid on any other shares of the Company. Such dividends
shall not be cumulative. As of September 30, 2000, the Company had declared no
dividends on either its common stock or preferred stock.

                                      F-12
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Holders of Series B-1, B-2, C, D and E are entitled to the following
liquidation preferences: first, amounts paid for preferred stock ($0.3333 per
share, $0.50 per share, $1.4167 per share, $4.663 per share and $17.24 per
share, respectively), plus declared but unpaid dividends. Thereafter, holders
of Series A shall receive $0.1666 for each such outstanding share, plus
declared but unpaid dividends on each such share. Any remaining proceeds will
be distributed to the holders of common stock on a pro rata basis.

 Warrants

   In connection with certain equipment financing facilities (See Note 10), the
Company issued warrants to purchase preferred shares.

   In September 1998, a warrant was issued to purchase 75,385 shares of Series
B-2 at a price of $1.16 per share. The warrant is exercisable at the earlier of
seven years from the date of grant or three years from the effective date of
the Company's initial public offering. The fair value of the warrant of
approximately $38,000 was determined using the Black-Scholes method and was
recorded as a credit to paid-in capital and is being recognized as additional
interest expense over the term of the respective facility.

   In January 1999, a warrant was issued to purchase 176,472 shares of Series C
at a price of $1.42 per share. The warrant is exercisable at the earlier of
seven years from the date of grant or three years from the effective date of
the Company's initial public offering. The fair value of the warrant of
approximately $161,000 was determined using the Black-Scholes method and was
recorded as a credit to paid-in capital and is being recognized as additional
interest expense over the term of the respective facility.

   In March 2000, a warrant was issued to purchase 77,088 shares of Series D at
a price of $4.67 per share. The warrant is exercisable at the earlier of seven
years from the date of grant or three years from the effective date of the
Company's initial public offering. The fair value of the warrant of
approximately $514,000 was determined using the Black-Scholes method and was
recorded as a credit to paid-in capital and is being recognized as additional
interest expense over the term of the respective facility.

   In connection with the Company's $10,000,000 lease line of credit that the
Company obtained in June 2000, a warrant was issued to purchase 85,653 shares
of Series D at a price of $4.67 per share. The warrant is exercisable at any
time from the date of grant through the expiration date of the warrant of June
2007. The fair value of the warrant of approximately $862,000 was determined
using the Black-Scholes method and was recorded as a credit to paid-in capital
and is being recognized as additional interest expense over the term of the
respective facility.

 Stock Options

   In 1997, the Board of Directors approved the adoption of a stock option
plan, as amended (the 1997 Plan), which authorized the grant of options to
purchase shares of common stock. The 1997 Plan provides for the granting of
options and issuance of shares to eligible employees, consultants, and members
of the Board of Directors to purchase common stock at an exercise price of not
less than the par value, and, in the case of incentive options, not less than
100% of the fair market value per share on the date of grant as determined by
the Board of Directors. Fair market value of the Company's common stock, in
absence of trading on a national or regional exchange, is determined by the
Board of Directors. All employees, consultants, and Board members are eligible
to participate in the 1997 Plan. The 1997 Plan is administered by the Board of
Directors, who determine the number of shares for which options will be
granted, the effective dates of the grants, the option price, and the vesting
schedules. All options under the 1997 Plan have a ten-year term and typically
vest over four years from the effective date of grant. Unless otherwise
established, options granted pursuant to the 1997 Plan vest 25% upon the
completion of 12 months of service and at a rate of 1/48 of the shares granted
each month thereafter. Certain option grants became exercisable upon grant,
upon achievement of certain performance objectives, or within 30 days after
grant pursuant to agreements with the employees.

                                      F-13
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Options granted under the 1997 Plan are immediately exercisable, subject to
a right of repurchase by the Company at the original exercise price for all
unvested shares. Once the optionee vests in the shares underlying the option
and until certain events occur, the Company has a right of first refusal to
repurchase these shares after the individual has received a bona fide third-
party offer with respect to those vested shares.

   In fiscal 2000, 551,777 shares of Series A were transferred to the Company
by an officer and principal stockholder and a corresponding number of option
grants to purchase shares of common stock were issued to certain employees. The
Company recorded the transfer of the shares of Series A as treasury stock. In
September 2000, a total of 551,777 options were granted under the 1997 Plan to
certain employees at an exercise price of $3.68 and will vest at the end of one
year.

   The following table summarizes the activity under the 1997 Plan since
inception through September 30, 2000.

<TABLE>
<CAPTION>
                                                                      Weighted
                                            Options     Options       Average
                                           Authorized Outstanding  Exercise Price
                                           ---------- -----------  --------------
   <S>                                     <C>        <C>          <C>
   At October 1, 1997.....................        --         --        $ --
     Authorized...........................  6,930,000        --          --
     Granted..............................        --   4,207,530        0.03
     Exercised............................        --    (381,000)       0.04
     Canceled.............................        --     (46,200)       0.04
                                           ---------- ----------       -----
   At September 30, 1998..................  6,930,000  3,780,330       $0.03
     Granted..............................        --   1,771,794        0.14
     Exercised............................        --  (4,182,180)       0.05
     Canceled.............................        --     (62,094)       0.12
                                           ---------- ----------       -----
   At September 30, 1999..................  6,930,000  1,307,850       $0.13
     Authorized...........................  7,778,706        --          --
     Granted..............................        --   7,352,891        1.45
     Exercised............................        --  (2,995,501)       0.45
     Canceled.............................        --    (403,375)       0.36
                                           ---------- ----------       -----
   At September 30, 2000.................. 14,708,706  5,261,865       $1.51
                                           ========== ==========       =====
</TABLE>

   At September 30, 2000, 2,440,519 shares were available for issuance under
the 1997 Plan.

   The following table summarizes the stock options outstanding as of September
30, 2000:

<TABLE>
<CAPTION>
              Options Outstanding                         Options Exercisable
     --------------------------------------------      --------------------------------
                                      Weighted
                                       Average
                                      Remaining
                                     Contractual         Number            Number
     Exercise        Number             Life           Exercisable       Exercisable
      Price        Outstanding         (Years)          (Vested)         (Unvested)
     --------      -----------       -----------       -----------       -----------
     <S>           <C>               <C>               <C>               <C>
      $0.14           851,775           9.02             38,026             813,749
      $0.47         1,304,550           9.40             20,832           1,283,718
      $0.93            49,000           9.53                --               49,000
      $1.31           593,563           9.69                --              593,563
      $1.85           981,750           9.88                --              981,750
      $3.68         1,481,227           9.98                --            1,481,227
                    ---------           ----             ------           ---------
                    5,261,865           9.56             58,858           5,203,007
                    =========           ====             ======           =========
</TABLE>


                                      F-14
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   At September 30, 2000, all options outstanding were exercisable, but only
58,858 were vested. A total of 4,330,497 shares of the common stock outstanding
were acquired and have not vested as of September 30, 2000. Should the
employees who hold these shares leave employment before the shares are
completely vested, the Company may reacquire the unvested shares at the same
price at which they were acquired. In fiscal years 1999 and 2000, the Company
acquired 65,625 shares and 486,734 shares, respectively, related to this
provision.

   On October 11, 2000, the Board of Directors approved the 2000 Equity
Incentive Plan (2000 Plan), the Employee Stock Purchase Plan (Employee Plan)
and the 2000 Director Option Plan (2000 Director Plan). No grants have been
made under these plans.

   The 2000 Plan provides for the granting of options and issuance of shares to
employees, consultants, and non-employee members of the Board of Directors.
Stock options granted under the 2000 Plan may be either options that are
intended to qualify for treatment as incentive stock options under Section 422
of the Internal Revenue Code or options that do not qualify (non-qualified
stock options). The exercise price for incentive stock options granted under
the 2000 Plan may not be less than 100% of the fair market value of the common
stock on the date of grant. The exercise price for non-statutory options
granted under the 2000 Plan may not be less than 85% of the fair market value
of our common stock on the option date of grant. A total of 3,900,000 shares of
common stock have been reserved for issuance under the 2000 Plan. As of
September 30, of each year, starting in 2001 and continuing through 2006, the
number of shares reserved for issuance under the 2000 Plan will be increased
automatically by 5% of the total number of common stock then outstanding or, if
less, by 2,000,000 shares.

   The Employee Plan permits eligible employees to purchase common stock
through payroll deductions and the plan is intended to qualify under
Section 423 of the Internal Revenue Code. Each employee's payroll deduction may
not exceed 15% of the employee's cash compensation. The price of each share of
common stock purchased under the Employee Plan will be 85% of the lower of the
fair market value of common stock on the date immediately before the first date
of the applicable offering period or the fair market value per share of common
stock on the last day of the applicable offering period. Employees may end
their participation in the Employee Plan at any time and the Board of Directors
may amend or terminate the plan at any time. A total of 1,000,000 shares of
common stock have been reserved for issuance under the Employee Plan. The
number of shares reserved for issuance under the Employee Plan will be
increased automatically by 1% of the total number of shares of common stock
then outstanding or, if less, by 1,000,000 shares.

   The 2000 Director Plan permits only non-employee members of the Board of
Directors to be eligible for option grants. The options have a 10-year term,
except that they expire one year after a director leaves the board. The Board
of Directors may amend or terminate the 2000 Director Plan at any time. If the
Board of Directors amends the 2000 Director Plan, it does not require
stockholder approval of the amendment, unless applicable law requires it. A
total of 300,000 shares of common stock have been reserved for issuance under
the 2000 Director Plan and starting in September 2001 and continuing through
2006, the number of shares reserved for issuance will increase by
50,000 shares.

 Deferred Compensation

   During the fiscal year ended September 30, 2000, the Company recorded
aggregate deferred compensation for employees of $61,975,573 representing the
difference between the exercise price of stock options granted in fiscal year
2000 under the 1997 Plan and the then deemed fair value of the common stock.
These amounts are being amortized as charges to operations, using the graded
method, over the vesting periods of the individual stock options, generally
four years. Under the graded method, approximately 52%, 27%, 15%, and 6%,
respectively, of each options compensation expense is recognized in each of the
four years following the date of the grant. For the fiscal year ended September
30, 2000, the Company amortized $11,977,817 of deferred compensation.

                                      F-15
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In fiscal year 2000, the Company granted 43,524 options to certain non-
employees for services performed. These options were granted under the 1997
Plan. The Company accounts for stock based awards issued to non-employees for
services received in accordance with the fair value method and accordingly
expense of $395,056 was recognized for the fiscal year ended September 30,
2000.

 Pro Forma Disclosure of the Effect of Stock Compensation Expense

   The Company has elected to follow APB Opinion No. 25 (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of the grant, there is no compensation expense recognized.

   Pro forma information regarding net loss is required by FAS 123 which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the fiscal periods ended September
30, 1998, 1999 and 2000 under the fair value method of FAS 123. The fair value
for these options was estimated at the date of the grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
no dividend payouts expected, expected option life of four years, and a risk
free interest rate averaging 6.5%. The weighted average fair value of options
granted was $0.01, $0.05, and $10.15, in the fiscal years ended September 30,
1998, 1999 and 2000, respectively.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected life of the option.
Because, among other things, changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods.

   If compensation cost for the Company's stock-based compensation plan had
been determined based on the fair value at the grant date for awards under this
plan consistent with the method provided for under FAS 123, then the Company's
net loss would have been as indicated in the pro forma amount below:

<TABLE>
<CAPTION>
                                         1998          1999          2000
                                      -----------  ------------  ------------
   <S>                                <C>          <C>           <C>
   Net loss:
     As reported..................... $(2,672,428) $(10,357,316) $(43,765,386)
     Pro forma....................... $(2,684,428) $(10,394,316) $(43,937,386)
   Basic and diluted earnings per
    share:
     As reported..................... $     (2.77) $      (4.93) $     (13.16)
     Pro forma....................... $     (2.78) $      (4.95) $     (13.22)
</TABLE>

 Common Stock

   At September 30, 2000, common stock reserved for future issuance is as
follows:

<TABLE>
<CAPTION>
                                                                        Shares
                                                                      ----------
     <S>                                                              <C>
     Options:
       Outstanding and available for grant under 1997 Plan...........  8,239,598
       Non employees.................................................     14,563
     Preferred Stock Conversion...................................... 53,076,127
     Warrants........................................................    414,598
                                                                      ----------
                                                                      61,744,886
                                                                      ==========
</TABLE>
   Subsequent to September 30, 2000, the Company reserved an additional
5,200,000 shares for issuance under the 2000 plans.

                                      F-16
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Net Loss Per Common Share--Basic and Diluted

   Basic and diluted net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period less
shares subject to repurchase. Shares subject to repurchase are not included in
the computations of basic and diluted net loss per share until the time-based
vesting restrictions have lapsed. Pro forma basic and diluted net loss per
common share, as presented in the consolidated statements of operations, have
been computed as described above and also give effect to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.

   The following table presents the calculation of basic and diluted net loss
per common share and pro forma basic and diluted net loss per common share:

<TABLE>
<CAPTION>
                                          Fiscal Years Ended September 30,
                                        ---------------------------------------
                                           1998          1999          2000
                                        -----------  ------------  ------------
<S>                                     <C>          <C>           <C>
Net loss..............................  $(2,672,428) $(10,357,316) $(43,765,386)
Basic and diluted:
  Weighted average common shares
   outstanding........................      969,655     4,381,609     7,240,030
  Less: shares subject to repurchase..       (3,828)   (2,279,916)   (3,915,392)
                                        -----------  ------------  ------------
Weighted average shares used to
 compute basic and diluted net loss
 per share............................      965,827     2,101,693     3,324,638
                                        ===========  ============  ============
Basic and diluted net loss per share..  $     (2.77) $      (4.93) $     (13.16)
                                        ===========  ============  ============
Pro forma unaudited:
  Shares used above...................                                3,324,638
  Pro forma adjustment to reflect
   weighted effect of the assumed
   conversion of preferred stock......                               47,669,690
                                                                   ------------
  Weighted average shares used to
   compute pro forma basic and diluted
   net loss per common share..........                               50,994,328
                                                                   ============
  Pro forma basic and diluted net loss
   per share..........................                             $      (0.86)
                                                                   ============
</TABLE>

   The Company has excluded the impact of all convertible preferred stock,
common shares subject to repurchase, warrants for convertible preferred stock
and outstanding stock options from the calculation of diluted loss per common
share because all such securities are antidilutive for all periods presented.

10. Commitments and Contingencies

   Certain of the Company's products are procured under both short- and long-
term supply agreements, some of which are supplied by a relatively few number
of suppliers.

   During 1999 and 2000, the Company utilized a capital lease facility from a
finance company. Under the terms of the master lease agreement, qualified
equipment up to an aggregate purchase price of $5,859,020 for 1999 and
$6,400,000 for 2000 and software and tenant improvements up to an aggregate
purchase price of $770,297 for 1999 and $1,600,000 for 2000 can be acquired
under this lease. Equipment and tenant improvements obtained under this lease
facility will be paid ratably over a 48-month term. At the end of the lease
term, the Company has the option to return, re-lease at mutually agreeable
rates, or purchase the equipment at no more than 15% of the equipment's cost.
As of September 30, 1999 and 2000, $3,682,602 and $12,112,446, respectively,
was outstanding under the lease facility. In connection with these lease
facilities, the

                                      F-17
<PAGE>

                            CHORUM TECHNOLOGIES INC.

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company issued warrants to acquire preferred stock (See Note 8). The
unamortized discount incurred in connection with issuance of these warrants
totaled approximately $1,213,000 at September 30, 2000.

   Future minimum lease payments under outstanding capital lease facilities are
as follows:

<TABLE>
     <S>                                                            <C>
     2001.......................................................... $ 4,218,776
     2002..........................................................   4,218,776
     2003..........................................................   3,746,560
     2004..........................................................   1,728,104
     2005..........................................................         --
                                                                    -----------
     Total minimum lease payments..................................  13,912,216
     Less: Amount representing interest............................  (3,012,508)
                                                                    -----------
     Present value of capitalized lease obligations................  10,899,708
     Less: Current portion.........................................  (3,319,089)
                                                                    -----------
     Long-term portion of capitalized lease obligations............ $ 7,580,619
                                                                    ===========
</TABLE>

   In June 2000, the Company entered into a $10,000,000 lease line of credit to
acquire qualified equipment, software and tenant improvements. As of September
30, 2000, the Company had not drawn on this lease line.

   The cost of property and equipment under capital leases was $4,263,705 and
$15,371,164 at September 30, 1999 and 2000, respectively. The accumulated
amortization for property and equipment under capital leases was $739,716 and
$2,636,277 at September 30, 1999 and 2000, respectively.

   The Company also leases its facility and certain equipment under non-
cancelable operating leases that expire in various years through 2003. Total
rent expense was $106,482, $353,100 and $916,773 for the fiscal years ended
September 30, 1998, 1999 and 2000, respectively. At September 30, 2000, minimum
future rental payments due under noncancelable operating leases are as follows:

<TABLE>
     <S>                                                             <C>
     2001........................................................... $ 2,106,469
     2002...........................................................   2,179,411
     2003...........................................................   2,076,934
     2004...........................................................   1,880,765
     2005...........................................................   1,439,423
     Thereafter.....................................................     956,337
                                                                     -----------
       Total........................................................ $10,639,339
                                                                     ===========
</TABLE>

                                      F-18
<PAGE>



                                   [Art Work]

                            [Inside Back Cover]

   The inside back cover of the prospectus starts with a centered graphic,
situated one-fourth of the way down the back cover.

   Connected to and extending under the graphic are four lines (side by side in
the middle of the page).

   Connected to the four lines extending from the centered graphic is the
following text: "Chorum Technologies designs, manufactures and markets high-
performance fiber optic products for next generation, ultra-high capacity,
dynamic optical networks."

   Connected to and extending under the text are four lines (side by side in
the middle of the page) intersecting with another centered graphic, three-
fourths of the way down the back cover.
<PAGE>

                         [LOGO OF CHORUM TECHNOLOGIES]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fees.

<TABLE>
   <S>                                                               <C>
   SEC Registration fee............................................. $   41,400
   NASD fee.........................................................     15,500
   Nasdaq National Market listing fee...............................      5,000
   Printing and engraving expenses..................................    175,000
   Legal fees and expenses..........................................    500,000
   Accounting fees and expenses.....................................    400,000
   Blue sky fees and expenses.......................................     10,000
   Custodian and transfer agent fees................................     10,000
   Miscellaneous fees and expenses..................................    243,100
                                                                     ----------
       Total........................................................ $1,400,000
                                                                     ==========
</TABLE>

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Our by-laws provide for mandatory indemnification of our
directors, officers and employees to the maximum extent permitted by the
Delaware General Corporation Law. Our Certificate of Incorporation provides
that, under Delaware law, our officers and directors shall not be liable for
monetary damages for breach of the officers' or directors' fiduciary duty as
officers or directors to our stockholders and us. This provision in the
Certificate of Incorporation does not eliminate the officers' or directors'
fiduciary duty, and in appropriate circumstances, equitable remedies like
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each officer or director will continue to be subject
to liability for breach of the officer's or director's duty of loyalty to us
for acts or omissions not in good faith or involving intentional misconduct,
for knowing violations of law, for actions leading to improper personal benefit
to the officer or director, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect an officer's or director's responsibilities under any
other law, like the federal securities laws or state or federal environmental
laws. We have entered into indemnification agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 and incorporated by
reference. The indemnification agreements provide our officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is made to Section 7 of the underwriting
agreement contained in Exhibit 1.1 to this prospectus, indemnifying officers
and directors of ours against limited liabilities.

Item 15. Recent Sales of Unregistered Securities

   Since inception, we have issued and sold the following securities:

     1. From inception through September 30, 2000, we granted direct
  issuances or stock options to purchase 13,332,215 shares of our common
  stock at exercise prices ranging from $0.03 to $3.68 per share to
  employees, consultants, directors and other service providers under our
  1997 Stock Plan.

     2. From inception through September 30, 2000, we issued and sold an
  aggregate of 7,558,681 shares of our common stock to employees,
  consultants, and other service providers for aggregate consideration of
  approximately $1,483,024 under direct issuances or exercises of options
  granted under our 1997 Stock Plan.

                                      II-1
<PAGE>

     3. In September 1997, we issued and sold 825,000 shares of our Common
  Stock for an aggregate cash purchase price of approximately $13,750 to ten
  of our employees pursuant to a series of stock purchase agreements and
  11,160,000 shares of our Series A Preferred Stock in exchange for all the
  membership interests in MacroVision Communications, L.L.C., valued at
  approximately $1,860,000 to Pei-Lan Wang, Jian-Yu Liu, Kuang-Yi Wu, Cheng
  Sun Lan, Shen Chia Wong and Li Hung Yang pursuant to a series of stock
  purchase agreements.

     4. In October 1997, we issued and sold 6,212,259 shares of our Series B-
  1 Preferred Stock for an aggregate purchase price of approximately
  $2,071,000 to a group of 19 accredited investors under a stock purchase
  agreement.

     5. In June 1998, we issued and sold 9,732,510 shares of our Series B-2
  Preferred Stock for an aggregate purchase price of approximately $4,866,000
  to a group of 19 accredited investors under a stock purchase agreement.

     6. In September 1998, we issued a warrant to purchase 75,385 shares of
  our Series B-2 Preferred Stock with an exercise price of $1.161 per share
  to Comdisco, Inc.

     7. In November 1998, we issued and sold 12,098,664 shares of our Series
  C Preferred Stock for an aggregate purchase price of approximately
  $17,140,000 to a group of 38 accredited investors under a stock purchase
  agreement.

     8. In January 1999, we issued a warrant to purchase 176,472 shares of
  our Series C Preferred Stock with an exercise price of $1.4166 per share to
  Comdisco, Inc.

     9. In November 1999, we issued and sold 9,093,843 shares of our Series D
  Preferred Stock for an aggregate purchase price of approximately
  $42,408,000 to a group of 62 accredited investors under a stock purchase
  agreement.

     10. In March 2000, we issued a warrant to purchase 77,088 shares of our
  Series D Preferred Stock with an exercise price of $4.67 per share to
  Comdisco, Inc.

     11. In June 2000, we issued a warrant to purchase 85,653 shares of our
  Series D Preferred Stock with an exercise price of $4.67 per share to
  Imperial Bancorp.

     12. In September and October 2000, we issued and sold 5,341,460 shares
  of our Series E Preferred Stock for an aggregate purchase price of
  approximately $92,087,000 to a group of 90 accredited investors under a
  stock purchase agreement.

   The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions under compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had adequate access,
through their relationships with us, to information about us.

   All of the securities referenced above are deemed restricted securities for
purposes of the Securities Act. No underwriters were involved in any of the
security sales referenced above.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.

  3.1**  Restated Certificate of Incorporation of the Registrant, as amended to
         date.

  3.2**  Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be effective upon the completion of the offering made
         under this Registration Statement.

  3.3**  Bylaws of the Registrant.

  3.4**  Form of Bylaws of the Registrant to be effective upon the completion
         of the offering made under this Registration Statement.

  4.1**  Reference is made to Exhibits 3.1, 3.2 and 3.3.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3**  Amended and Restated Investors' Rights Agreement, dated September 5,
         2000.

  4.4**  Warrant to Purchase Stock between the Registrant and Imperial Bancorp,
         dated June 1, 2000.

  4.5**  Warrant to Purchase Stock between the Registrant and Comdisco, Inc.,
         dated September 22, 1998.

  4.6**  Warrant to Purchase Stock between Registrant and Comdisco, Inc., dated
         January 22, 1999.

  4.7**  Warrant to Purchase Stock between Registrant and Comdisco, Inc., dated
         March 1, 2000.

  5.1*   Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
         LLP.

 10.1**  Form of Indemnification Agreement entered into between Registrant and
         its directors and officers.

 10.2**  1997 Stock Plan.

 10.3**  2000 Equity Incentive Plan.

 10.4**  Employee Stock Purchase Plan.

 10.5**  2000 Director Option Plan.

 10.6**  Lease between GUS-Enterprises-XII, L.L.C. and the Registrant, dated
         November 11, 1999.

 10.7**  Lease between Cardinal Collins Tech Center, Inc. and the Registrant,
         dated April 1, 1998.

 10.8**  Master Lease Agreement between Imperial Bank Equipment Leasing
         Division and the Registrant, dated July 7, 2000.

 10.9**  Master Lease Agreement between Comdisco, Inc. and the Registrant,
         dated September 22, 1998.

 10.10** Lease between East Collins L.P. and the Registrant, dated October 10,
         2000.

 10.11+  OEM Purchase and Sale Agreement between Nortel Networks Limited and
         the Registrant, effective January 1, 2000.

 10.12+  Amendment No. 1 to the OEM Purchase and Sale Agreement between Nortel
         Networks Limited, and the Registrant, dated October 12, 2000.

 21.1    Subsidiary List.

 23.1    Consent of Ernst & Young LLP, independent auditors.
</TABLE>


                                      II-3
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                Description
 -------                              -----------
 <C>     <S>
 23.2*   Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
         LLP, counsel to the Registrant. Reference is made to Exhibit 5.1.

 24.1**  Power of Attorney. Reference is made to page II-5.

 27.1**  Financial Data Schedule.

 99.1    Consent of Ryan, Hankin & Kent
</TABLE>

---------------------
* To be filed by amendment.
**Previously filed.
+ Confidential treatment requested.

   All schedules have been omitted because the information required to be
presented in them is not applicable or is shown in the financial statements or
related notes.

Item 17. Undertakings

   We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in the denominations and registered in the
names as required by the underwriters to permit prompt delivery to each
purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant under the Delaware General Corporation Law, the Certificate of
Incorporation or our by-laws, the underwriting agreement, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for indemnification
against these liabilities, other than the payment by us of expenses incurred or
paid by a director, officer, or controlling person of ours in the successful
defense of any action, suit or proceeding, is asserted by a director, officer
or controlling person in connection with the securities being registered in
this offering, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether this indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of this issue.

   We undertake that:

     (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of prospectus filed as part of this
  registration statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the
  Securities Act shall be deemed to be part of this registration statement as
  of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of prospectus shall
  be deemed to be a new registration statement relating to the securities
  offered, and the offering of these securities at that time shall be deemed
  to be the initial bona fide offering.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Richardson, State of Texas, on this day of December 14, 2000.

                                          Chorum Technologies Inc.

                                                     /s/ Scott C. Grout
                                          By: _________________________________
                                                       Scott C. Grout
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
          /s/ Scott C. Grout           President (Principal        December 14, 2000
______________________________________  Executive Officer), Chief
            Scott C. Grout              Executive Officer and
                                        Director

        /s/ Jian-Yu Liu, Ph.D*         Chief Technology Officer    December 14, 2000
______________________________________  and Director
          Jian-Yu Liu, Ph.D

          /s/ S. Kent Coker*           Chief Financial Officer     December 14, 2000
______________________________________  (Principal Financial and
            S. Kent Coker               Accounting Officer) and
                                        Chief Operating Officer

        /s/ Robert J. Paluck*          Director and Chairman of    December 14, 2000
______________________________________  the Board
           Robert J. Paluck

        /s/ Philip T. Gianos*          Director                    December 14, 2000
______________________________________
           Philip T. Gianos

      /s/ Jon W. Bayless, Ph.D.*       Director                    December 14, 2000
______________________________________
        Jon W. Bayless, Ph.D.
</TABLE>



                                      II-5
<PAGE>

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Edward E. Olkkola*         Director                    December 14, 2000
______________________________________
          Edward E. Olkkola
</TABLE>


       /s/ Scott C. Grout
*By:_____________________________
         Scott C. Grout
        Attorney-in-Fact
  Pursuant to Power of Attorney

                                      II-6
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.

  3.1**  Restated Certificate of Incorporation of the Registrant, as amended to
         date.

  3.2**  Form of Amended and Restated Certificate of Incorporation of the
         Registrant to be effective upon the completion of the offering made
         under this Registration Statement.

  3.3**  Bylaws of the Registrant.

  3.4**  Form of Bylaws of the Registrant to be effective upon the completion
         of the offering made under this Registration Statement.

  4.1**  Reference is made to Exhibits 3.1, 3.2 and 3.3.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3**  Amended and Restated Investors' Rights Agreement, dated September 5,
         2000.

  4.4**  Warrant to Purchase Stock between the Registrant and Imperial Bancorp,
         dated June 1, 2000.

  4.5**  Warrant to Purchase Stock between the Registrant and Comdisco, Inc.,
         dated September 22, 1998.

  4.6**  Warrant to Purchase Stock between Registrant and Comdisco, Inc., dated
         January 22, 1999.

  4.7**  Warrant to Purchase Stock between Registrant and Comdisco, Inc., dated
         March 1, 2000.

  5.1*   Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
         LLP.

 10.1**  Form of Indemnification Agreement entered into between Registrant and
         its directors and officers.

 10.2**  1997 Stock Plan.

 10.3**  2000 Equity Incentive Plan.

 10.4**  Employee Stock Purchase Plan.

 10.5**  2000 Director Option Plan.

 10.6**  Lease between GUS-Enterprises-XII, L.L.C. and the Registrant, dated
         November 11, 1999.

 10.7**  Lease between Cardinal Collins Tech Center, Inc. and the Registrant,
         dated April 1, 1998.

 10.8**  Master Lease Agreement between Imperial Bank Equipment Leasing
         Division and the Registrant, dated July 7, 2000.

 10.9**  Master Lease Agreement between Comdisco, Inc. and the Registrant,
         dated September 22, 1998.

 10.10** Lease between East Collins L.P. and the Registrant, dated October 10,
         2000.

 10.11+  OEM Purchase and Sale Agreement between Nortel Networks Limited and
         the Registrant, effective January 1, 2000.

 10.12+  Amendment No. 1 to the OEM Purchase and Sale Agreement between Nortel
         Networks Limited and the Registrant, dated October 12, 2000.

 21.1    Subsidiary List.

 23.1    Consent of Ernst & Young LLP, independent auditors.

 23.2*   Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
         LLP, counsel to the Registrant. Reference is made to Exhibit 5.1.

 24.1**  Power of Attorney. Reference is made to page II-5.

 27.1**  Financial Data Schedule.

 99.1    Consent of Ryan, Hankin & Kent
</TABLE>
---------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.

                                      II-7