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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-K

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

(Mark One)

                                      [X]
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended July 31, 2001

                                      OR

                                      [_]
               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the transition period from         to

                       Commission File Number: 000-27273

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

                            SYCAMORE NETWORKS, INC.
            (Exact name of registrant as specified in its charter)

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

                Delaware                              04-3410558
    (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)              Identification No.)

                               150 Apollo Drive
                        Chelmsford, Massachusetts 01824
                    (Address of principal executive office)

      Registrant's telephone number, including area code: (978) 250-2900

       Securities registered pursuant to Section 12(b) of the Act: NONE

          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK $0.001 PAR VALUE
                               (Title of class)

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

   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X]  No [_]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   As of September 10, 2001 there were 273,680,683 shares outstanding of the
registrant's common stock, $0.001 par value. As of that date, the aggregate
market value of voting stock held by non-affiliates of the registrant was
approximately $784,495,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

   PART III--Portions of the definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on December 13, 2001 are incorporated by reference
into Part III (Items 10, 11, 12 and 13) to this Form 10-K.


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                    FACTORS THAT MAY AFFECT FUTURE RESULTS

   Our prospects are subject to uncertainties and risks. This Annual Report on
Form 10-K contains forward-looking statements within the meaning of the federal
securities laws that also involve substantial uncertainties and risks. Our
future results may differ materially from our historical results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. Readers should pay particular
attention to the considerations described in the section of this report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that May Affect Future Operating Results."
Readers should also carefully review the risk factors described in the other
documents that we file from time to time with the Securities and Exchange
Commission.

                                    PART I

ITEM 1. BUSINESS

Overview

   We are a leading provider of intelligent optical networking products that
enable telecommunications service providers to quickly and cost-effectively
transform the capacity created by their fiber optic networks into usable
bandwidth for the deployment of new high-speed data services. Our current and
prospective customer base includes emerging carriers, incumbent local exchange
carriers (also known as Regional Bell Operating Companies or RBOCs),
Competitive Local Exchange Carriers (CLECs), Interexchange Carriers (IXCs),
international incumbent operators (also known as Postal Telephone and Telegraph
operators or PTTs), international competitive carriers, Internet Service
Providers (ISPs) and non-traditional telecommunications service providers.

   Although in recent months there has been a sharp decrease in capital
spending by our current and prospective customers, we believe that our industry
continues to present exceptional long-term growth opportunities. We believe
that the legacy technologies used to build the existing voice-centric public
network do not provide a scalable, cost-effective platform to support the
demands of the high-speed data applications that are now driving network
growth. As data traffic on the public network continues to grow, we believe
that service providers will require new solutions to relieve network
congestion, improve service profitability and to create new services to support
new data applications. Our intelligent optical networking products are designed
to enable telecommunications service providers to easily scale their existing
networks, reduce capital and operational costs to achieve greater service
profitability, accelerate the time it takes to provision high-speed services
and to introduce new high-speed data services. Our products are designed to
protect service providers' existing investment in fiber optic and transmission
equipment and provide a migration path to a new data-optimized network
infrastructure. Our acquisition of Sirocco Systems, Inc. in September 2000
expanded our product portfolio to include intelligent optical networking
products designed for the metropolitan or edge segment of the network. As a
result, Sycamore is able to provide our customers with a solution set that
addresses applications from the core to the edge of the optical network.

   We commenced operations in February 1998 and shipped our first product in
May 1999. Our revenue has increased from $11.3 million in fiscal 1999 to $198.1
million in fiscal 2000 and $374.7 million in fiscal 2001. However, during the
last half of fiscal 2001, our revenue declined significantly compared to the
first half of fiscal 2001 due to a rapid and significant decrease in capital
spending by telecommunications service providers. In response to these
conditions, we implemented a business restructuring program which included a
reduction in workforce, facilities consolidations and the discontinuation of
certain product offerings.

Industry Background

  Increase in Data Traffic on the Public Network

   Over the past decade, the volume of high-speed data traffic across the
public network has grown significantly, reflecting an increasing amount of
bandwidth intensive applications, including use of the network

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for Internet access, electronic mail communications, electronic commerce,
remote access by telecommuters and other network data transmission services. To
meet the demand for high-speed data services created by these new network
applications, telecommunications service providers have invested significantly
to upgrade the voice-centric public network infrastructure to more easily
facilitate the transmission of data traffic. This has presented numerous
challenges since data traffic has very different characteristics than voice
traffic. Individual voice calls consume very little bandwidth for short periods
of time and most often terminate within a local city environment. Provisioning
services within these voice-centric networks can be time consuming and
expensive, and the connections were often designed to be maintained for many
years. Data traffic is far less predictable in terms of the amount of bandwidth
required for each connection, the time that each connection is to be maintained
and the distance that traffic is required to travel from origin to destination.
Combined, these characteristics have resulted in greater demands for bandwidth
and data-oriented services across the entire public network.

  Existing Public Network Transmission Infrastructure

   Historically, to build the infrastructure of their networks,
telecommunications service providers laid fiber optic cable and installed
transmission equipment to "light" the fiber to create capacity. This capacity
was then transformed into usable bandwidth and delivered to customers in the
form of voice or data services, typically over a period of several months.
Traditional investments in transmission equipment have been spread across dense
wave division multiplexing equipment, known as DWDM, and SONET/SDH equipment.
DWDM equipment expands the transmission capacity of a specific fiber by
dividing a single strand of fiber into multiple light-paths, or wavelengths.
SONET/SDH transmission equipment is used to convert data or voice traffic from
an electrical signal to an optical signal for transport over wavelengths of
light on a fiber.

   In a traditional public network transmission infrastructure, the ability to
manage data resides in the SONET/SDH equipment. The optical fiber itself is
only a physical transmission medium with no imbedded intelligence. As a result,
moving data through the network involves the following complex processes that
add cost and make scaling difficult:

  .  Traffic enters the network as an electrical signal and is converted by the
     SONET/SDH equipment into an optical signal for transmission across the
     network;

  .  At each network transit point, the optical data traveling across the
     network is terminated at a SONET/SDH network terminal;

  .  The optical data is then converted into an electrical signal and examined
     to see which portions of the data are to be extracted from the network at
     that transit point; and

  .  The data is then converted back to an optical signal by the SONET/SDH
     equipment for transport to the next network transit point, where the
     process is repeated.

  Limitations of the Existing Public Network Transmission Infrastructure

   As previously noted, this SONET/SDH-based network architecture was
originally designed to transport voice traffic rather than the data traffic
that is now fueling network growth. Typically deployed in a ring-based
architecture, the SONET/SDH equipment allocates half of the bandwidth available
on the fiber for back-up in case of a network failure, which limits a
telecommunications service provider's ability to fully utilize all of their
optical resources. Once bandwidth on the SONET/SDH ring is fully allocated, it
is a time-consuming, complex and costly process to upgrade the ring to support
the delivery of additional bandwidth and services. To support the bandwidth
requirements, connection duration and demand characteristics of data traffic,
networks must be capable of quickly delivering and redeploying large amounts of
bandwidth cost-effectively, when and where it is needed and for just as long as
it is needed.

   A traditional SONET/SDH network architecture, however, is not sufficiently
flexible to meet these requirements. Generally, the process of expanding the
capacity of a SONET/SDH network to supply more

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bandwidth for service delivery is time-consuming, complex and costly, requiring
trained technicians to visit each network transit point and significant
up-front capital investment by the telecommunications service provider. In
addition, once bandwidth is made available it cannot be easily redeployed as
customer demands change.

   In today's competitive environment, long lead times for service delivery and
large scale upfront investment in capital equipment can negatively impact a
service providers ability to respond to customer demands for competitively
priced flexible services. To remain successful in a competitive market
environment, service providers need to move toward a "just-in-time" investment
and service delivery model allowing them to introduce and expand services when
and where needed in response to demand. The migration to a "just-in-time" model
requires a public network architecture that is scalable, flexible and
cost-effective and that is capable of supporting the anticipated growth in
high-speed data communications services.

The Sycamore Solution

   We develop and market software-based intelligent optical networking products
that enable service providers to quickly and cost-effectively create and
deliver bandwidth in the form of high-speed data services. Our products are
designed to move data directly onto the fiber without a requirement for
intermediary SONET/SDH equipment. Once on the optical network, data moves
through the network without the need to convert the optical signals to
electrical signals at each network transit point. We believe that adding
intelligence to the optical network enhances the functionality of the network
and preserves the management and restoration benefits of SONET/SDH, while
providing the capacity benefits of DWDM. Our products provide the tools to
enable service providers to provision, utilize and maintain their existing
network architecture and optimize the performance of these networks, while
providing a migration path to the next generation intelligent optical network.

  Key benefits of our solution include the following:

   Improves Network Flexibility and Scalability. Our software-based optical
products are designed to allow telecommunications service providers to improve
the flexibility and scalability of their networks without the long lead times
and large, upfront capital investment presently required for a network
build-out. The software-based capabilities of our products allow service
providers to efficiently and effectively change and upgrade their network
infrastructure and services. This improved flexibility and scalability enables
service providers to more easily expand their network infrastructure, support
new high-speed data applications and introduce value-added services for the
benefit of their customers.

   Enables Rapid Service Delivery. The competitive marketplace facing service
providers and the pace of technological change require that the public network
infrastructure be adaptable to accommodate rapid changes in the demand for
service. Our products are designed to shorten the time it takes for service
providers to increase bandwidth and provide services, thereby enabling our
customers to introduce network services on a rapid basis in response to their
customers' demand. We believe that this flexibility is cost-effective for
service providers because it enables them to increase capacity based on
current, rather than forecasted, market demand for their services.

   Facilitates Introduction of New Data Services and Creation of New Revenue
Opportunities for Service Providers. Because our products are software-centric
and based on open industry standards, we are able to rapidly introduce new
features into our products, which can in turn be used by service providers to
create new features for the service products they offer their customers. We
believe that these added features provide revenue opportunities for our
customers and enables them to differentiate their network services from those
of their competitors. We have designed a comprehensive network management
solution which enables service providers to monitor the performance of their
network, isolate and manage network faults, and otherwise manage their network
on a real-time basis. With our network management system, service providers are
able to offer value-added services such as customer network management to their
customers.

   Protects Existing Investments. Our products are designed to enable our
customers to increase the functionality and improve the performance of their
networks without sacrificing their infrastructure investments

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in SONET/SDH equipment. Our products are designed to facilitate a gradual
migration from existing electro-optical SONET/SDH networks to more data
optimized networks. Service providers can introduce our products into an
existing optical network environment, when and where needed, without replacing
the current architecture. For example, over a common fiber infrastructure, a
service provider's existing SONET/SDH network could be used to continue to
support low speed voice and data services, while new higher speed data services
could be supported by our intelligent optical network products. Furthermore,
the common software architecture, which serves as the basis for our future
products, is intended to ensure the continued interoperability and
manageability of our products as our product line evolves.

   Provides capital and operational cost savings to deliver improved service
profitability. By using the latest in hard-optics technology in combination
with sophisticated soft-optics software intelligence, our products are designed
to minimize both the upfront capital costs and ongoing operational costs
associated with an infrastructure build. Electrical-optical-electrical
conversions are the most costly function performed in the optical network;
therefore, any elimination of these conversions has a direct impact on the cost
of the network deployment. Sycamore's products are designed to eliminate
electrical-to-optical conversions wherever possible by optimizing optical
performance across the entire network. Operational costs are positively
impacted by the strength of our software which provides the ability to automate
the provisioning and management of new services, improving time to revenue for
our customers and eliminating the requirement for labor intensive manual
installation and maintenance programs.

   Provides the Ability to Deploy an Integrated Optical Networking Solution
From the Edge of the Public Network Through the Core. Our transport, switching
and management product portfolio is designed to enable service providers to
extend the scaling and service provisioning benefits of intelligent optical
networking throughout the network with an integrated solution from the edge to
the core. Our use of a common software architecture and management system
across our entire product portfolio simplifies service creation, provisioning
and management for service providers, thereby enabling them to improve their
time to market for new services.

Strategy

   Our objective is to be the leading provider of intelligent optical
networking products. Key elements of our strategy include the following:

   Offer End-to-End Optical Network Solutions To Customers. We offer a full
range of intelligent optical networking products to our customers. Our
switching and transport products, under the umbrella of our SILVX(TM) network
management system, support an integrated deployment of intelligent optical
networking technology from the edge to the core of the network. In addition to
supporting the development of new networks, our products help service providers
improve the utilization of fiber optic capacity that has already been deployed
in the network. For example, our SN 16000 optical switch has been designed to
facilitate the transition to a data-optimized network environment. A
data-optimized meshed-based network provides greater flexibility than a
SONET/SDH ring-based network by providing for more direct routes between
network points, better utilization of bandwidth and enabling more efficient
network restoration schemes in the event of a fiber or circuit failure. When
the SN 16000 optical switch is combined with our optical edge switches,
telecommunications service providers can deploy an integrated "all switched"
infrastructure from the core to the edge of their network.

   Collaborate With Customers To Generate Demand For High Speed Data Services.
We work collaboratively with our customers to help them identify and create new
high-speed data services. Our professional services team provides assistance in
such areas as network planning, design, implementation and service launch to
facilitate the introduction of these services. By helping our customers to
create new services, we help generate additional revenue opportunities for our
customers and drive additional demand for our products.

   Utilize Software-Based Product Architecture. Our products utilize a
standards-based software-centric architecture that permits improved flexibility
and interoperability and expanded network management capabilities. The common
architecture is designed to reduce the complexity of introducing new software

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revisions across the network. We believe that this architecture accelerates the
release of new products and enables our customers to upgrade with minimal
network impact and operator training. All Sycamore transport and switching
products are linked by a common network management system, SILVX, while the
switching products also rely on a common network operating system,
Broadleaf(TM).

   Incorporate Commercially Available Optical Hardware Components. We use
commercially available optical hardware components in our products wherever
feasible. We believe that by using these third-party components, we benefit
from the research and development of the vendors of these products, as well as
from the efficiencies of scale that these vendors generate by producing the
components in higher volumes. As a result of our use of these components, we
believe that we can more quickly bring to market a broad-based product line at
a lower cost than if we had utilized proprietary components.

   Outsource Manufacturing. We outsource the manufacturing of our products to
reduce our cost structure and to maintain our focus on the development of
value-added software and the integration of hard-optics components into our
products. We believe that most optical networking companies have manufactured
their own products in order to implement specialized manufacturing techniques
historically required for optical componentry. However, we believe that the
quality and consistency of optical manufacturing techniques have advanced
significantly and that, as a result, it is now possible to engage third party
manufacturers to build our products without sacrificing quality or performance.

   Focus On Just-In-Time Implementation. Our product architecture strategy is
to develop products that enable service providers to expand and upgrade their
networks in response to demand on a "just-in-time" basis. Our software-based
product architecture is designed to help us achieve this goal. Our software
capabilities support a modular "plug and play" hardware architecture which is
designed to allow new and enhanced modules to be easily and non-disruptively
inserted into the network as optical component technology advances.

   Capitalize On Extensive Industry Experience. We have significant management,
engineering and sales experience in the networking and optics industries, and
long-standing relationships with key personnel in our target customer base. We
believe that our experience and relationships are important in enabling us to
develop products to meet our customers' needs and to penetrate our target
market.

Products and Technology

  Product Architecture

   Our software-based intelligent optical networking products are designed to
enable service providers to use their existing optical network infrastructure
to deliver high-speed end-to-end services to meet the bandwidth intensive needs
of data applications. Our products are designed to enable service providers to
offer high-speed services over wavelengths directly from the optical network.

   Our product architecture is designed to provide the following benefits:

  .  lowered network infrastructure cost by reducing network elements and
     delivering high capacity systems in more compact form factors;

  .  network simplification by eliminating the need for a separate layer of
     SONET/SDH equipment for new services and providing an integrated
     end-to-end optical solution;

  .  more rapid service delivery by enabling automated end-to-end provisioning
     of services;

  .  non-disruptive network upgrades through advanced software capabilities;

  .  a practical migration path from a SONET/SDH architecture to data optimized
     network; and

  .  new revenue opportunities for service providers through advanced features
     that support value-added service offerings.

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   We believe that the acceptance and implementation of intelligent optical
networking technology by service providers is being driven by high-speed data
service demands and network scaling requirements. Our product strategy allows
service providers to migrate from today's SONET/SDH network architecture to an
intelligent optical network while preserving their investment in the existing
network.

  Sycamore's intelligent optical networking products incorporate the following
  features:

   Intelligent Optical Networking Software. Our product line shares a common
software foundation that is based on open industry standards. This software
foundation allows us to minimize product development time by leveraging our
software architecture across multiple product lines. Our software architecture
is designed to provide service providers with tools to continue to evolve their
network without requiring the replacement of existing infrastructure. In
addition, the architecture is designed to enable service providers to rapidly
absorb new optical technology and functionality into the network with minimal
effort, training and incremental investment. Software-based features such as
optical signaling and routing, topology discovery, system self-inventory and
dynamic power balancing allow service providers to quickly respond to customer
needs. Additionally, advances in optical components, such as new lasers,
filters, and amplifiers, can be quickly integrated within this software-based
environment.

   SONET/SDH Functionality. Our products are designed to provide the optical
interfaces and management and restoration capabilities traditionally offered on
SONET/SDH equipment. By supporting these capabilities within the optical
domain, rather than the electrical domain, service providers can directly offer
services without the need for separate SONET/SDH products.

   DWDM Technology. DWDM technology creates capacity by multiplying the number
of wavelengths that a single fiber can support. We integrate commercially
available DWDM optical technology into our products, providing a comprehensive
solution for our customers' multiplexing needs.

   Network Management. Our network management products are designed to provide
end-to-end management and control of the intelligent optical network. Network
management functions include fault management, configuration management,
accounting management, performance management and security management. Composed
of SilvxManager(TM), a network management platform, and SilvxSource(TM), a
system-resident management application, our network management products
constitute a distributed solution designed to provide end-to-end management of
the intelligent optical network. Our network management products are designed
to manage Sycamore's intelligent optical networking products, provide for the
management of third-party products and integrate with other operating support
systems when introduced into an existing network environment.

Sycamore's Currently Available Intelligent Optical Networking Products

   SN 3000. The SN 3000 is an optical access switch that is being designed to
perform aggregation, grooming and switching functions, primarily in the metro
layer of optical networks. The SN 3000 is a highly redundant system designed
for central office applications. Its compact design is intended to provide
extremely high port density and efficient space utilization. Featuring an
integrated optical subsystem for DWDM trunking and wavelength cross-connect,
the SN 3000 platforms aggregate traffic from existing SONET/SDH rings or
directly from subscribers and support a full complement of service interfaces.

   SN 8000. The SN 8000 is an intelligent optical transport product that
provides high-speed services over fiber optic wavelengths for access,
interoffice, regional and backbone networks. The SN 8000 provides a complete
stand-alone optical networking solution and can be configured in
point-to-point, linear or ring applications. The SN 8000 can be overlaid on top
of existing SONET/SDH networks, allowing service providers to implement optical
networking technology when and where needed, without replacing an installed
infrastructure.

   SN 10000. The SN 10000 is an intelligent optical transport product that is
used to provide high-speed services over fiber optic wavelengths in high
capacity long distance and ultra long distance backbone networks.

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The SN 10000 has been designed to provide a complete stand-alone networking
solution and to be capable of being configured in point-to-point, linear, ring
or mesh applications.

   SN 16000. The SN 16000 is an intelligent optical switch for end-to-end
wavelength switching and routing at the core of the optical network, which is
necessary for the creation of a meshed topology network. The SN 16000 supports
incremental network growth through a modular architecture and has been designed
to coexist with all of our product offerings, as well as other third-party
optical networking products.

   SilvxSource and SilvxManager. The SILVX optical network management system
provides end-to-end management of data communications services across a service
provider's optical network. SILVX simplifies network configuration, network
provisioning and network management by implementing many of today's manual and
labor-intensive network management processes within software. Additionally,
SILVX allows service providers to offer network management-based services to
their customers. SilvxSource software runs on the intelligent optical network
elements on all of our product offerings and the SilvxManager software runs on
a centralized management station.

Customers

   Our target customer base includes incumbent local exchange carriers (also
known as Regional Bell Operating Companies), Competitive Local Exchange
Carriers, Interexchange Carriers, PTTs (international incumbent operators),
international competitive carriers, Internet Service Providers and
non-traditional telecommunications service providers. During the years ended
July 31, 2001, 2000 and 1999, shipments of products to one customer, Williams
Communications Group, Inc., accounted for 47%, 92% and 100% of our revenue,
respectively. During the year ended July 31, 2001, shipments to another
customer, 360networks inc., accounted for 11% of our revenue.

   Historically, a large percentage of our revenue has been derived from
emerging service providers, including Williams Communications and 360networks.
Beginning in the third quarter of fiscal 2001, unfavorable economic conditions
caused a rapid and significant decrease in capital spending by
telecommunications service providers. As a result, emerging service providers,
which had been the early adopters of our technology, were no longer able to
continue to fund aggressive deployments of equipment within their networks due
to their inability to access the capital markets. A key element of our strategy
is to increase our sales to incumbent service providers, which typically have
longer sales evaluation cycles than those of emerging service providers.
However, incumbent service providers have also recently slowed their capital
expenditures significantly and this trend is resulting in longer than
anticipated sales evaluation cycles.

Sales and Marketing

   We sell our products through a combination of a direct sales force and
distribution partners in certain international markets. As of July 31, 2001,
our sales and marketing organization consisted of 211 employees, located at our
headquarters in Chelmsford, Massachusetts, eight domestic and eleven
international sales and support office locations. International revenue was 35%
of total revenue during the year ended July 31, 2001, compared to an
insignificant amount for the years ended July 31, 2000 and 1999.

   Our marketing objectives include building market awareness and acceptance of
Sycamore and our products as well as generating qualified customer leads. We
send out direct mail and attend trade shows, and provide information about our
company and our products on our Web site. We also conduct public relations
activities, including interviews and demonstrations for industry analysts.

   Our professional services team works collaboratively with our customers and
prospective customers to help them identify and create new high speed data
services that they can offer to their customers. We believe that this
assistance is an integral aspect of our sales and marketing efforts which can
create additional demand for our products.

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Research and Development

   Our future success depends on our ability to increase the performance of our
products, to develop and introduce new products and product enhancements and to
effectively respond to our customers' changing needs. Our research and
development team is primarily responsible for, and is currently working on,
these objectives. We believe that we can continue to enhance our technologies
to improve the scalability, performance and reliability of our intelligent
optical networking products. We have made, and will continue to make, a
substantial investment in research and development. Research and development
expenses were $159.6 million, $71.9 million and $18.0 million, respectively,
for the years ended July 31, 2001, 2000, and 1999.

   To help meet the challenge of rapidly increasing network traffic demands, we
plan to continue to develop and enhance our intelligent optical networking
products. We also plan to enhance our network management software to enable our
customers to deliver new or enhanced services using our intelligent optical
networking products. We have assembled a team of skilled hardware, software and
optical engineers with extensive experience. As of July 31, 2001, we had 471
employees involved in research and development.

Competition

   The market for intelligent optical networking products is intensely
competitive, subject to rapid technological change and significantly affected
by new product introductions and other market activities of industry
participants. We expect competition to persist and intensify in the future both
domestically and internationally, in response to pressures on capital spending
by telecommunications providers and as we move into new markets and expand our
presence globally. Our primary sources of competition include vendors of
network infrastructure equipment and optical network equipment, such as Nortel
Networks, Lucent Technologies, Alcatel and Ciena Corporation, as well as other
private and public companies that have focused on our target market. Many of
our competitors have significantly greater financial resources than us and are
able to devote greater resources to the development, promotion, sale and
support of their products. In addition, many of our competitors have more
extensive customer bases and broader customer relationships than us, including
relationships with our potential customers.

   In order to compete effectively, we must deliver products that:

  .  provide extremely high network reliability;

  .  scale easily and efficiently with minimum disruption to the network;

  .  interoperate with existing network designs and equipment vendors;

  .  reduce the complexity of the network by decreasing the need for
     overlapping equipment;

  .  provide effective network management; and

  .  provide a cost-effective solution for service providers.

   In addition, we believe that a knowledge of the infrastructure requirements
applicable to service providers and experience in working with service
providers to develop new services for their customers are important competitive
factors in our market.

Proprietary Rights and Licensing

   Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright law and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently have numerous
patent applications pending in the United States and we cannot be certain that
patents will be granted based on these or any other applications. We seek to
protect our source code for our

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software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed or shrinkwrap
license agreements, which impose certain restrictions on the licensee's ability
to utilize the software. Finally, we seek to limit disclosure of our
intellectual property by requiring employees, consultants and any third party
with access to our proprietary information to execute confidentiality
agreements with us and by restricting access to our source code. Due to rapid
technological change, we believe that factors such as the technological and
creative skills of our personnel, new product developments and enhancements to
existing products are more important than the various legal protections of our
technology to establishing and maintaining a technology leadership position.

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. However, the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States. Any such resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar technology. Any failure
by us to meaningfully protect our proprietary rights could have a material
adverse effect on our business, operating results and financial condition.

   There can be no assurance that third parties will not claim infringement
with respect to our current or future products. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all. A successful claim of intellectual property infringement against
us and our failure or inability to license the infringed technology or develop
or license technology with comparable functionality could have a material
adverse effect on our business, financial condition and operating results.

   We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. If
we cannot maintain licenses to this third-party software, distribution of our
products could be delayed until equivalent software could be developed or
licensed and integrated into our products, which could materially adversely
affect our business, operating results and financial condition.

Manufacturing

   We have limited internal manufacturing capabilities. We have contracts with
Celestica Corporation and Jabil Circuit, Inc., which provide comprehensive
manufacturing services, including assembly, test, control and shipment to our
customers, and procurement of materials on our behalf. These contracts have
indefinite terms and are cancelable by either party with advance notice. Under
these agreements, our contract manufacturers are committed to supply products
and services that we order pursuant to conforming purchase orders. We believe
that the outsourcing of our manufacturing enables us to conserve the working
capital that would be required to purchase inventory, allows us to better
adjust manufacturing volumes to meet changes in demand, and enables us to
deliver products more quickly. At present, we purchase products from our other
manufacturers on a purchase order basis.

   Our optical networking products utilize hundreds of individual parts, many
of which are customized for our products. Component suppliers in the
specialized, high technology end of the optical communications industry are
generally not as plentiful or, in some cases, as reliable, as component
suppliers in more mature industries. We work closely with our strategic
component suppliers to pursue new component technologies that could either
reduce cost or enhance the performance of our products.

                                      10

<PAGE>

   We currently purchase several key components, including commercial digital
signal processors, RISC processors, field programmable gate arrays, SONET
transceivers and erbium doped fiber amplifiers, from single or limited sources.
We purchase each of these components on a purchase order basis and have no
long-term contracts for these components. Although we believe that there are
alternative sources for each of these components, in the event of a disruption
in supply, we may not be able to develop an alternate source in a timely manner
or at favorable prices. Such a failure could hurt our ability to deliver our
products to our customers and negatively affect our operating margins. In
addition, our reliance on our suppliers exposes us to potential supplier
production difficulties or quality variations. Any such disruption in supply
would seriously impact present and future sales and revenue.

Employees

   As of July 31, 2001, we had a total of 944 employees of which:

  .  471 were in research and development,

  .  211 were in sales and marketing,

  .  90 were in customer service and support,

  .  79 were in manufacturing, and

  .  93 were in finance and administration.

   Our future success will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel, for whom
competition is intense, particularly in the New England area where we are
headquartered. Our employees are not represented by any collective bargaining
unit. We believe our relations with our employees are good.

ITEM 2. PROPERTIES

   The Company currently leases five facilities in Chelmsford, Massachusetts,
containing approximately 423,000 square feet in the aggregate. In Wallingford,
Connecticut, the Company leases two facilities containing a total of
approximately 43,000 square feet. These facilities consist of offices and
engineering laboratories used for administration, sales and customer support,
research and development, and ancillary light manufacturing, storage and
shipping activities. These facilities are presently adequate for the Company's
needs, and the Company does not expect to require additional space during
fiscal 2002. The Company owns a parcel of undeveloped land, containing
approximately 106 acres, in Tyngsborough, Massachusetts. This land was acquired
for the purpose of developing a campus that would serve as the Company's
corporate headquarters, if the Company should require additional facilities
over the next several years. The Company maintains smaller offices to provide
sales and customer support at eight other domestic locations and eleven
international locations.

ITEM 3. LEGAL PROCEEDINGS

   Beginning on July 2, 2001, several purported class action complaints were
filed in the United States District Court for the Southern District of New York
against the Company and several of its officers and directors and the
underwriters for the Company's initial public offering on October 21, 1999.
Some of the complaints also include the underwriters for the Company's
follow-on offering on March 14, 2000. The complaints were filed on behalf of
persons who purchased the Company's common stock during specified periods, all
beginning on October 21 or October 22, 1999 and ending on various dates, the
latest of which is August 10, 2001. The complaints are similar and allege
violations of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, primarily based on the assertion that the
Company's lead underwriters, the Company and the other named defendants made
material false and misleading statements in the Company's prospectus
incorporated in its registration statements on Form S-1 filed with the SEC in
October 1999 and March 2000 because of the failure to disclose (a) the alleged
solicitation and receipt of excessive and undisclosed commissions by the
underwriters in connection with the allocation of shares of common stock to
certain investors in the Company's

                                      11

<PAGE>

public offerings and (b) that certain of the underwriters allegedly had entered
into agreements with investors whereby underwriters agreed to allocate the
public offering shares in exchange for which the investors agreed to make
additional purchases of stock in the aftermarket at pre-determined prices. The
complaints allege claims against the Company, several of the Company's officers
and directors and the underwriters under Sections 11 and 15 of the Securities
Act. The complaints also allege claims solely against the underwriter
defendants under Section 12(a)(2) of the Securities Act and some of the
complaints allege claims against the individual defendants under Section 10(b)
of the Exchange Act. The complaints are currently in the process of being
consolidated into a single action. The actions seeks damages in an unspecified
amount. The Company believes that the claims against it are without merit and
intends to defend against the complaints vigorously. The Company is aware that
at least 170 companies have been named in nearly identical lawsuits that have
been filed by some of the same law firms. The Company is not currently able to
estimate the possibility of loss or range of loss, if any, relating to these
claims.

   The Company is subject to legal proceedings, claims, and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the results of
our operations or our financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   None.

                                    PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

   Our common stock has been traded on the Nasdaq National Market under the
symbol "SCMR" since October 22, 1999. The following table sets forth, for the
periods indicated, the high and low closing sale prices as reported on the
Nasdaq National Market for Sycamore common stock, as adjusted for all stock
splits.


<TABLE>
<CAPTION>
                                           High    Low
                                          ------- ------
<S>                                       <C>     <C>
Fiscal year 2001:
   Fourth Quarter ended July 31, 2001.... $ 12.18 $ 5.84
   Third Quarter ended April 28, 2001....   37.75   7.25
   Second Quarter ended January 27, 2001.   70.00  29.13
   First Quarter ended October 28, 2000..  167.19  64.25
</TABLE>


<TABLE>
<CAPTION>
                                           High    Low
                                          ------- ------
<S>                                       <C>     <C>
Fiscal year 2000:
   Fourth Quarter ended July 31, 2000.... $150.06 $62.63
   Third Quarter ended April 29, 2000....  189.94  51.00
   Second Quarter ended January 29, 2000.  105.38  73.13
   First Quarter ended October 30, 1999..   71.67  12.67
</TABLE>


   As of July 31, 2001, there were approximately 1,879 stockholders of record.

Dividend Policy

   We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, results of operations, capital requirements, general business
condition and such other factors as the board of directors may deem relevant.

                                      12

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included in Part II of this report on Form 10-K. The
statement of operations data for the years ended July 31, 2001, 2000 and 1999,
and the balance sheet data as of July 31, 2001 and 2000 are derived from our
audited financial statements which are included elsewhere in this report. The
statement of operations data for the period from inception (February 17, 1998)
through July 31, 1998 and the balance sheet data as of July 31, 1999 are
derived from the audited financial statements included in our report on Form
8-K filed on May 18, 2001, which gives retroactive effect to our September 7,
2000 acquisition of Sirocco Systems, Inc. ("Sirocco"), which was accounted for
as a pooling of interests. The balance sheet data as of July 31, 1998 was
derived from the audited financial statements included on our registration
statement on Form S-1, as amended, filed on February 17, 2000. The selected
financial data for all periods presented has been restated to include the
results of operations and financial position of Sirocco. The historical results
are not necessarily indicative of results to be expected for any future period.

<TABLE>
<CAPTION>
                                                                                             Period from
                                                                                              Inception
                                                                                            (February 17,
                                                                 Year Ended July 31,            1998)
                                                          --------------------------------     through
                                                             2001        2000       1999    July 31, 1998
                                                          ----------  ----------  --------  -------------
                                                               (in thousands, except per share data)
<S>                                                       <C>         <C>         <C>       <C>
Consolidated Statement of Operations Data:
Revenue.................................................. $  374,746  $  198,137  $ 11,330     $    --
Cost of revenue (exclusive of non-cash stock compensation
  expense of $3,132, $1,433, $101 and $0)................    314,664     104,986     8,486          --
                                                          ----------  ----------  --------     -------
   Gross profit..........................................     60,082      93,151     2,844          --
Operating expenses:
   Research and development..............................    159,607      71,903    17,979         714
   Sales and marketing...................................     83,478      30,650     4,064          92
   General and administrative............................     16,820       9,824     3,056         247
   Amortization of stock compensation....................     65,224      21,067     3,648           5
   Acquisition costs.....................................      4,948          --        --          --
   Restructuring costs and related asset impairments.....     81,926          --        --          --
                                                          ----------  ----------  --------     -------
       Total operating expenses..........................    412,003     133,444    28,747       1,058
                                                          ----------  ----------  --------     -------
Loss from operations.....................................   (351,921)    (40,293)  (25,903)     (1,058)
Interest and other income, net...........................     85,299      41,706       850         108
                                                          ----------  ----------  --------     -------
Income (loss) before income taxes........................   (266,622)      1,413   (25,053)       (950)
Income tax expense.......................................     13,132         745        --          --
                                                          ----------  ----------  --------     -------
Net income (loss)........................................ $ (279,754) $      668  $(25,053)    $  (950)
                                                          ==========  ==========  ========     =======
Basic net income (loss) per share........................ $    (1.18) $     0.00  $  (1.32)    $ (0.17)
Diluted net income (loss) per share...................... $    (1.18) $     0.00  $  (1.32)    $ (0.17)
   Shares used in per-share calculation--basic...........    237,753     166,075    18,919       5,677
   Shares used in per-share calculation--diluted.........    237,753     233,909    18,919       5,677
<CAPTION>

                                                                          As of July 31,
                                                          ----------------------------------------------
                                                             2001        2000       1999        1998
                                                          ----------  ----------  --------  -------------
                                                                          (in thousands)
<S>                                                       <C>         <C>         <C>       <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities......... $1,248,549  $1,517,103  $ 47,889     $ 4,599
Working capital..........................................    783,665   1,147,131    59,292       4,549
Total assets.............................................  1,551,321   1,697,915    79,038       5,522
Long term debt, less current portion.....................         --       1,157     4,489          --
Redeemable convertible preferred stock...................         --          --    55,771       5,621
Total stockholders' equity (deficit)..................... $1,387,860  $1,591,118  $  6,691     $  (349)
</TABLE>

                                      13

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

   The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our consolidated financial statements and the
related notes thereto included elsewhere herein. Except for the historical
information contained herein, we wish to caution you that certain matters
discussed in this report constitute forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
stated or implied in forward-looking statements due to a number of factors,
including but not limited to the rate of product purchases by current and
prospective customers; general economic conditions including stock market
volatility, uncertainty resulting from recent terrorist acts, and conditions
specific to the telecommunications, Internet and related industries; the
commercial success of our line of intelligent optical networking products; our
reliance on a limited number of customers; new product introductions and
enhancements by us and our competitors; the length and variability of the sales
cycles for our products; competition; manufacturing and sourcing risks;
variations in our quarterly results; and the other factors discussed in this
Form 10-K and other reports filed by us from time to time with the Securities
and Exchange Commission. We disclaim any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future results or otherwise. Forward looking statements include statements
regarding our expectations, beliefs, intentions or strategies regarding the
future and can be identified by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will,"
and "would" or similar words.

Overview

   We develop and market products that transport voice and data traffic over
wavelengths of light. Our products enable service providers to quickly and cost
effectively provide bandwidth and create new high-speed data services. From our
inception in February 1998 through May 1999, our operating activities consisted
primarily of research and development, product design, development and testing.
During this period, we also staffed and trained our administrative, marketing
and sales personnel and began sales and marketing activities. We began shipping
our first product in May 1999, and recorded our first revenue during the
quarter ended July 31, 1999.

   Through the second quarter of fiscal year 2001, our revenue increased each
quarter sequentially compared to the previous quarter. However, our revenue
declined significantly beginning in the third quarter of fiscal 2001 due to
unfavorable economic conditions caused by a rapid and significant decrease in
capital spending by telecommunications service providers. As a result, emerging
service providers, which had been the early adopters of our technology, were no
longer able to continue to fund aggressive deployments of equipment within
their networks due to their inability to access the capital markets. This trend
was compounded by decisions by incumbent service providers to slow their
capital expenditures significantly. In response to these unfavorable economic
conditions, we implemented a restructuring program designed to decrease our
business expenses in order to align resources with long-term growth
opportunities. In the third quarter of fiscal 2001, we recorded a charge of
$165.9 million, which consisted of an inventory writedown of $84.0 million and
a charge for restructuring and related asset impairments of $81.9 million. The
business restructuring activities included a reduction in workforce, facilities
consolidations and the discontinuation of certain product offerings.

   Our revenue has been impacted by recent trends in capital spending by our
customers and there can be no certainty as to the severity or duration of the
current economic downturn and its impact on our future revenue. We currently
anticipate that the cost of revenue and the resulting gross margin will
continue to be adversely affected by several factors, including reduced demand
for our products, effect of new product introductions including volumes and
manufacturing efficiencies, component limitations, the mix of products sold,
competitive pricing, and possible increases in inventory levels which could
increase our exposure to excess and obsolete inventory charges. During the last
half of fiscal 2001, we incurred substantial operating losses totaling $298.3
million. We expect to incur operating losses until the overall economic
environment and the demand for our

                                      14

<PAGE>

products improves. At this time, we have limited visibility into future
revenues and cannot predict, when or if, the economic environment and the
demand for our products will improve.

Results of Operations

  Fiscal Years ended July 31, 2001 and 2000

Revenue

   Revenue increased $176.6 million to $374.7 million for fiscal 2001 compared
to $198.1 million for fiscal 2000. The overall increase in revenue was
primarily due to increased sales of our SN 8000 product and the broadening of
our product offerings to include the SN 3000, SN 10000 and SN 16000. One
customer accounted for 47% and 92% of our revenue for fiscal 2001 and 2000,
respectively, and another customer accounted for 11% of our revenue in fiscal
2001. No other customer accounted for more than 10% of our revenue in fiscal
2001 and 2000. Revenue increased significantly in the first two quarters of
fiscal 2001 compared to the same period in fiscal 2000, but beginning in the
third quarter of fiscal 2001, declined significantly compared to the first two
quarters of fiscal 2001, primarily due to a reduction in capital spending by
our customers, and to a lesser extent, component issues related to our SN 16000
product. International revenue was 35% of total revenue in fiscal 2001,
compared to an insignificant amount in fiscal 2000. There can be no certainty
as to the severity or duration of the current economic downturn and its impact
on our future revenue.

Cost of Revenue

   Cost of revenue increased $209.7 million to $314.7 million for fiscal 2001
compared to $105.0 million for fiscal 2000. Cost of revenue represented 84% of
total revenue in fiscal 2001, as compared to 53% of total revenue for fiscal
2000. The increase in cost of revenue was primarily related to the increase in
revenue, the impact of an $84.0 million inventory write-down associated with
the consolidation and elimination of certain product offerings, headcount
increases in our manufacturing overhead and customer service organizations,
additional warranty expenses and other period costs. During the first two
quarters of fiscal 2001, cost of revenue remained constant as a percentage of
revenue at 53% compared to the same period in fiscal 2000. Because of the sharp
decrease in revenue which occurred during the last two quarters of fiscal 2001,
cost of revenue exceeded total revenue for the last half of fiscal year 2001.

Research and Development Expenses

   Research and development expenses increased $87.7 million to $159.6 million
for fiscal 2001 compared to $71.9 million for fiscal 2000. The increase was
attributable to costs associated with increased personnel and related expenses,
increased depreciation expense due to increased investments in lab and testing
equipment, and increases in engineering costs and prototype expenses for the
design and development of new products, as well as enhancements to existing
products.

Sales and Marketing Expenses

   Sales and marketing expenses increased $52.8 million to $83.5 million for
fiscal 2001 compared to $30.7 million for fiscal 2000. The increase was
attributable to increased personnel and related expenses, higher sales-based
commissions, the expansion of sales offices and higher marketing program costs,
including trade shows and new product launch activities. In addition, during
fiscal 2001 we recorded a provision for doubtful accounts of $5.5 million, of
which $4.4 million related to a specific accounts receivable balance for a
customer that filed for bankruptcy protection during the fourth quarter of
fiscal 2001. There was no provision for doubtful accounts in fiscal 2000.

General and Administrative Expenses

   General and administrative expenses increased $7.0 million to $16.8 million
for fiscal 2001 compared to $9.8 million for fiscal 2000. The increase in
expenses reflects the hiring of additional general and administrative personnel
and expenses necessary to support increased levels of business activities.

                                      15

<PAGE>

Amortization of Stock Compensation

   Amortization of stock compensation expense was $65.2 million for fiscal
2001, an increase of $44.1 million from $21.1 million for fiscal 2000. Amounts
for fiscal 2001 and 2000 include $22,000 and $6.2 million of compensation
expense associated with the grant of options to purchase common stock to
non-employees, respectively. In addition, the amount for fiscal 2001 includes
$36.3 million which was attributable to the acceleration of options and
restricted stock relating to the acquisition of Sirocco. Amortization of stock
compensation expense primarily resulted from the granting of stock options and
restricted shares with exercise or sale prices which were deemed to be below
fair market value. Amortization of stock compensation relating to these grants
is expected to affect our results of operations through the fourth quarter of
fiscal 2005.

   In March 2001, we issued a two-year warrant to purchase 150,000 shares of
common stock at $11.69 per share, exercisable immediately, in exchange for
general and administrative services. We valued the warrant using the
Black-Scholes model with the following assumptions: 6.5% risk free interest
rate, 90% expected volatility, and a two year expected life, and recorded a
charge for stock compensation of $0.9 million in the third quarter of fiscal
2001.

   As described in Note 7 to the consolidated financial statements, in May 2001
we announced an offer to exchange outstanding employee stock options having an
exercise price of $7.25 or more per share in return for restricted stock and
new stock options to be granted by the Company (the "Exchange Offer"). Pursuant
to the Exchange Offer, in exchange for eligible options, an option holder
generally received a number of shares of restricted stock equal to one-tenth
(1/10) of the total number of shares subject to the options tendered by the
option holder and accepted for exchange, and commitment for new options to be
issued exercisable for a number of shares of common stock equal to nine-tenths
(9/10) of the total number of shares subject to the options tendered by the
option holder and accepted for exchange. In order to address potential adverse
tax consequences for employees of certain international countries, these
employees were allowed to forego the restricted stock grants and receive all
stock options.

   A total of 17.6 million options were accepted for exchange under the
Exchange Offer and accordingly, were canceled in June 2001. A total of 1.7
million shares of restricted stock were issued in June 2001 and we recorded
deferred compensation of $12.6 million related to these grants. The deferred
compensation costs will be amortized ratably over the vesting periods of the
restricted stock, generally over a four year period, with 25% of the shares
vesting one year after the date of grant and the remaining 75% vesting
quarterly thereafter. Until the restricted stock vests, such shares are subject
to forfeiture in the event the employee leaves the Company.

   The new option grants, approximately 15.9 million shares, are expected to be
granted in the second quarter of fiscal 2002, however, no sooner than six
months and one day from June 20, 2001. The new options will generally vest over
three years, with 8.34% of the options vesting on the date of grant and the
remaining 91.66% vesting quarterly thereafter subject to forfeiture in the
event the employee leaves the Company. The new options will have an exercise
price equal to the fair market value of our common stock on the date of the
grant.

Acquisition Costs

   In connection with the acquisition of Sirocco in the first quarter of fiscal
2001, we incurred $4.9 million of acquisition costs for legal, accounting and
professional services. The Company completed a merger with Sirocco, a U.S.
company headquartered in Wallingford, Connecticut on September 7, 2000, where
an aggregate of approximately 28.6 million shares of Sycamore common stock were
either exchanged for all outstanding shares of Sirocco or reserved for common
stock issuable under outstanding Sirocco stock options assumed by Sycamore in
the transaction.

Restructuring Charges and Related Asset Impairments

   As a result of unfavorable economic conditions and reduced capital spending
by telecommunications service providers, we implemented a restructuring program
in the third quarter of fiscal 2001, designed to reduce

                                      16

<PAGE>

expenses in order to align resources with long-term growth opportunities. The
restructuring program included a workforce reduction, consolidation of excess
facilities, and the restructuring of certain business functions to eliminate
non-strategic products and overlapping feature sets. This included the
discontinuance of the SN 6000 Intelligent Optical Transport product and the
bi-directional capabilities of the SN 8000 Intelligent Optical Network Node.

   As a result of the restructuring program, we recorded restructuring charges
and related asset impairments of $81.9 million classified as operating expenses
and an additional excess inventory charge of $84.0 million classified as cost
of revenue. We expect pretax savings of approximately $50 million in annual
operating expenses in connection with the restructuring program and certain
cost reduction initiatives.

   The following paragraphs provide detailed information relating to the
restructuring charges and related asset impairments which were recorded during
the third quarter of fiscal 2001.

  Workforce reduction

   The restructuring program resulted in the reduction of approximately 132
regular employees across all business functions, and geographic regions. The
workforce reductions were substantially completed in the third quarter of
fiscal 2001. We recorded a workforce reduction charge of approximately $4.2
million relating primarily to severance and fringe benefits. In addition the
number of temporary and contract workers employed by us were also reduced.

  Consolidation of facilities and certain other costs

   We recorded a restructuring charge of $24.4 million relating to
consolidation of excess facilities and certain other costs. The consolidation
of excess facilities relates to business activities that have been exited or
restructured. We recorded a restructuring charge of $12.2 million primarily
related to lease terminations and non-cancelable lease costs. We also recorded
other restructuring costs of $12.2 million relating primarily to administrative
expenses and professional fees in connection with the restructuring activities.

  Inventory and asset write downs

   We recorded a restructuring charge of $137.3 million relating to the
write-down of inventory to its net realizable value and the write down of
certain assets which became impaired as a result of the decision to eliminate
non-strategic products and overlapping feature sets. The restructuring charge
includes $84.0 million of inventory write-downs which are recorded as part of
cost of revenue. The restructuring charge also includes $53.3 million of
impaired assets which largely relate to the rationalization of our future
product offerings and contract settlements associated with the discontinuance
of certain product offerings.

   A summary of the restructuring charges and related asset impairments is
outlined as follows (in thousands):

<TABLE>
<CAPTION>
                                              Total
                                          Restructuring   Cash   Non-cash Accrual
                                             Charge     Payments Charges  Balance
                                          ------------- -------- -------- -------
<S>                                       <C>           <C>      <C>      <C>
Work-force reductions....................   $  4,174    $ 2,823  $   829  $   522
Facility consolidations and certain other
  costs..................................     24,437      1,132    1,214   22,091
Inventory and assets write-downs.........    137,285     13,923   84,972   38,390
                                            --------    -------  -------  -------
Ending balance at July 31, 2001..........   $165,896    $17,878  $87,015  $61,003
                                            ========    =======  =======  =======
</TABLE>

   The remaining cash expenditures relating to workforce reductions will be
substantially paid in the first quarter of fiscal 2002. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2007. We
expect to substantially complete our restructuring program during the first
half of fiscal 2002.

                                      17

<PAGE>

Interest and Other Income, Net

   Interest and other income, net increased $43.6 million to $85.3 million for
fiscal 2001 compared to $41.7 million for fiscal 2000. The increase in interest
income was primarily attributable to higher balances of cash and marketable
securities, resulting from the proceeds of our two public offerings in fiscal
year 2000 being available to earn interest for the entire year in fiscal 2001.

Provision for Income Taxes

   We recorded a tax provision of $13.1 million and $0.7 million for fiscal
years 2001 and 2000 respectively. The provision for income taxes for fiscal
2001 consists primarily of a valuation allowance and state and foreign taxes,
offset by a federal loss carryback benefit. The Company recorded a full
valuation allowance in fiscal 2001 to offset net deferred tax assets as the
Company believes it is more likely than not that net deferred tax assets will
not be realized. The provision for fiscal 2000 was higher than the expected
federal statutory rate of 35% primarily due to non-deductible stock
compensation offset by the utilization of net operating carryforwards and tax
credits.

  Fiscal Years ended July 31, 2000 and 1999

Revenue

   Revenue increased $186.8 million to $198.1 million for fiscal 2000 compared
to $11.3 million for fiscal 1999. The increase in revenue was primarily due to
increased sales of our products and the broadening of our product offerings
including the SN 8000 and SN 16000. One customer accounted for 92% and 100% of
our revenue for fiscal 2000 and 1999, respectively.

Cost of Revenue

   Cost of revenue increased $96.5 million to $105.0 million for fiscal 2000
compared to $8.5 million for fiscal 1999. The increase in cost of revenue was
primarily related to increased revenue since we began shipping products in May
1999, as well as headcount increases in our manufacturing overhead and customer
service organizations, warranty and other period costs. Gross profit as a
percentage of revenue was 47% and 25% for fiscal 2000 and 1999, respectively.
The increase in gross profit in fiscal 2000 compared to fiscal 1999 was largely
attributable to higher volume of product shipments.

Research and Development Expenses

   Research and development expenses increased $53.9 million to $71.9 million
for fiscal 2000 compared to $18.0 million for fiscal 1999. The increase in
expenses was primarily due to increased costs associated with a significant
increase in personnel and personnel-related expenses, increases in
non-recurring engineering costs and increases in prototype expenses for the
design and development of new products as well as enhancements to existing
products.

Sales and Marketing Expenses

   Sales and marketing expenses increased $26.6 million to $30.7 million for
fiscal 2000 compared to $4.1 million for fiscal 1999. The increase in expenses
reflect the hiring of additional sales and marketing personnel, sales based
commissions, additional office space both domestically and internationally and
marketing program costs, including web development, trade shows and new product
launch activities.

General and Administrative Expenses

   General and administrative expenses increased $6.7 million to $9.8 million
for fiscal 2000 compared to $3.1 million for fiscal 1999. The increase in
expenses reflect the hiring of additional general and administrative personnel
and expenses necessary to support increased levels of business activities.

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Amortization of Stock Compensation

   Amortization of stock compensation expense was $21.1 million for fiscal
2000, an increase of $17.5 million from $3.6 million for fiscal 1999. Amounts
for fiscal 2000 and 1999 include $6.2 million and $2.2 million of compensation
expense associated with the grant of options to purchase common stock to
non-employees, respectively. Amortization of stock compensation expense
primarily resulted from the granting of stock options and restricted shares
with exercise or sale prices which were deemed to be below fair market value.

Interest and Other Income, Net

   Interest and other income, net increased $40.9 million to $41.7 million for
fiscal 2000 compared to $850,000 for fiscal 1999. The increase in interest and
other income primarily reflects the earned income from the invested proceeds of
our two public offerings within fiscal year 2000.

Provision for Income Taxes

   We provided for income taxes of $745,000 for fiscal 2000. The provision for
fiscal 2000 differed from the expected federal statutory provision of $495,000
due to non-deductible stock compensation, offset by the utilization of net
operating loss carryforwards and tax credits. During fiscal 2000, we reduced
our valuation allowance related to deferred tax assets by $9.2 million as the
realization of such assets became probable. We did not provide for income taxes
in fiscal 1999 due to the loss from operations and the uncertainty of the
realization of deferred tax assets.

Liquidity and Capital Resources

   Total cash, cash equivalents and marketable securities were $1.25 billion at
July 31, 2001. Included in this amount were cash and cash equivalents of $492.5
million, compared to $430.0 million at July 31, 2000. The increase in cash and
cash equivalents of $62.5 million was attributable to cash provided by
investing activities of $160.8 million and cash provided by financing
activities of $5.1 million, offset by cash used in operating activities of
$103.4 million.

   Cash provided by investing activities of $160.8 million consisted primarily
of net maturities of marketable securities of $330.8 million, offset by
purchases of property and equipment of $115.5 million and increases in other
long-term assets of $45.6 million. Cash provided by financing activities of
$5.1 million consisted primarily of the proceeds received from employee stock
plan activity, offset by repayment of debt acquired through the Sirocco
acquisition. Cash used by operating activities of $103.4 million consisted of
the net loss for the year of $279.8 million, adjusted for non-cash charges
totaling $176.0 million and changes in working capital totaling $0.4 million.
Non-cash charges included depreciation and amortization, non-cash restructuring
charges and related asset impairments, and amortization of stock compensation.
The most significant changes in working capital were due to an increase in
inventories of $62.7 million and a decrease in deferred revenue of $23.1
million, offset partially by an increase in accrued restructuring costs of
$61.0 million.

   Increasingly, as a result of the financial demands of major network
deployments, service providers are looking to their suppliers for financing
assistance. From time to time we may provide or commit to extend credit

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or credit support to our customers as we consider appropriate in the course of
our business, considering our resources. Currently, we have customer financing
commitments of approximately $200 million, subject to draw down over two to
three years and completion of definitive lease financing documentation. As of
July 31, 2001, $73.0 million has been drawn down under these financing
arrangements. Revenue recognition under these financing agreements is generally
on a cash basis, with payments allocated between principal and interest based
on the terms of the agreement, unless collectibility is reasonably assured and
all other criteria for revenue recognition are met. Depending on market
conditions, we may seek to factor these arrangements to financial institutions
and investors to free up our capital and reduce the amount of our commitments
for such arrangements. Our ability to provide customer financing is limited and
depends on a number of factors, including our capital structure, the level of
our available credit and our ability to factor commitments. The extension of
financing to our customers will limit the capital that we have available for
other uses.

   Based on our current plans and business conditions, we believe that our
existing cash, cash equivalents and marketable securities will be sufficient to
satisfy our anticipated cash requirements for at least the next twelve months.

Recent Accounting Pronouncements

   In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The Company adopted SAB 101 in the Company's fourth
quarter of fiscal year 2001, and the adoption of SAB 101 did not have a
material impact on the Company's financial position or results of operations.

   In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 requires the
purchase method of accounting to be used for business combinations initiated
after June 30, 2001 and eliminates the pooling of interests method. The
adoption of this statement is not expected to have a material impact on the
Company's financial position or results of operations.

   In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also addresses
the initial recognition and measurement of intangible assets acquired outside
of a business combination whether acquired individually or with a group of
other assets. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that intangible assets with indefinite lives and
goodwill will not be amortized, but will rather be tested at least annually for
impairment. Although SFAS No. 142 is not required to be adopted by the Company
until fiscal 2003, its provisions must be applied to goodwill and other
intangible assets acquired after June 30, 2001. As of July 31, 2001, the
Company does not have any goodwill or other intangible assets relating to
business combinations that were accounted for under APB Opinion No. 16.
Accordingly, the adoption of SFAS No. 142 is not expected to have a material
impact on the Company's financial position or results of operations.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

RISKS RELATED TO OUR BUSINESS

WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS

   As a result of unfavorable economic conditions and a sudden and severe
decline in the purchasing patterns of our customers, our revenue declined
significantly beginning in the third quarter of fiscal 2001, as compared to the
first two quarters of fiscal 2001. The economic downtown and reduced capital
spending by telecommunications service providers has also resulted in longer
selling cycles with extended trial periods for new equipment purchases. Our
business and results of operations will be seriously harmed if current economic
conditions do not improve.

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<PAGE>

WE ARE ENTIRELY DEPENDENT ON OUR LINE OF INTELLIGENT OPTICAL NETWORKING
PRODUCTS AND OUR FUTURE REVENUE DEPENDS ON THEIR COMMERCIAL SUCCESS

   Our future revenue depends on the commercial success of our line of
intelligent optical networking products. As of July 31, 2001, our SN 3000
Optical Access Switch, SN 6000 Intelligent Optical Transport product, SN 8000
Intelligent Optical Network Node, SN 10000 Intelligent Optical Transport
System, SN 16000 Intelligent Optical Switch and Silvx Manager Network
Management System are the only products that have been shipped to customers. As
part of the restructuring we announced in the third quarter of fiscal 2001, we
are consolidating our transport product offerings and development programs to
eliminate non-strategic products and overlapping feature sets. This includes
discontinuance of the SN 6000 Intelligent Optical Transport product and the
bi-directional capabilities of the SN 8000 Intelligent Optical Network Node. We
cannot assure you that we will be successful in completing the development,
introduction or production manufacturing of new products or enhancing our
existing products. Failure of our current or planned products to operate as
expected could delay or prevent their adoption. If our target customers do not
adopt, purchase and successfully deploy our current and planned products, our
results of operations could be adversely affected.

WE EXPECT THAT SUBSTANTIALLY ALL OF OUR REVENUE WILL BE GENERATED FROM A
LIMITED NUMBER OF CUSTOMERS, AND OUR REVENUE IS SUBSTANTIALLY DEPENDENT UPON
SALES OF PRODUCTS TO THESE CUSTOMERS

   We currently have a limited number of customers, one of whom, Williams
Communications, accounted for 47%, 92%, and 100% of our revenue during fiscal
2001, 2000 and 1999, respectively. Another customer, 360networks, accounted for
11% of our revenue in fiscal 2001. As a result of unfavorable economic and
other conditions, several of our largest customers to date, including Williams
and 360networks, have slowed their capital expenditures and decreased their
rate of ordering products from us. Historically, a large percentage of our
sales have been made to emerging carriers such as Williams and 360networks.
Many of these emerging carriers have recently begun to experience severe
financial difficulties. As a result, we believe that sales to emerging carriers
are likely to be at reduced levels, and to be successful, we will need to
increase our sales to incumbent carriers, which typically have longer sales
evaluation cycles and with which we have limited experience in selling our
products. There can be no assurance that we will be successful in increasing
our sales to incumbent carriers, which currently represent a relatively small
percentage of our total revenue.

   None of our customers are contractually committed to purchase any minimum
quantities of products from us. We expect that in the foreseeable future a
majority of our revenue will continue to depend on sales of our intelligent
optical networking products to a limited number of customers. The rate at which
our current and prospective customers purchase products from us will depend, in
part, on their success in selling communications services based on these
products to their own customers. Any failure of current or prospective
customers to purchase products from us for any reason, including any
determination not to install our products in their networks or a downturn in
their business, would seriously harm our financial condition or results of
operations.

WE EXPECT GROSS MARGINS TO FLUCTUATE

   Our gross margins declined significantly compared to historical levels
beginning in the third quarter of fiscal 2001. We currently anticipate that
gross margins may continue to be adversely affected by several factors,
including reduced demand for our products, effect of new product introductions
including volumes and manufacturing efficiencies, component limitations, the
mix of products sold, competitive pricing, and possible increases in inventory
levels which could increase our exposure to excess and obsolete inventory
charges.

OUR FAILURE TO GENERATE SUFFICIENT REVENUE WOULD PREVENT US FROM ACHIEVING
PROFITABILITY

   Beginning in the third quarter of fiscal 2001, our revenue declined
considerably and we incurred significant operating losses during the last half
of fiscal 2001. As of July 31, 2001, we had an accumulated deficit of $301.4

                                      21

<PAGE>

million. We cannot assure you that our revenue will increase or that we will
generate sufficient revenue to achieve or sustain profitability. While we have
implemented a restructuring program designed to decrease the Company's business
expenses, we will continue to have large fixed expenses and we expect to
continue to incur significant sales and marketing, product development,
customer support and service, administrative and other expenses. As a result,
we need to generate significantly higher revenue to achieve and maintain
profitability.

THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK

   Our revenue and operating results have varied significantly from quarter to
quarter. For example, from the fourth quarter of fiscal 1999 through the second
quarter of fiscal 2001, our revenue increased each quarter sequentially
compared to the previous quarter. However, in the third quarter of fiscal 2001,
our revenue declined due to a sudden and severe decline in the purchasing
patterns of our customers, resulting in a significant operating loss for the
quarter. We believe that our revenue and operating results are likely to
continue to vary significantly from quarter to quarter due to a number of
factors, many of which are outside of our control and any of which may cause
our stock price to fluctuate. The primary factors that may affect us include
the following:

  .  fluctuation in demand for intelligent optical networking products;

  .  the timing and size of sales of our products;

  .  the length and variability of the sales cycle for our products, which we
     believe is increasing in length;

  .  the timing of recognizing revenue and deferred revenue;

  .  new product introductions and enhancements by our competitors and
     ourselves;

  .  changes in our pricing policies or the pricing policies of our
     competitors;

  .  our ability to develop, introduce and ship new products and product
     enhancements that meet customer requirements in a timely manner;

  .  delays or cancellations by customers;

  .  our ability to obtain sufficient supplies of sole or limited source
     components;

  .  increases in the prices of the components we purchase;

  .  our ability to attain and maintain production volumes and quality levels
     for our products;

  .  manufacturing lead times;

  .  the timing and level of prototype expenses;

  .  costs related to acquisitions of technology or businesses;

  .  general economic conditions as well as those specific to the
     telecommunications; Internet and related industries.

   While we have implemented a restructuring and cost control program, we plan
to continue to invest in our business, to continue to maintain a strong product
development and customer support infrastructure so as to be poised to move
quickly when economic conditions recover. Our operating expenses are largely
based on anticipated organizational growth and a high percentage of our
expenses are, and will continue to be, fixed. As a result, a delay in
generating or recognizing revenue for the reasons set forth above, or for any
other reason, could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
You should not rely on our results for one quarter as any indication

                                      22

<PAGE>

of our future performance. Occurrences of the foregoing factors are extremely
difficult to predict. In addition, our ability to forecast our future business
has been significantly impaired by the general economic downturn. As a result,
it is likely that in some future period our operating results may be below the
expectations of public market analysts and investors or that our net sales may
decline or increase at a slower rate. In this event, the price of our common
stock could decrease.

OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS AND MAY HAVE
ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL DEPLOYMENT, WHICH COULD
SERIOUSLY HARM OUR BUSINESS

   Our intelligent optical networking products are complex and are designed to
be deployed in large and complex networks. Our customers may discover errors or
defects in the hardware or the software, or the product may not operate as
expected after it has been fully deployed. From time to time, there may be
interruptions or delays in the deployment of our products due to product
performance problems or post delivery obligations. If we are unable to fix
errors or other problems, or if our customers experience interruptions or
delays that cannot be promptly resolved, we could experience:

  .  loss of or delay in revenue and loss of market share;

  .  loss of customers;

  .  failure to attract new customers or achieve market acceptance;

  .  diversion of development resources;

  .  increased service and warranty costs;

  .  delays in collecting accounts receivable;

  .  legal actions by our customers; and

  .  increased insurance costs,

any of which could seriously harm our financial condition or results of
operations.

THE LONG AND VARIABLE SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUE AND
OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER

   A customer's decision to purchase our intelligent optical networking
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. As a result, our sales
cycle is lengthy and recently has increased in length. Throughout the sales
cycle, we spend considerable time and expense educating and providing
information to prospective customers about the use and features of our
products. Even after making a decision to purchase, we believe that our
customers will deploy the products slowly and deliberately. Timing of
deployment can vary widely and depends on the economic environment of our
customers, the skills of our customers, the size of the network deployment and
the complexity of our customers' network environment. Customers with complex
networks usually expand their networks in large increments on a periodic basis.
Accordingly, we may receive purchase orders for significant dollar amounts on
an irregular and unpredictable basis. Because of our limited operating history
and the nature of our business, we cannot predict these sales and deployment
cycles. The long sales cycles, as well as our expectation that customers will
tend to sporadically place large orders with short lead times, may cause our
revenue and results of operations to vary significantly and unexpectedly from
quarter to quarter.

OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT

   We were founded in February 1998 and began shipping our first product in May
1999. As a result, there is limited meaningful historical financial data upon
which investors may evaluate us and our prospects. We also have limited
historical financial data upon which to base our projected revenue. Our
operating expenses are

                                      23

<PAGE>

largely based on anticipated revenue trends, and a high percentage of our
expenses are and will continue to be fixed. You should consider the risks and
difficulties frequently encountered by companies like ours in a new and rapidly
evolving market. Our ability to sell products and the level of success, if any,
we achieve depend, among other things, on the level of demand for intelligent
optical networking products, which is a new and rapidly evolving market. If we
do not achieve our expected revenue, our operating results will be below our
expectations and the expectations of our investors and market analysts, which
could cause the price of our common stock to decline.

WE MAY NOT BE SUCCESSFUL IF OUR CUSTOMER BASE DOES NOT GROW

   Our future success will depend on our attracting additional customers. The
growth of our customer base could be adversely affected by:

  .  customer unwillingness to implement our optical networking architecture;

  .  any delays or difficulties that we may incur in completing the
     development, introduction and production manufacturing of our planned
     products or product enhancements;

  .  new product introductions by our competitors;

  .  any failure of our products to perform as expected; or

  .  any difficulty we may incur in meeting customers' delivery, installation
     or performance requirements.

WE RELY ON SINGLE SOURCES FOR SUPPLY OF CERTAIN COMPONENTS AND OUR BUSINESS MAY
BE SERIOUSLY HARMED IF OUR SUPPLY OF ANY OF THESE COMPONENTS AND OTHER
COMPONENTS IS DISRUPTED

   We currently purchase several key components, including commercial digital
signal processors, RISC processors, field programmable gate arrays, SONET
transceivers and erbium doped fiber amplifiers, from single or limited sources.
We purchase each of these components on a purchase order basis and have no
long-term contracts for these components. Although we believe that there are
alternative sources for each of these components, in the event of a disruption
in supply, we may not be able to develop an alternate source in a timely manner
or at favorable prices. Such a failure could hurt our ability to deliver our
products to our customers and negatively affect our operating margins. In
addition, our reliance on our suppliers exposes us to potential supplier
production difficulties or quality variations. Any such disruption in supply
would seriously impact present and future sales and revenue. In particular,
component yield limitations negatively impacted the production manufacturing
for the SN 16000 and our revenue from this product during fiscal 2001.

   During the past year, the optical component industry has been downsizing
manufacturing capacity while consolidating product lines from earlier
acquisitions. This business environment could impact product deliveries and
result in the consolidation of product offerings. Because optical components
are integrated into our products, the business environment for optical
component manufacturers could negatively impact our revenue and results of
operations.

IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD
BECOME OBSOLETE

   The market for intelligent optical networking products is likely to be
characterized by rapid technological change, frequent new product introductions
and changes in customer requirements. We may be unable to respond quickly or
effectively to these developments. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our development,
introduction or marketing of new products and enhancements. The introduction of
new products by competitors, market acceptance of products based on new or
alternative technologies or the emergence of new industry standards could
render our existing or future products obsolete.

                                      24

<PAGE>

   In developing our products, we have made, and will continue to make,
assumptions about the standards that may be adopted by our customers and
competitors. If the standards adopted are different from those which we have
chosen to support, market acceptance of our products may be significantly
reduced or delayed and our business will be seriously harmed. The introduction
of products incorporating new technologies and the emergence of new industry
standards could render our existing products obsolete.

   In addition, in order to introduce products incorporating new technologies
and new industry standards, we must be able to gain access to the latest
technologies of our customers, our suppliers and other network vendors. Any
failure to gain access to the latest technologies could impair the
competitiveness of our products.

CUSTOMER REQUIREMENTS ARE LIKELY TO EVOLVE, AND WE WILL NOT RETAIN CUSTOMERS OR
ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE AND MEET SPECIFIC CUSTOMER
REQUIREMENTS

   Our current and prospective customers may require product features and
capabilities that our current products do not have. To achieve market
acceptance for our products, we must effectively and timely anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Our failure to develop products or offer services that
satisfy customer requirements would seriously harm our ability to increase
demand for our products.

   We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction, volume production or marketing
of new products and enhancements. The introduction of new or enhanced products
also requires that we manage the transition from older products in order to
minimize disruption in customer ordering patterns and ensures that adequate
supplies of new products can be delivered to meet anticipated customer demand.
Our inability to effectively manage this transition would cause us to lose
current and prospective customers.

OUR MARKET IS HIGHLY COMPETITIVE, AND OUR FAILURE TO COMPETE SUCCESSFULLY COULD
ADVERSELY AFFECT OUR MARKET POSITION

   Competition in the public network infrastructure market is intense. This
market has historically been dominated by large companies, such as Nortel
Networks, Lucent Technologies, Alcatel and Ciena Corporation. In addition, a
number of smaller companies have either announced plans for new products or
introduced new products to address the same network problems which our products
address. Many of our current and potential competitors have significantly
greater selling and marketing, technical, manufacturing, financial and other
resources, including vendor-sponsored financing programs. Moreover, our
competitors may foresee the course of market developments more accurately and
could develop new technologies that compete with our products or even render
our products obsolete. Due to the rapidly evolving markets in which we compete,
additional competitors with significant market presence and financial resources
may enter those markets, thereby further intensifying competition.

   In order to compete effectively, we must deliver products that:

  .  provide extremely high network reliability;

  .  scale easily and efficiently with minimum disruption to the network;

  .  interoperate with existing network designs and equipment vendors;

  .  reduce the complexity of the network by decreasing the need for
     overlapping equipment;

  .  provide effective network management; and

  .  provide a cost-effective solution for service providers.

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<PAGE>

   In addition, we believe that knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers
to develop new services for their customers and an ability to provide
vendor-sponsored financing, are important competitive factors in our market. We
have a limited ability to provide vendor-sponsored financing and this may
influence the purchasing decisions of prospective customers, who may decide to
purchase products from one of our competitors who are able to provide more
extensive financing programs.

   If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations and
reduced gross margins, any one of which could materially and adversely affect
our business, results of operations and financial condition.

THE INDUSTRY IN WHICH WE COMPETE IS SUBJECT TO CONSOLIDATION

   We believe that the industry in which we compete may enter into a
consolidation phase. Over the past year, the market valuations of the majority
of companies in our industry have declined significantly, and many companies
have experienced reduced revenues due to factors including decreased customer
demand in general, a smaller customer base due to the financial difficulties
impacting emerging carriers, financial exposures due to customer financing
commitments, and other factors. We expect that the weakened financial position
of many companies in our industry may cause acquisition activity to increase.
We believe that industry consolidation may result in stronger competitors that
are better able to compete as sole-source vendors for customers. This could
lead to more variability in operating results as we compete to be a single
vendor solution and could have a material adverse effect on our business,
operating results, and financial condition.

WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS

   We have limited internal manufacturing capabilities. We rely on a small
number of contract manufacturers to manufacture our products in accordance with
our specifications and to fill orders on a timely basis. We have supply
contracts with Celestica Corporation and Jabil Circuit, Inc., which provide
comprehensive manufacturing services, including assembly, test, control and
shipment to our customers, and procure material on our behalf. We may not be
able to effectively manage our relationship with such contract manufacturers,
and such contract manufacturers may not meet our future requirements for timely
delivery. Each of our contract manufacturers also builds products for other
companies, and we cannot assure you that they will always have sufficient
quantities of inventory available to fill orders placed by our customers or
that they will allocate their internal resources to fill these orders on a
timely basis. The contract manufacturing industry is highly competitive, and in
recent months, several major acquisitions within the industry have been
announced. Any proposed or announced acquisitions could have an adverse effect
on our working relationship with our contract manufacturers. Qualifying a new
contract manufacturer and commencing volume production is expensive and time
consuming and could result in a significant interruption in the supply of our
products. If we are required or choose to change contract manufacturers, we may
lose revenue and damage our customer relationships.

SALES TO EMERGING SERVICE PROVIDERS MAY INCREASE THE UNPREDICTABILITY OF OUR
RESULTS

   As a result of current economic and market conditions, decreased funding is
available for large capital expenditures by service providers. This decrease in
available funding significantly affects spending by our customers that are
emerging service providers. In addition, the timing and volume of purchases by
emerging service providers can be unpredictable due to other factors, including
their need to build a customer base and capacity while working within their
budgetary constraints. As a result of economic and other conditions, emerging
service providers, which had been the early adopters of our technology, are no
longer able to continue to fund aggressive deployments. Our ability to
recognize revenue from emerging service providers will depend on the relative
financial strength of the particular customer. We may be required to write off
or decrease the

                                      26

<PAGE>

value of our accounts receivable from a customer whose financial condition
materially deteriorates. During the fourth quarter of fiscal 2001, we recorded
a specific provision for doubtful accounts of $4.4 million, due to the filing
for bankruptcy protection by our customer, 360networks. Decreases in purchasing
volume of emerging service providers or changes in the financial condition of
emerging service provider customers could have a material adverse effect on our
results of operations.

THE INTELLIGENT OPTICAL NETWORKING MARKET IS RELATIVELY NEW AND OUR BUSINESS
WILL SUFFER IF IT DOES NOT DEVELOP AS WE EXPECT

   The market for intelligent optical networking products is relatively new and
continues to evolve. We cannot assure you that a viable market for our products
will develop or be sustainable. If this market does not develop, develops more
slowly than we expect or is not sustained, our business, results of operations
and financial condition would be seriously harmed.

IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, INSTALLATIONS
WILL BE DELAYED OR CANCELLED AND WE COULD HAVE SUBSTANTIAL PRODUCT RETURNS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS

   Many of our customers utilize multiple protocol standards, and each of our
customers may have different specification requirements to interface with their
existing networks. Our customers' networks contain multiple generations of
products that have been added over time as these networks have grown and
evolved. Our products must interoperate with all of the products within these
networks as well as future products in order to meet our customers'
requirements. The requirement that we modify product design in order to achieve
a sale may result in a longer sales cycle, increased research and development
expense and reduced margins on our products. If our products do not
interoperate with those of our customers' networks, installations could be
delayed, orders for our products could be cancelled or our products could be
returned. This would also seriously harm our reputation, all of which could
seriously harm our business and prospects.

UNDETECTED SOFTWARE OR HARDWARE ERRORS AND PROBLEMS ARISING FROM USE OF OUR
PRODUCTS IN CONJUNCTION WITH OTHER VENDORS' PRODUCTS COULD RESULT IN DELAYS OR
LOSS OF MARKET ACCEPTANCE OF OUR PRODUCTS

   Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. We expect that
errors will be found from time to time in new or enhanced products after we
begin commercial shipments. In addition, service providers typically use our
products in conjunction with products from other vendors. As a result, when
problems occur, it may be difficult to identify the source of the problem.
These problems may cause us to incur significant warranty, support and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems. The
occurrence of these problems could result in the delay or loss of market
acceptance of our products and would likely have a material adverse effect on
our business, results of operations and financial condition. Defects,
integration issues or other performance problems in our products could result
in financial or other damages to our customers or could damage market
acceptance for our products. Our customers could also seek damages for losses
from us. A product liability claim brought against us, even if unsuccessful,
would likely be time consuming and costly.

OUR FAILURE TO ESTABLISH AND MAINTAIN KEY CUSTOMER RELATIONSHIPS MAY RESULT IN
DELAYS IN INTRODUCING NEW PRODUCTS OR CAUSE CUSTOMERS TO FOREGO PURCHASING OUR
PRODUCTS

   Our future success will also depend upon our ability to develop and manage
key customer relationships in order to introduce a variety of new products and
product enhancements that address the increasingly sophisticated needs of our
customers. Our failure to establish and maintain these customer relationships
may

                                      27

<PAGE>

adversely affect our ability to develop new products and product enhancements.
In addition, we may experience delays in releasing new products and product
enhancements in the future. Material delays in introducing new products and
enhancements or our inability to introduce competitive new products may cause
customers to forego purchases of our products and purchase those of our
competitors, which could seriously harm our business.

   The majority of our product sales to date have been to emerging carriers
rather than incumbent carriers. We believe that it is important for us to
increase our sales to incumbent carriers, including incumbent local exchange
carriers such as the RBOCs. Incumbent carriers typically have longer sales
evaluation cycles than emerging carriers, and we have limited experience in
selling our products to incumbent carriers. In addition, we will need to invest
in product certification standards such as the Operations System Integration
and Modification of Network Elements ("OSMINE") standard, which will be
necessary for us to increase our sales to the RBOCs. There can be no assurance
that we will be able to establish or maintain strong customer relationships or
increase our sales to incumbent carriers.

OUR FAILURE TO CONTINUALLY IMPROVE OUR INTERNAL CONTROLS AND SYSTEMS, AND
RETAIN NEEDED PERSONNEL COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

   Since inception, the scope of our operations has increased and we have grown
our headcount substantially year over year, both domestically and
internationally. At July 31, 2001, we had a total of 944 employees, as compared
to 687 employees at July 31, 2000. Our growth has placed a significant strain
on our management systems and resources. Our ability to successfully offer our
products and services and implement our business plan in a rapidly evolving
market requires an effective planning and management process. We expect that we
will need to continue to improve our financial, managerial and manufacturing
controls and reporting systems, and will need to effectively manage our
headcount levels worldwide. We may not be able to implement adequate control
systems in an efficient and timely manner. In spite of recent economic
conditions, competition for highly skilled personnel is intense, especially in
the New England area where we are headquartered. Any failure to attract,
assimilate or retain qualified personnel to fulfill our current or future needs
could adversely affect our results of operations.

WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES, OUR ABILITY
TO COMPETE COULD BE HARMED

   We depend on the continued services of our executive officers and other key
engineering, sales, marketing and support personnel, who have critical industry
experience and relationships that we rely on to implement our business plan.
None of our officers or key employees is bound by an employment agreement for
any specific term. We do not have "key person" life insurance policies covering
any of our employees. All of our key employees have been granted stock options
which are intended to represent an integral component of their compensation
package. These stock options may not provide the intended incentive to our
employees if our stock price declines or experiences significant volatility.
The loss of the services of any of our key employees, the inability to attract
and retain qualified personnel in the future, or delays in hiring qualified
personnel could delay the development and introduction of, and negatively
impact our ability to sell, our products.

IF WE BECOME SUBJECT TO UNFAIR HIRING, WRONGFUL TERMINATION OR OTHER EMPLOYMENT
RELATED CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS IN DEFENDING OURSELVES

   Companies in our industry, whose employees accept positions with
competitors, frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive claims of this
kind or other claims relating to our employees in the future as we seek to hire
qualified personnel or that those claims will not result in material
litigation. During the third quarter of fiscal 2001, we terminated
approximately 132 employees in response to changing market conditions, and as a
result, may face claims relating to their compensation and/or wrongful
termination based on discrimination. We could incur substantial costs in
defending ourselves or our employees against such claims, regardless of their
merits. In addition, defending ourselves or our employees from such claims
could divert the attention of our management away from our operations.

                                      28

<PAGE>

OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES

   We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.

   Monitoring unauthorized use of our products is difficult and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. If competitors are
able to use our technology, our ability to compete effectively could be harmed.

IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, THE COMPETITIVENESS OF OUR PRODUCTS COULD BE IMPAIRED

   From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could seriously harm the competitiveness of our products.

WE COULD BECOME SUBJECT TO CLAIMS REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR SIGNIFICANT COSTS

   In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Our industry in
particular is characterized by the existence of a large number of patents and
frequent claims and related litigation regarding patents and other intellectual
property rights. We may be a party to claims as a result of an allegation that
we infringe others' intellectual property. Such disputes could result in
significant expenses to Sycamore and divert the efforts of our technical and
management personnel.

   Any parties asserting that our products infringe upon their proprietary
rights would force us to defend ourselves and possibly our customers,
manufacturers or suppliers against the alleged infringement. Regardless of
their merit, these claims could result in costly litigation and subject us to
the risk of significant liability for damages. These claims, again regardless
of their merit, would likely be time consuming and expensive to resolve, would
divert management time and attention and would put the Company at risk to:

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

  .  obtain from the owner of the intellectual property right a license to sell
     or use the relevant technology, which license may not be available on
     reasonable terms, or at all;

  .  redesign those products that use such technology; or

  .  accept a return of products that use such technologies.

   If we are forced to take any of the foregoing actions, our business may be
seriously harmed.

WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD IMPAIR
OUR ABILITY TO GROW OUR REVENUE ABROAD

   International sales represented 35% of total revenue in fiscal 2001, and we
intend to continue to expand our sales into international markets. This
expansion will require significant management attention and financial

                                      29

<PAGE>

resources to develop successfully direct and indirect international sales and
services channels and to support customers in international markets. We may not
be able to develop international market demand for our products.

   We have limited experience in marketing, distributing and supporting our
products internationally and to do so, we expect that we will need to develop
versions of our products that comply with local standards. In addition,
international operations are subject to other inherent risks, including:

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

  .  difficulties and costs of staffing and managing foreign operations;

  .  necessity to work with third parties in certain countries to perform
     installation and obtain customer acceptance, and the resulting potential
     impact on revenue recognition;

  .  the impact of recessions in economies outside the United States;

  .  unexpected changes in regulatory requirements;

  .  certification requirements;

  .  currency fluctuations;

  .  reduced protection for intellectual property rights in some countries;

  .  potentially adverse tax consequences; and

  .  political and economic instability.

ANY ACQUISITIONS OR STRATEGIC INVESTMENTS WE MAKE COULD DISRUPT OUR BUSINESS
AND SERIOUSLY HARM OUR FINANCIAL CONDITION

   As part of our ongoing business development strategy, we consider
acquisitions and strategic investments in complementary companies, products or
technologies. In the event of an acquisition, we could:

  .  issue stock that would dilute our current stockholders' percentage
     ownership;

  .  incur debt;

  .  assume liabilities;

  .  record goodwill and non-amortizable intangible assets that will be subject
     to impairment testing and potential periodic impairment charges.

  .  incur amortization expenses related to certain intangible assets;

  .  incur large and immediate write-offs; or

  .  become subject to litigation;

   Our ability to achieve the benefits of any acquisition, including our
acquisition of Sirocco which we completed on September 7, 2000, will also
involve numerous risks, including:

  .  problems combining the purchased operations, technologies or products;

  .  unanticipated costs;

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

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

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

  .  problems with integrating employees and potential loss of key employees.

                                      30

<PAGE>

   We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future and any failure to do so could disrupt our business and seriously harm
our financial condition.

   As of July 31, 2001, we have made strategic investments in privately held
companies totaling $26.0 million, and we may decide to make additional
investments in the future. These investments are inherently risky as the market
for the technologies or products they have under development are typically in
the early stages and may never materialize. We could lose our entire investment
in certain or all of these companies.

ANY EXTENSION OF CREDIT TO OUR CUSTOMERS MAY SUBJECT US TO CREDIT RISKS AND
LIMIT THE CAPITAL THAT WE HAVE AVAILABLE FOR OTHER USES

   We are experiencing increased demands for customer financing and we expect
these demands to continue. We believe it is a competitive factor in obtaining
business. From time to time we may provide or commit to extend credit or credit
support to our customers, including emerging service providers, as we consider
appropriate in the course of our business. Such financing activities subject us
to the credit risk of customers whom we finance. In addition, our ability to
recognize revenue from financed sales will depend upon the relative financial
condition of the specific customer, among other factors. Although we have
programs in place to monitor the risk associated with vendor financing, we
cannot assure you that such programs will be effective in reducing our risk of
an impaired ability to pay on the part of a customer whom we have financed. We
could experience losses due to customers failing to meet their financial
obligations which could harm our business and materially adversely affect our
operating results and financial condition.

   Currently, we have outstanding customer financing commitments of
approximately $200 million, subject to draw down over two to three years and
completion of definitive lease financing documentation. As of July 31, 2001,
$73.0 million has been drawn down under these financing arrangements, and as
such, we are exposed to credit risk relating to these customers.

RISKS RELATED TO THE SECURITIES MARKET

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE

   Historically, the market for technology stocks has been extremely volatile.
Our common stock has experienced, and may continue to experience, substantial
price volatility. The following factors could cause the market price of our
common stock to fluctuate significantly:

  .  our loss of a major customer;

  .  significant changes or slowdowns in the funding and spending patterns of
     our current and prospective customers;

  .  the addition or departure of key personnel;

  .  variations in our quarterly operating results;

  .  announcements by us or our competitors of significant contracts, new
     products or product enhancements;

  .  failure by us to meet product milestones;

  .  acquisitions, distribution partnerships, joint ventures or capital
     commitments;

  .  variations between our actual results and the published expectations of
     analysts;

  .  changes in financial estimates by securities analysts;

  .  sales of our common stock or other securities in the future;

  .  changes in market valuations of networking and telecommunications
     companies; and

  .  fluctuations in stock market prices and volumes.

                                      31

<PAGE>

   In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies.

   Beginning on July 2, 2001, several purported securities class action
complaints were filed against the Company, several of its officers and
directors and the Company's lead underwriters in connection with the Company's
initial public offering and secondary offering. The Company believes that the
claims against it are without merit and intends to defend against the
complaints vigorously. However, defending the Company and its officers against
these complaints may result in substantial costs and a diversion of
management's attention and resources. See Item 3--Legal Proceedings for
additional details regarding these cases.

THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK THAT COULD CAUSE
OUR STOCK PRICE TO FALL, OR INCREASE THE VOLATILITY OF OUR STOCK PRICE

   As of July 31, 2001 options to purchase a total of 19.5 million shares of
our common stock were outstanding. In addition, we plan to issue options to
purchase approximately 15.9 million shares during the second quarter of fiscal
2002, in accordance with the terms of an option exchange program in which most
of our employees were eligible to participate. While these options are subject
to vesting schedules, a number of the shares underlying these options are
freely tradable. Sales of a substantial number of shares of our common stock
could cause our stock price to fall or increase the volatility of our stock
price. In addition, sales of shares by our stockholders could impair our
ability to raise capital through the sale of additional stock.

INSIDERS OWN A SUBSTANTIAL NUMBER OF SYCAMORE SHARES AND COULD LIMIT YOUR
ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS, INCLUDING CHANGES OF
CONTROL

   As of July 31, 2001, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 42.9%
of our outstanding common stock. These stockholders, if acting together, would
be able to influence significantly matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE OF CONTROL

   Provisions of our amended and restated certificate of incorporation,
by-laws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The following discussion about our market risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates and foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes.

Interest Rate Sensitivity

   We maintain a portfolio of cash equivalents and short-term and long-term
investments in a variety of securities including: commercial paper,
certificates of deposit, money market funds and government and non-

                                      32

<PAGE>

government debt securities. These available-for-sale securities are subject to
interest rate risk and may fall in value if market interest rates increase. If
market interest rates increase immediately and uniformly by 10 percent from
levels at July 31, 2001, the fair value of the portfolio would decline by
approximately $2.3 million. We have the ability to hold our fixed income
investments until maturity, and therefore do not expect our operating results
or cash flows to be affected to any significant degree by the effect of a
sudden change in market interest rates on our securities portfolio.

Exchange Rate Sensitivity

   We operate primarily in the United States, and the majority of our sales to
date have been made in US dollars. However, our business has become
increasingly global, with international revenue representing 35% of total
revenue in fiscal 2001, and we expect this trend to continue. As a result, we
expect that sales in non-dollar currencies and our exposure to foreign currency
exchange rate fluctuations are likely to increase. Fluctuations in foreign
currencies may have an impact on our financial results. We are prepared to
hedge against fluctuations in foreign currencies if the exposure is material,
although we have not engaged in hedging activities to date.

                                      33

<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
Report of Independent Accountants....................................................................  35

Consolidated Balance Sheets as of July 31, 2001 and 2000.............................................  36

Consolidated Statements of Operations for the years ended July 31, 2001, 2000 and 1999...............  37

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended July 31, 2001, 2000 and
  1999...............................................................................................  38

Consolidated Statements of Cash Flows for the years ended July 31, 2001, 2000 and 1999...............  39

Notes to Consolidated Financial Statements...........................................................  40
</TABLE>

                                      34

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and the Board of Directors of Sycamore Networks, Inc.:

   In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Sycamore Networks, Inc. and its subsidiaries at July 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

                                          /S/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
August 20, 2001

                                      35

<PAGE>

                            SYCAMORE NETWORKS, INC.

                          CONSOLIDATED BALANCE SHEETS

                       (in thousands, except par value)

<TABLE>
<CAPTION>
                                    ASSETS                                      July 31, 2001 July 31, 2000
                                    ------                                      ------------- -------------
<S>                                                                             <C>           <C>
Current assets:
   Cash and cash equivalents...................................................  $  492,500    $  429,965
   Marketable securities.......................................................     332,471       710,398
   Accounts receivable, net of allowance for doubtful accounts of $4,773
     at July 31, 2001..........................................................      41,477        43,407
   Inventories, net............................................................      66,939        39,739
   Prepaids and other current assets...........................................      13,739        25,932
                                                                                 ----------    ----------
       Total current assets....................................................     947,126     1,249,441
Property and equipment, net....................................................     106,625        42,840
Marketable securities..........................................................     423,578       376,740
Other assets...................................................................      73,992        28,894
                                                                                 ----------    ----------
       Total assets............................................................  $1,551,321    $1,697,915
                                                                                 ==========    ==========
<CAPTION>

                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
<S>                                                                             <C>           <C>
Current liabilities:
   Accounts payable............................................................  $   62,513    $   49,030
   Accrued compensation........................................................       7,198         7,177
   Accrued expenses............................................................      18,001         7,529
   Accrued restructuring costs.................................................      61,003            --
   Deferred revenue............................................................       6,607        29,708
   Other current liabilities...................................................       8,139         8,866
                                                                                 ----------    ----------
       Total current liabilities...............................................     163,461       102,310
Long-term liabilities..........................................................          --         4,487
Commitments and contingencies (Notes 5 and 11)
Stockholders' equity:
   Preferred stock, $.01 par value, 5,000 shares authorized, none issued and
     outstanding at July 31, 2001 and July 31, 2000............................          --            --
   Common stock, $.001 par value; 2,500,000 and 1,500,000 shares authorized at
     July 31, 2001 and July 31, 2000, respectively; 273,681 and 271,664 shares
     issued at July 31, 2001 and July 31, 2000, respectively...................         274           272
   Additional paid-in capital..................................................   1,738,505     1,720,565
   Accumulated deficit.........................................................    (301,429)      (21,675)
   Notes receivable............................................................          --          (262)
   Deferred compensation.......................................................     (54,110)     (112,816)
   Treasury stock, at cost; 680 shares held at July 31, 2001...................        (126)           --
   Accumulated other comprehensive income......................................       4,746         5,034
                                                                                 ----------    ----------
       Total stockholders' equity..............................................   1,387,860     1,591,118
                                                                                 ----------    ----------
       Total liabilities and stockholders' equity..............................  $1,551,321    $1,697,915
                                                                                 ==========    ==========
</TABLE>


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

                                      36

<PAGE>

                            SYCAMORE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                               Year Ended July 31,
                                                                          -----------------------------
                                                                            2001       2000      1999
                                                                          ---------  --------  --------
<S>                                                                       <C>        <C>       <C>
Revenue.................................................................. $ 374,746  $198,137  $ 11,330
Cost of revenue (exclusive of non-cash stock compensation expense of
  $3,132, $1,433 and $101)...............................................   314,664   104,986     8,486
                                                                          ---------  --------  --------
Gross profit.............................................................    60,082    93,151     2,844
Operating expenses:
   Research and development (exclusive of non-cash stock compensation
     expense of $34,203, $9,685 and $851)................................   159,607    71,903    17,979
   Sales and marketing (exclusive of non-cash stock compensation expense
     of $24,308, $7,014 and $346)........................................    83,478    30,650     4,064
   General and administrative (exclusive of non-cash stock compensation
     expense of $3,581, $2,935 and $2,350)...............................    16,820     9,824     3,056
   Amortization of stock compensation....................................    65,224    21,067     3,648
   Acquisition costs.....................................................     4,948        --        --
   Restructuring charges and related asset impairments...................    81,926        --        --
                                                                          ---------  --------  --------
       Total operating expenses..........................................   412,003   133,444    28,747
                                                                          ---------  --------  --------
Loss from operations.....................................................  (351,921)  (40,293)  (25,903)
Interest and other income, net...........................................    85,299    41,706       850
                                                                          ---------  --------  --------
Income (loss) before income taxes........................................  (266,622)    1,413   (25,053)
Income tax expense.......................................................    13,132       745        --
                                                                          ---------  --------  --------
Net income (loss)........................................................ $(279,754) $    668  $(25,053)
                                                                          =========  ========  ========
Basic net income (loss) per share........................................ $   (1.18) $   0.00  $  (1.32)
Diluted net income (loss) per share...................................... $   (1.18) $   0.00  $  (1.32)
   Shares used in per-share calculation--basic...........................   237,753   166,075    18,919
   Shares used in per-share calculation--diluted.........................   237,753   233,909    18,919
</TABLE>



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

                                      37

<PAGE>

                            SYCAMORE NETWORKS, INC.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                                 Accumulated
                                    Common Stock   Additional                         Deferred   Treasury Stock     Other
                                   ---------------  paid-in    Accumulated   Notes    Compen--   -------------  Comprehensive
                                   Shares   Amount  Capital      Deficit   Receivable  sation    Shares  Amount    Income
                                   -------  ------ ----------  ----------- ---------- ---------  ------  ------ -------------
<S>                                <C>      <C>    <C>         <C>         <C>        <C>        <C>     <C>    <C>
Balance, July 31, 1998............  24,578     25         755        (950)      --         (179)     --     --         --
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Exercise of stock options.........  18,222     18       2,923          --       --           --      --     --         --
Issuance of common stock, net.....  52,096     52      25,812          --       --           --      --     --         --
Deferred compensation expense
 associated with equity awards....      --     --      26,719          --       --      (26,719)     --     --         --
Issuance of equity awards in
 exchange for services............      --     --       2,189          --       --           --      --     --         --
Amortization of deferred
 compensation.....................      --     --          --          --       --        1,459      --     --         --
Issuance of common stock in
 exchange for notes receivable....      --     --          --          --     (360)          --      --     --         --
Net loss..........................      --     --          --     (25,053)      --           --      --     --         --
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Balance, July 31, 1999............  94,896     95      58,398     (26,003)    (360)     (25,439)     --     --         --
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Net income........................      --     --          --         668       --           --      --     --         --
Unrealized gain on marketable
 securities, net of tax effect....      --     --          --          --       --           --      --     --      5,034

Total comprehensive income........
Exercise of stock options.........   2,495      2       4,289          --       --           --      --     --         --
Issuance of common stock, net.....  32,603     33   1,486,508          --       --           --      --     --         --
Conversion of preferred stock into
 common stock..................... 141,850    142      55,629          --       --           --      --     --         --
Deferred compensation expense
 associated with equity awards....      --     --     102,256          --       --     (102,256)     --     --         --
Issuance of equity awards in
 exchange for services............      --     --       6,188          --       --           --      --     --         --
Amortization of deferred
 compensation.....................      --     --          --          --       --       14,879      --     --         --
Notes receivable transactions.....      --     --          --          --       98           --      --     --         --
Treasury stock transactions.......    (180)    --         (28)         --       --           --      --     --         --
Tax benefit from employee stock
 plans............................      --     --       7,325          --       --           --      --     --         --
Adjustment to conform Sirocco
 year end.........................      --     --          --       3,660       --           --      --     --         --
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Balance, July 31, 2000............ 271,664    272   1,720,565     (21,675)    (262)    (112,816)     --     --      5,034
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Net loss..........................      --     --          --    (279,754)      --           --      --     --         --
Unrealized loss on marketable
 securities.......................      --     --          --          --       --           --      --     --       (288)

Total comprehensive loss..........
Treasury stock transactions.......    (373)    --         (20)         --       --           --   2,497   (511)        --
Issuance of common stock under
 employee stock plans.............   2,390      2       6,787          --       --           --  (1,817)   385         --
Deferred compensation expense
 associated with equity awards....      --     --      14,440          --       --      (14,440)     --     --         --
Issuance of equity awards in
 exchange for services............      --     --         915          --       --           --      --     --         --
Amortization of deferred
 compensation.....................      --     --          --          --       --       64,309      --     --         --
Adjustments to deferred
 compensation for terminated
 employees........................      --     --      (8,837)         --       --        8,837      --     --         --
Compensation expense relating to
 stock option acceleration........      --     --       1,447          --       --           --      --     --         --
Repayment of notes receivable.....      --     --          --          --      262           --      --     --         --
Tax benefit from employee stock
 plans............................      --     --       3,208          --       --           --      --     --         --
                                   -------   ----  ----------   ---------    -----    ---------  ------  -----     ------
Balance, July 31, 2001............ 273,681   $274  $1,738,505   $(301,429)   $  --    $ (54,110)    680  $(126)    $4,746
                                   =======   ====  ==========   =========    =====    =========  ======  =====     ======
</TABLE>
<TABLE>
<CAPTION>
                                       Total
                                   Stockholders'
                                      Equity
                                     (Deficit)
                                   -------------
<S>                                <C>
Balance, July 31, 1998............        (349)
                                    ----------
Exercise of stock options.........       2,941
Issuance of common stock, net.....      25,864
Deferred compensation expense
 associated with equity awards....          --
Issuance of equity awards in
 exchange for services............       2,189
Amortization of deferred
 compensation.....................       1,459
Issuance of common stock in
 exchange for notes receivable....        (360)
Net loss..........................     (25,053)
                                    ----------
Balance, July 31, 1999............       6,691
                                    ----------
Net income........................         668
Unrealized gain on marketable
 securities, net of tax effect....       5,034
                                    ----------
Total comprehensive income........       5,702
Exercise of stock options.........       4,291
Issuance of common stock, net.....   1,486,541
Conversion of preferred stock into
 common stock.....................      55,771
Deferred compensation expense
 associated with equity awards....          --
Issuance of equity awards in
 exchange for services............       6,188
Amortization of deferred
 compensation.....................      14,879
Notes receivable transactions.....          98
Treasury stock transactions.......         (28)
Tax benefit from employee stock
 plans............................       7,325
Adjustment to conform Sirocco
 year end.........................       3,660
                                    ----------
Balance, July 31, 2000............   1,591,118
                                    ----------
Net loss..........................    (279,754)
Unrealized loss on marketable
 securities.......................        (288)
                                    ----------
Total comprehensive loss..........    (280,042)
Treasury stock transactions.......        (531)
Issuance of common stock under
 employee stock plans.............       7,174
Deferred compensation expense
 associated with equity awards....          --
Issuance of equity awards in
 exchange for services............         915
Amortization of deferred
 compensation.....................      64,309
Adjustments to deferred
 compensation for terminated
 employees........................          --
Compensation expense relating to
 stock option acceleration........       1,447
Repayment of notes receivable.....         262
Tax benefit from employee stock
 plans............................       3,208
                                    ----------
Balance, July 31, 2001............  $1,387,860
                                    ==========
</TABLE>

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

                                      38

<PAGE>

                            SYCAMORE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (in thousands)

<TABLE>
<CAPTION>
                                                                              Year Ended July 31,
                                                                       ---------------------------------
                                                                          2001        2000        1999
                                                                       ----------  -----------  --------
<S>                                                                    <C>         <C>          <C>
Cash flows from operating activities:
   Net income (loss).................................................. $ (279,754) $       668  $(25,053)
   Adjustments to reconcile net income (loss) to net cash provided by
     (used in) operating activities:
       Depreciation and amortization..................................     35,500        6,325     1,094
       Restructuring charges and related asset impairments............     52,476           --        --
       Amortization of stock compensation.............................     65,224       21,067     3,648
       Deferred income taxes..........................................     14,049      (11,569)       --
       Tax benefit from employee stock plans..........................      3,208        7,325        --
       Provision for doubtful accounts................................      5,530           --        --
Changes in operating assets and liabilities:
   Accounts receivable................................................     (3,600)     (31,997)  (11,410)
   Inventories........................................................    (62,678)     (33,131)   (6,608)
   Prepaids and other current assets..................................      6,751      (15,017)   (5,257)
   Deferred revenue...................................................    (23,101)      29,236       472
   Accounts payable...................................................     13,483       43,073     5,908
   Accrued expenses and other liabilities.............................      8,527       18,454     4,295
   Accrued restructuring costs........................................     61,003           --        --
                                                                       ----------  -----------  --------
Net cash provided by (used in) operating activities...................   (103,382)      34,434   (32,911)
                                                                       ----------  -----------  --------
Cash flows from investing activities:
   Purchases of property and equipment................................   (115,454)     (42,473)   (7,183)
   Purchases of marketable securities.................................   (703,526)  (1,378,008)  (10,615)
   Maturities of marketable securities................................  1,034,327      302,924     6,177
   Minority equity investments........................................     (9,004)     (17,000)       --
   Increase in other assets...........................................    (45,551)      (1,471)     (362)
                                                                       ----------  -----------  --------
Net cash provided by (used in) investing activities...................    160,792   (1,136,028)  (11,983)
                                                                       ----------  -----------  --------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net........................      7,174    1,490,704    28,445
   Proceeds from issuance of redeemable convertible preferred stock,
     net..............................................................         --           --    50,150
   Purchase of treasury stock.........................................       (531)          --        --
   Payments received for notes receivable.............................        262          198        --
   Proceeds from notes payable........................................         --        1,761     5,684
   Payments on notes payable..........................................     (1,780)      (5,413)      (33)
                                                                       ----------  -----------  --------
Net cash provided by financing activities.............................      5,125    1,487,250    84,246
                                                                       ----------  -----------  --------
Net increase in cash and cash equivalents.............................     62,535      385,656    39,352
Adjustment to conform fiscal year of Sirocco..........................         --        3,440        --
Cash and cash equivalents, beginning of period........................    429,965       40,869     1,517
                                                                       ----------  -----------  --------
Cash and cash equivalents, end of period.............................. $  492,500  $   429,965  $ 40,869
                                                                       ==========  ===========  ========
Supplemental cash flow information:
   Cash paid for interest............................................. $      264  $       216  $    186
   Cash paid for income taxes.........................................        885        3,764        --
Supplementary non cash activity:
   Issuance of common stock in exchange for notes receivable..........         --          100       360
   Conversion of preferred stock into common stock....................         --       55,771        --
</TABLE>

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

                                      39

<PAGE>

                            SYCAMORE NETWORKS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business

   Sycamore Networks, Inc. (the "Company") was incorporated in Delaware on
February 17, 1998. The Company is a leading provider of intelligent optical
networking products that enable telecommunications service providers to quickly
and cost-effectively transform the capacity created by their fiber optic
networks into usable bandwidth for the deployment of new high-speed data
services.

   The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, dependence on key personnel, and the
ability to obtain additional capital as needed to meet its product plans. The
Company's ultimate success is dependent upon its ability to successfully
develop and market its products.

2. Significant Accounting Policies

  Principles of Consolidation

   The accompanying financial statements of the Company reflect the application
of certain significant accounting policies as described below. The consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to be consistent with current
year presentation.

   The Company completed a merger with Sirocco Systems, Inc. ("Sirocco"), a
U.S. company headquartered in Wallingford, Connecticut on September 7, 2000,
where an aggregate of approximately 28.6 million shares of Sycamore common
stock were either exchanged for all outstanding shares of Sirocco or reserved
for common stock issuable under outstanding Sirocco stock options assumed by
Sycamore in the transaction. The transaction has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, the consolidated financial statements for all prior periods
presented have been restated to include the results of operations, financial
position and cash flows of Sirocco.

   Since the fiscal years of Sycamore and Sirocco differ, the historical
periods were combined giving effect to the merger as follows:

<TABLE>
<CAPTION>
    Sycamore                          Sirocco
    --------                          -------
    <S>                               <C>
    Fiscal period ended July 31, 1998 Fiscal period ended December 31, 1998
    Fiscal year ended July 31, 1999   Fiscal year ended December 31, 1999
    Fiscal year ended July 31, 2000   Fiscal year ended July 31, 2000
</TABLE>

   The Company's fiscal year ended July 31, 2000 results include five months of
Sirocco's financial results which are also recorded in the fiscal year ended
December 31, 1999. Sirocco's net losses for these five months totaled $3.7
million which was recorded as an adjustment to accumulated deficit. There were
no intercompany transactions requiring elimination in any period presented.

   The following table shows the separate historical results of Sycamore and
Sirocco for the periods prior to the consummation of the merger of the two
entities.

<TABLE>
<CAPTION>
                                                           Period from Inception
                                Year Ended    Year Ended    (February 17, 1998)
                               July 31, 2000 July 31, 1999 through July 31, 1998
                               ------------- ------------- ---------------------
<S>                            <C>           <C>           <C>
Revenue:
   Sycamore...................   $198,137      $ 11,330            $  --
   Sirocco....................         --            --               --
                                 --------      --------            -----
Consolidated revenue..........   $198,137      $ 11,330            $  --
                                 --------      --------            -----
Net income (loss):............
   Sycamore...................   $ 20,399      $(19,490)           $(693)
   Sirocco....................    (19,731)       (5,563)            (257)
                                 --------      --------            -----
Consolidated net income (loss)   $    668      $(25,053)           $(950)
                                 ========      ========            =====
</TABLE>

                                      40

<PAGE>

  Cash Equivalents and Marketable Securities

   Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less at the date of acquisition. Cash
equivalents are carried at cost plus accrued interest, which approximates fair
market value. The Company's marketable securities, which have maturities of up
to three years, are classified as available-for-sale and are recorded at fair
value with any unrealized gain or loss recorded as an element of stockholders'
equity. The fair value of marketable securities was determined based on quoted
market prices at the reporting date for those instruments. As of July 31, 2001
and 2000, marketable securities consisted of (in thousands):

<TABLE>
<CAPTION>
                            Amortized  Fair Market Unrealized
                              Cost        Value    Gain/(Loss)
                            ---------- ----------- -----------
<S>                         <C>        <C>         <C>
July 31, 2001:
   Certificate of deposits. $   23,259 $   23,285    $    26
   Commercial paper........    438,494    441,027      2,533
   Government securities...    289,550    291,737      2,187
                            ---------- ----------    -------
       Total............... $  751,303 $  756,049    $ 4,746
                            ========== ==========    =======
<CAPTION>

                            Amortized  Fair Market Unrealized
                              Cost        Value    Gain/(Loss)
                            ---------- ----------- -----------
<S>                         <C>        <C>         <C>
July 31, 2000:
   Certificate of deposits. $  109,220 $  108,980    $  (240)
   Commercial paper........    651,839    650,517     (1,322)
   Common stock............      2,500     11,322      8,822
   Government securities...    316,065    316,319        254
                            ---------- ----------    -------
       Total............... $1,079,624 $1,087,138    $ 7,514
                            ========== ==========    =======
</TABLE>

   The Company also has certain investments in non-publicly traded companies
for the promotion of business and strategic objectives. These investments are
included in other long-term assets in the Company's balance sheet and are
generally carried at cost. As of July 31, 2001 and 2000, $26.0 million and
$17.0 million of these investments are included in other long-term assets,
respectively. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values, if necessary. Through July 31, 2001,
no impairment charges have been recorded.

  Inventories

   Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).

  Revenue Recognition

   Revenue from product sales is recognized upon shipment provided that a
purchase order has been received or a contract has been executed, there are no
significant uncertainties regarding customer acceptance, the fee is fixed or
determinable and collectibility is deemed reasonably assured. If uncertainties
regarding customer acceptance exist, revenue is recognized when such
uncertainties are resolved. Revenue from technical support and maintenance
contracts is deferred and recognized ratably over the period of the related
agreements. The Company records a warranty liability for parts and labor on its
products at the time of revenue recognition. Warranty periods are generally
three years from installation date.

   The Company's transactions frequently involve the sales of systems and
services under multiple element arrangements. Revenue under multiple element
arrangements is allocated based on the fair value of each element.

                                      41

<PAGE>

  Property and Equipment

   Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:

<TABLE>
<S>                                       <C>
Computer and telecommunications equipment 2 to 3 years
Computer software........................ 3 years
Furniture and office equipment........... 5 years
Leasehold improvements................... Shorter of lease term or useful life of asset
</TABLE>

   The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Costs related to internal use software are capitalized in
accordance with AICPA Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. Upon retirement or
sale of an asset, the cost and related accumulated depreciation of the assets
are removed from the accounts and any resulting gain or loss is reflected in
the determination of net income or loss.

   The Company evaluates the carrying value of long-lived assets (which
currently consist entirely of property and equipment) whenever events or
changes in circumstances indicate that the carrying value of the asset may be
impaired. An impairment loss is recognized when the fair value or the estimated
future cash flows expected to result from the use of the asset, including
disposition, is less than the carrying value of the asset.

  Research and Development and Software Development Costs

   The Company's products are highly technical in nature and require a large
and continuing research and development effort. All research and development
costs are expensed as incurred. Software development costs incurred prior to
the establishment of technological feasibility are charged to expense.
Technological feasibility is demonstrated by the completion of a working model.
Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized until the product is available for
general release to customers. Amortization is based on the greater of (i) the
ratio that current gross revenue for a product bear to the total of current and
anticipated future gross revenue for that product or (ii) the straight-line
method over remaining estimated life of the product. To date, the period
between achieving technological feasibility and the general availability of the
related products has been short and software development costs qualifying for
capitalization have not been material. Accordingly, the Company has not
capitalized any software development costs.

  Income Taxes

   Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are recorded based on temporary
differences between the financial statement amounts and the tax bases of assets
and liabilities measured using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company periodically
evaluates the realizability of its net deferred tax assets and records a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.

  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 reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.

  Concentrations and Significant Customer Information

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
marketable securities and accounts receivable. The Company invests its excess

                                      42

<PAGE>

cash primarily in deposits with commercial banks, high-quality corporate
securities and U.S. government securities. For the years ended July 31, 2001,
2000 and 1999, one customer accounted for 47%, 92% and 100% of the Company's
revenue, respectively. For the year ended July 31, 2001, another customer
accounted for 11% of the Company's revenue. The Company's accounts receivable
balance at any point in time typically consists of a relatively small number of
customer account balances. The Company generally does not require collateral
for sales to customers. Several emerging carriers, from which the Company has
historically derived a large percentage of its revenue, have recently begun to
experience financial difficulties. As a result, the Company is increasingly
directing its sales efforts towards incumbent carriers, which typically have
longer sales evaluation cycles than emerging carriers. The Company expects that
its revenue and related accounts receivable balances will continue to be
concentrated among a relatively small number of customers.

   Certain components and parts used in the Company's products are procured
from a single source. The Company generally obtains parts from one vendor only,
even where multiple sources are available, to maintain quality control and
enhance working relationships with suppliers. These purchases are made under
existing contracts or purchase orders. The failure of a supplier, including
subcontractor, to deliver on schedule could delay or interrupt the Company's
delivery of products and thereby adversely affect the Company's revenue and
results of operations.

  Other Comprehensive Income (Loss)

   The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). For the year ended July 31, 2001, comprehensive net loss was $280.0
million. For the year ended July 31, 2000, comprehensive net income was $5.7
million. For the year ended July 31, 1999, the comprehensive net loss was equal
to the reported net loss of $25.1 million.

  Net Income (Loss) Per Share

   Basic net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of common shares
outstanding during the period less unvested restricted stock. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares
outstanding during the period, if dilutive. Common equivalent shares are
composed of unvested shares of restricted common stock and the incremental
common shares issuable upon the exercise of stock options.

   The following table sets forth the computation of basic and diluted income
(loss) per share:

<TABLE>
<CAPTION>
                                                           Year Ended July 31,
                                                  ------------------------------------
                                                      2001          2000       1999
                                                   ---------      --------   --------
                                                  (in thousands, except per share data
<S>                                               <C>            <C>        <C>
Numerator:
   Net income (loss)............................. $(279,754)     $    668   $(25,053)
Denominator:
   Weighted-average shares of common stock
     outstanding.................................   272,929       223,999     63,173
   Weighted-average shares subject to repurchase.   (35,176)      (57,924)   (44,254)
                                                   ---------      --------   --------
Shares used in per-share calculation--basic......   237,753       166,075     18,919
                                                   =========      ========   ========
Weighted-average shares of common stock
  outstanding....................................   237,753       223,999     18,919
Weighted common stock equivalents................        --         9,910         --
                                                   ---------      --------   --------
Shares used in per-share calculation--diluted....   237,753       233,909     18,919
                                                   =========      ========   ========
Net income (loss) per share:
   Basic......................................... $   (1.18)     $   0.00   $  (1.32)
                                                   =========      ========   ========
   Diluted....................................... $   (1.18)     $   0.00   $  (1.32)
                                                   =========      ========   ========
</TABLE>

Options to purchase 19,516,902, 4,617,449 and 5,252,099 shares of common stock
at average exercise prices of $15.87, $78.86 and $0.45 have not been included
in the computation of diluted net income (loss) per share for the

                                      43

<PAGE>

years ended July 31, 2001, 2000 and 1999, respectively, as their effect would
have been anti-dilutive. In addition, as described in Note 7, the Company has a
commitment to grant approximately 15.9 million options to purchase common stock
during the second quarter of fiscal 2002.

  Stock Based Compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,"
Accounting for Stock Issued to Employees," and related interpretations and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").

  Segment Information

   The Company has determined that it conducts its operations in one business
segment. For the year ended July 31, 2001, the geographical distribution of
revenue was as follows: United States--65%, Canada--11%, Europe and Asia--24%.
For the years ended July 31, 2000 and 1999, substantially all of the Company's
revenue was derived in the United States. Long-lived assets consist entirely of
fixed assets and are principally located in the United States for all periods
presented.

  Recent Accounting Pronouncements

   In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the
SEC's view in applying generally accepted accounting principles to selected
revenue recognition issues. The Company adopted SAB 101 in the Company's fourth
quarter of fiscal year 2001, and the adoption of SAB 101 did not have a
material impact on the Company's financial position or results of operations.

   In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 141 requires the
purchase method of accounting to be used for business combinations initiated
after June 30, 2001 and eliminates the pooling of interests method. The
adoption of this statement is not expected to have a material impact on the
Company's financial position or results of operations.

   In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also addresses
the initial recognition and measurement of intangible assets acquired outside
of a business combination whether acquired individually or with a group of
other assets. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that intangible assets with indefinite lives and
goodwill will not be amortized, but will rather be tested at least annually for
impairment. Although SFAS No. 142 is not required to be adopted by the Company
until fiscal 2003, its provisions must be applied to goodwill and other
intangible assets acquired after June 30, 2001. As of July 31, 2001, the
Company does not have any goodwill or other intangible assets relating to
business combinations that were accounted for under APB Opinion No. 16.
Accordingly, the adoption of SFAS No. 142 is not expected to have a material
impact on the Company's financial position or results of operations.

3. Inventories, Net

   Inventories, net consisted of the following at July 31, 2001 and 2000 (in
thousands):

<TABLE>
<CAPTION>
                 2001    2000
                ------- -------
<S>             <C>     <C>
Raw materials.. $25,299 $14,340
Work in process  18,849   3,685
Finished goods.  22,791  21,714
                ------- -------
                $66,939 $39,739
                ======= =======
</TABLE>

                                      44

<PAGE>

4. Property and Equipment

   Property and equipment consisted of the following at July 31, 2001 and 2000
(in thousands):

<TABLE>
<CAPTION>
                                                 2001     2000
                                               --------  -------
<S>                                            <C>       <C>
Computer software and equipment............... $118,671  $46,247
Land..........................................   12,288       --
Furniture and office equipment................    3,692    1,657
Leasehold improvements........................    6,396    2,386
                                               --------  -------
                                                141,047   50,290
Less accumulated depreciation and amortization  (34,422)  (7,450)
                                               --------  -------
                                               $106,625  $42,840
                                               ========  =======
</TABLE>

   Depreciation and amortization expense was $35.5 million, $6.3 million and
$1.1 million for the years ended July 31, 2001, 2000 and 1999, respectively.

5. Commitments and Contingencies

  Operating Leases

   Rent expense under operating leases was $5.2 million, $2.0 million and $0.4
million for the years ended July 31, 2001, 2000 and 1999, respectively. At July
31, 2001, future minimum lease payments under all non-cancelable operating
leases are as follows, in thousands:

<TABLE>
<S>                                 <C>
2002............................... $ 7,436
2003...............................   6,603
2004...............................   6,532
2005...............................   5,262
2006...............................   4,970
Thereafter.........................  17,835
                                    -------
Total future minimum lease payments $48,638
                                    =======
</TABLE>

   Included in the amounts shown above is $24.5 million which relates to an
excess facility for which the Company recorded a charge for lease terminations
and non-cancelable lease costs as part of its restructuring activities during
the third quarter of fiscal 2001 (Note 10). The Company currently anticipates
being able to sublease the facility and obtain a partial recovery of the future
lease payments. Accordingly, $10.3 million of the future lease payments
relating to this facility are included in accrued restructuring costs as of
July 31, 2001.

  Vendor Financing

   Increasingly, as a result of the financial demands of major network
deployments, service providers are looking to their suppliers for financing
assistance. From time to time the Company may provide or commit to extend
credit or credit support to its customers as considered appropriate. Currently,
the Company has customer financing commitments of approximately $200 million,
subject to draw down over two to three years and completion of definitive lease
financing documentation. As of July 31, 2001, $73.0 million has been drawn down
under these financing arrangements. Revenue recognition under these financing
agreements is generally on a cash basis, with payments allocated between
principal and interest based on the terms of the agreement, unless
collectibility is reasonably assured and all other criteria for revenue
recognition are met.

                                      45

<PAGE>

  Notes Payable

   In May 1999, the Company entered into a $500,000 revolving line of credit
financing agreement for equipment purchases. The line of credit allowed for
draws through June 2000 for equipment purchases, then converted into a term
loan payable in equal monthly installments through May 2003. Interest was
computed based on the average daily balance outstanding, at a per annum rate of
0.5% above the prime rate. All assets of the Company were pledged as collateral
and the agreement contained covenants and restrictions relating to asset
protection, financial condition, dividends, investments, and certain other
matters. In January 2000, the Company refinanced its line of credit and
increased the amount available under the credit facility to $7.5 million, of
which $2.5 million was available for equipment purchases and $5.0 million was
available as a working capital line. At July 31, 2000, $1.8 million was
outstanding under the line of credit at a stated interest rate of 10%. In
September 2000, the Company paid off all outstanding amounts under the line of
credit.

6. Income Taxes

   Substantially all of the income (loss) before income taxes as shown in the
Consolidated Statement of Operations for the years ended July 31, 2001 and 2000
is derived in the United States. No income taxes were provided during the year
ended July 31, 1999 as there was no taxable income.

   The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          July 31,
                                                     -----------------
                                                      2001      2000
                                                     -------  --------
        <S>                                          <C>      <C>
        Current:
           Federal.................................. $(2,050) $ 12,375
           State....................................     931     2,419
           Foreign..................................     202        --
                                                     -------  --------
                                                        (917)   14,794
                                                     -------  --------
        Deferred:
           Federal..................................  11,052   (11,052)
           State....................................   2,997    (2,997)
           Foreign..................................      --        --
                                                     -------  --------
                                                      14,049   (14,049)
                                                     -------  --------
               Total provision for income taxes..... $13,132  $    745
                                                     =======  ========
</TABLE>

   A reconciliation between the statutory federal income tax rate and the
Company's effective tax is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   July 31,
                                                              -----------------
                                                                2001     2000
                                                              --------  -------
<S>                                                           <C>       <C>
Statutory federal income tax (benefit)....................... $(93,318) $   495
State taxes, net of federal benefit..........................   (8,446)     140
Non-deductible stock compensation............................   19,542    7,362
Utilization of net operating loss and tax credit carryfowards       --   (7,639)
Valuation allowance..........................................   97,115       --
Other........................................................   (1,761)     387
                                                              --------  -------
                                                              $ 13,132  $   745
                                                              ========  =======
</TABLE>

                                      46

<PAGE>

   The significant components of the deferred tax assets and liabilities as of
July 31, 2001 and 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        2001      2000
                                                      ---------  -------
      <S>                                             <C>        <C>
      Assets:
         Net operating loss and credit carryforwards. $ 110,228  $10,185
         Restructuring and related accruals..........    39,244       --
         Accruals....................................     6,406    2,251
         Depreciation................................     3,241       --
         Other.......................................     6,008    2,732
                                                      ---------  -------
             Total deferred tax assets...............   165,127   15,168
      Liabilities:
         Depreciation and other......................        --   (3,599)
                                                      ---------  -------
         Net deferred tax asset......................   165,127   11,569
         Valuation allowance.........................  (165,127)      --
                                                      ---------  -------
                                                      $      --  $11,569
                                                      =========  =======
</TABLE>

   During the year ended July 31, 2001, due to cumulative net losses and
charges for restructuring and related asset impairments, the Company recorded a
full valuation allowance to offset the net deferred tax assets as the Company
believes it is more likely than not that the net deferred tax assets will not
be realized. The income tax provision does not reflect the tax savings
resulting from deductions associated with the Company's stock option plans. Tax
benefits associated with the Company's stock plans of approximately $3.2
million and $7.3 million were credited to additional paid-in capital during the
years ended July 31, 2001 and 2000, respectively.

   The Company had federal and state tax net operating loss carryforwards at
July 31, 2001 of approximately $241.1 million and $140.8 million, respectively.
The federal and state tax loss carryforwards will begin to expire in 2018 and
2003, respectively. Included in the net operating loss carryforwards are stock
option deductions of approximately $157.6 million. The benefit of certain stock
option deductions will be credited to additional paid-in capital when realized.
The Company also has federal and state research tax credit carryforwards of
approximately $5.5 million and $2.3 million respectively, which will begin to
expire in 2018.

7. Stockholders' Equity

  Preferred Stock

   The Company's Board of Directors (the "Board") has the authority to issue up
to 5,000,000 shares of preferred stock without stockholder approval in one or
more series and to fix the rights, preferences, privileges and restrictions of
ownership. No shares of preferred stock were outstanding at July 31, 2001 or
July 31, 2000.

  Common Stock

   The Company is authorized to issue up to 2,500,000,000 shares of its common
stock. The holders of the common stock are entitled to one vote for each share
held. The Board may declare dividends from legally available funds, subject to
any preferential dividend rights of any outstanding preferred stock and
restrictions under the Company's loan agreements. Holders of the common stock
are entitled to receive all assets available for distribution on the
dissolution or liquidation of the Company, subject to any preferential rights
of any outstanding preferred stock.

                                      47

<PAGE>

   In October 1999, the Company completed its initial public offering ("IPO")
in which it sold 22,425,000 shares of common stock at a price to the public of
$12.67 per share. The net proceeds of the IPO, after deducting underwriting
discounts and other offering expenses, were approximately $263.0 million. Upon
the closing of the IPO, all then outstanding shares of redeemable convertible
preferred Stock (Series A, B, C and D) automatically converted to 141,849,675
shares of common stock. In March 2000, the Company completed a follow-on public
offering of 10,200,000 shares of common stock at $150.25 per share. Of the
10,200,000 shares offered, 8,428,401 shares were sold by the Company and
1,771,599 shares were sold by existing stockholders of the Company. The net
proceeds of this offering, to the Company, after deducting underwriting
discounts and other expenses, were approximately $1.2 billion.

   The Company effected the following stock splits: 3-for-1 in February 2000
and 3-for-1 in August 1999. All common shares, common share options and per
share amounts in the accompanying financial statements have been adjusted to
reflect the stock splits.

  Stock Incentive Plans

   The Company currently has three primary stock incentive plans: the 1998
Stock Incentive Plan (the "1998 Plan"), the 1999 Stock Incentive Plan (the
"1999 Plan") and the Sirocco 1998 Stock Option Plan (the "Sirocco 1998 Plan").
A total of 86,856,514 shares of common stock have been reserved for issuance
under these plans. The 1999 Plan is the only one of the three primary plans
under which new awards are currently being issued. The total amount of shares
that may be issued under the 1999 Plan is the remaining shares to be issued
under the 1998 Plan, plus 25,000,000 shares, plus an annual increase equal to
the lesser of (i) 18,000,000 shares, (ii) 5% of the outstanding shares on
August 1 of each year, or (iii) a lesser number as determined by the Board. The
plans provide for the grant of incentive stock options, nonstatutory stock
options, restricted stock awards and other stock-based awards to officers,
employees, directors, consultants and advisors of the Company. No participant
may receive any award, or combination of awards, for more than 1,500,000 shares
in any calendar year. Options may be granted at an exercise price less than,
equal to or greater than the fair market value on the date of grant. The Board
determines the term of each option, the option exercise price, and the vesting
terms. Stock options generally expire ten years from the date of grant and vest
over three to five years.

   All employees who have been granted options by the Company under the 1998
and 1999 Plans are eligible to elect immediate exercise of all such options.
However, shares obtained by employees who elect to exercise prior to the
original option vesting schedule are subject to the Company's right of
repurchase, at the option exercise price, in the event of termination. The
Company's repurchase rights lapse at the same rate as the shares would have
become vested under the original vesting schedule. As of July 31, 2001, there
were 8,883,512 shares related to immediate option exercises subject to
repurchase by the Company through fiscal 2005 at prices ranging from $0.01 to
$5.83.

  Restricted Stock

   Restricted stock may be issued to employees, officers, directors,
consultants, and other advisors. Shares acquired pursuant to a restricted stock
agreement are subject to a right of repurchase by the Company which lapses as
the restricted stock vests. In the event of termination of services, the
Company has the right to repurchase unvested shares at the original issuance
price. The vesting period is generally four to five years. The Company issued
1,675,027, 0 and 37,933,573 shares of restricted stock, during the years ended
July 31, 2001, 2000 and 1999, respectively. The number of shares of restricted
stock outstanding at July 31, 2001 was 59,216,074, of which 19,586,465 were
subject to repurchase by the Company through fiscal 2005 at their original
issuance prices, ranging from $0.00 to $0.60.

  Employee Stock Purchase Plan

   The Company has an Employee Stock Purchase Plan under which a total of
2,250,000 shares of common stock have been reserved for issuance. Eligible
employees may purchase common stock at a price equal to 85%

                                      48

<PAGE>

of the lower of the fair market value of the common stock at the beginning or
end of each six-month offering period. Participation is limited to 10% of an
employee's eligible compensation not to exceed amounts allowed by the Internal
Revenue Code. On August 1 of each year, the aggregate number of common shares
available for purchase under the Employee Stock Purchase Plan is automatically
increased by the number of common shares necessary to cause the number of
common shares available for purchase to be 2,250,000. During the years ended
July 31, 2001 and 2000, 148,473 and 101,021 shares of common stock were issued
under the plan. At July 31, 2001, 2,101,527 shares were available for future
issuance.

  Non-Employee Director Option Plan

   The Company has a Non-Employee Director Option Plan ("the Director Plan")
under which a total of 1,500,000 shares of common stock have been reserved for
issuance. As of August 1 of each year, the aggregate number of common shares
available for the grant of options under the Director Plan is automatically
increased by the number of common shares necessary to cause the total number of
common shares available for grant to be 1,500,000. Each non-employee director
is granted an option to purchase 90,000 shares which vests over three years
upon their initial appointment as a director, and immediately following each
annual meeting of stockholders, each non-employee director is automatically
granted an option to purchase 30,000 shares which vests in one year. The
Company granted 90,000 and 270,000 options under the Director Plan during the
years ended July 31, 2001 and 2000, respectively. At July 31, 2001, 1,410,000
shares were available for future issuance.

  Deferred Stock Compensation

   In connection with the grant of certain stock options and restricted shares
to employees during the years ended July 31, 2001, 2000 and 1999, the Company
recorded deferred stock compensation of $14.4 million, $102.3 million and $26.7
million, respectively, representing the difference between the deemed fair
market value of the common stock on the date of grant and the exercise price.
Deferred compensation related to options and restricted shares which vest over
time was recorded as a component of stockholders' equity and is being amortized
over the vesting periods of the related options. During the years ended July
31, 2001, 2000 and 1999, the Company recorded compensation expense relating to
these options and restricted shares totaling $64.3 million, $14.9 million and
$1.5 million, respectively. Included in the compensation expense for the year
ended July 31, 2001 was $36.3 million relating to the acceleration of certain
restricted stock and stock options pursuant to the terms of the merger
agreement between Sycamore and Sirocco. During the year ended July 31, 2001,
the Company reversed deferred stock compensation of $8.8 million relating to
former employees that had terminated prior to vesting in the stock options and
restricted shares.

  Non-Employee Stock Compensation

   During the years ended July 31, 2001, 2000, and 1999, the Company granted
5,500, 273,054, and 1,596,085 shares of fully vested common stock awards to
non-employees, respectively, and recognized compensation expense of $22,000,
$6.2 million, and $2.2 million, respectively. The fair value of each stock
option was estimated using the Black-Scholes option-pricing model with the
following assumptions for the years ended July 31, 2001, 2000 and 1999,
respectively: weighted-average risk free interest rates of 4.0%, 5.2% and 6.5%,
weighted-average expected option life of 3, 4 and 3 years, no dividend yield
and 90%, 85% and 60% volatility.

   During the year ended July 31, 2001, the Company issued a two-year warrant
to purchase 150,000 shares of common stock at $11.69 per share, exercisable
immediately in exchange for general and administrative services. The fair value
of the warrant of $0.9 million was charged to expense during the year ended
July 31, 2001, and was determined using the Black-Scholes model with the
following assumptions: 6.5% risk free interest rate, 90% expected volatility, 2
year expected life and no dividend yield.

                                      49

<PAGE>

  Stock Option Activity

   All stock option transactions issued under the Company's stock plans are
summarized as follows:

<TABLE>
<CAPTION>
                              Number of   Weighted Average
                               Shares      Exercise Price
                             -----------  ----------------
<S>                          <C>          <C>
Outstanding at July 31, 1998          --           --
Options granted.............  23,473,499       $ 0.16
Options exercised........... (18,221,400)        0.22
                             -----------       ------
Outstanding at July 31, 1999   5,252,099       $ 0.45
                             ===========       ======
Options granted.............  26,248,434        52.09
Options exercised...........  (2,494,538)        1.72
Options canceled............    (241,999)       66.13
                             -----------       ------
Outstanding at July 31, 2000  28,763,996       $46.91
                             ===========       ======
Options granted.............  16,224,893        42.46
Options exercised...........  (2,383,582)        2.13
Options canceled............ (23,088,405)       74.65
                             -----------       ------
Outstanding at July 31, 2001  19,516,902       $15.87
                             ===========       ======
</TABLE>

   The preceding table includes the cancellation of 17.6 million stock options
during the year ended July 31, 2001 pursuant to the Company's stock option
exchange offer (see discussion below).

  Stock Option Exchange Offer

   In May 2001 the Company announced an offer to exchange outstanding employee
stock options having an exercise price of $7.25 or more per share in return for
restricted stock and new stock options to be granted by the Company (the
"Exchange Offer"). Pursuant to the Exchange Offer, in exchange for eligible
options, an option holder generally received a number of shares of restricted
stock equal to one-tenth ( 1/10) of the total number of shares subject to the
options tendered by the option holder and accepted for exchange, and commitment
for new options to be issued exercisable for a number of shares of common stock
equal to nine-tenths ( 9/10) of the total number of shares subject to the
options tendered by the option holder and accepted for exchange. In order to
address potential adverse tax consequences for employees of certain
international countries, these employees were allowed to forego the restricted
stock grants and receive all stock options.

   A total of 17.6 million options were accepted for exchange under the
Exchange Offer and accordingly, were canceled in June 2001. A total of 1.7
million shares of restricted stock were issued in June 2001 and the Company
recorded deferred compensation of $12.6 million related to these grants. The
deferred compensation costs will be amortized ratably over the vesting periods
of the restricted stock, generally over a four year period, with 25% of the
shares vesting one year after the date of grant and the remaining 75% vesting
quarterly thereafter. Until the restricted stock vests, such shares are subject
to forfeiture in the event the employee leaves the Company.

   The new option grants, approximately 15.9 million shares, are expected to be
granted in the second quarter of fiscal 2002, however, no sooner than six
months and one day from June 20, 2001. The new options will generally vest over
three years, with 8.34% of the options vesting on the date of grant and the
remaining 91.66% vesting quarterly thereafter subject to forfeiture in the
event the employee leaves the Company. The new options will have an exercise
price equal to the fair market value of the Company's common stock on the date
of the grant.

                                      50

<PAGE>

  Pro Forma Disclosure of the Effect of Stock-Based Compensation

   Had compensation cost of the Company's stock awards been determined in
accordance with the provisions of SFAS No. 123, the Company's results of
operations for the years ended July 31, 2001, 2000 and 1999 would have been
adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                    Year Ended July 31,
                                               -----------------------------
                                                 2001       2000      1999
                                               ---------  --------  --------
<S>                                            <C>        <C>       <C>
Pro forma net loss (in thousands)............. $(531,502) $(97,374) $(26,894)
Pro forma basic and diluted net loss per share $   (2.24) $  (0.59) $  (1.42)
</TABLE>

   The fair value of these stock awards at the date of grant was estimated
using the Black-Scholes model with the following assumptions:

<TABLE>
<CAPTION>
                           Year Ended July 31,
                        -------------------------
                         2001     2000     1999
                        -------  -------  -------
<S>                     <C>      <C>      <C>
Risk free interest rate     5.0%     6.5%     4.5%
Dividend yield.........       0%       0%       0%
Expected volatility....      90%      85%       0%
Expected life.......... 5 years  5 years  5 years
</TABLE>

   The weighted average grant date fair value of stock awards granted during
the years ended July 31, 2001, 2000 and 1999 was $30.70, $41.88 and $0.35 per
share, respectively. For purposes of the pro forma information, the estimated
fair values of the employee stock options are amortized to expense using the
straight-line method over the vesting period. The pro forma effect of applying
SFAS No. 123 for the periods presented is not necessarily representative of the
pro forma effect to be expected in future years.

   The weighted average exercise price for options granted at fair value were
$41.73, $97.97 and $0 for 2001, 2000 and 1999, respectively. The weighted
average fair value for options granted at fair value were $30.17, $69.55 and $0
for 2001, 2000 and 1999, respectively. The weighted average exercise price for
options granted below fair value were $134.63, $3.71 and $0.22 for 2001, 2000
and 1999, respectively. The weighted average fair value of options granted
below fair value were $102.58, $16.33 and $0.35 for 2001, 2000 and 1999,
respectively.

   The following table summarizes information about stock options outstanding
at July 31, 2001:

<TABLE>
<CAPTION>
                          Options Outstanding       Vested Options Exercisable
     -               ------------------------------ --------------------------
                                 Weighted
                                  Average  Weighted                  Weighted
                      Number of  Remaining Average                   Average
        Range of       Shares    Contract  Exercise   Number         Exercise
     Exercise Prices Outstanding   Life     Price   Exercisable       Price
     --------------- ----------- --------- --------   -----------     --------
     <S>             <C>         <C>       <C>      <C>             <C>
     $ 0.00-$  1.33   4,508,351     8.1    $  0.66   1,214,789      $  0.63
     $ 1.66-$  4.33   4,405,893     8.1    $  2.81     935,198      $  2.86
     $ 5.00-$  7.39   4,994,712     9.3    $  6.92     626,327      $  6.33
     $ 7.46-$ 81.67   4,573,158     8.8    $ 31.09     922,194      $ 35.29
     $82.38-$189.94   1,034,788     8.8    $113.66     238,834      $115.65
     --------------  ----------     ---    -------    ---------       -------
     $ 0.00-$189.94  19,516,902     8.6    $ 15.87   3,937,342      $ 17.16
     ==============  ==========     ===    =======    =========       =======
</TABLE>

   At July 31, 2000 and 1999, approximately 410,000 and 450,000 outstanding
options were exercisable, respectively. The weighted average exercise prices
for outstanding options were $16.60 and $0.23 at July 31, 2000 and 1999,
respectively.

  Treasury Stock

   At July 31, 2001, the Company held 679,804 shares of treasury stock,
recorded at the acquisition cost of $0.1 million. Treasury stock relates to the
repurchase upon employee terminations of unvested shares of

                                      51

<PAGE>

restricted stock. The shares of treasury stock held are reissued upon the
exercise of options or the issuance of other stock based equity awards.

  Stockholder Notes Receivable

   At July 31, 2000, the Company held notes receivable in the amount of $0.3
million from stockholders in consideration for the purchase of common stock.
The notes were repaid in full during fiscal 2001.

8. Employee Benefit Plan

   The Company sponsors a defined contribution plan covering substantially all
of its employees which is designed to be qualified under Section 401(k) of the
Internal Revenue Code. Eligible employees are permitted to contribute to the
401(k) plan through payroll deductions within statutory and plan limits. The
Company made matching contributions of $1.1 million to the plan during fiscal
2001, and made no contributions in fiscal 2000 and 1999.

9. Related Party Transactions

   In July 2000, the Company and the Chairman of the Company's Board of
Directors (the "Chairman"), entered into an Investor Agreement with Tejas
Networks India Private Limited, a private company incorporated in India
("Tejas"), pursuant to which the Company and the Chairman each invested $2.2
million in Tejas in exchange for equity shares of Tejas. The Chairman also
serves as the Chairman of the Board of Directors of Tejas. The Company has
entered into various agreements with Tejas under which the Company has licensed
certain proprietary software development tools to Tejas, and Tejas will assist
the Company's business development efforts in India and also provide
maintenance and other services to the Company's customers in India. During the
year ended July 31, 2001, the Company made payments of $1.1 million to Tejas
under the agreements and recognized revenue of $0.1 million under the software
license agreements with Tejas.

10. Restructuring Charges and Related Asset Impairments

   As a result of unfavorable economic conditions and reduced capital spending
by telecommunications service providers, the Company implemented a
restructuring program in the third quarter of fiscal 2001, designed to reduce
expenses in order to align resources with long-term growth opportunities. The
restructuring program included a workforce reduction, consolidation of excess
facilities, and the restructuring of certain business functions to eliminate
non-strategic products and overlapping feature sets. This included the
discontinuance of the SN 6000 Intelligent Optical Transport product and the
bi-directional capabilities of the SN 8000 Intelligent Optical Network Node.

   As a result of the restructuring program, the Company recorded restructuring
charges and related asset impairments of $81.9 million classified as operating
expenses and an additional excess inventory charge of $84.0 million classified
as cost of revenue. The following paragraphs provide detailed information
relating to the restructuring charges and related asset impairments which were
recorded during the third quarter of fiscal 2001.

  Workforce reduction

   The restructuring program resulted in the reduction of approximately 132
employees across all business functions and geographic regions. The workforce
reductions were substantially completed in the third quarter of fiscal 2001.
The Company recorded a workforce reduction charge of approximately $4.2 million
relating primarily to severance and fringe benefits. In addition the number of
temporary and contract workers employed by the Company were also reduced.

  Consolidation of facilities and certain other costs

   The Company recorded a restructuring charge of $24.4 million relating to the
consolidation of excess facilities and certain other costs. The consolidation
of excess facilities relates to business activities that have been exited or
restructured. The Company recorded a restructuring charge of $12.2 million
primarily related to lease terminations and non-cancelable lease costs. The
Company also recorded other restructuring costs of $12.2 million relating
primarily to administrative expenses and professional fees in connection with
the restructuring activities.

                                      52

<PAGE>

  Inventory and asset write downs

   The Company recorded a restructuring charge of $137.3 million relating to
the write-down of inventory to its net realizable value and the write down of
certain assets which became impaired as a result of the decision to eliminate
non-strategic products and overlapping feature sets. The restructuring charge
includes $84.0 million of inventory write-downs which are recorded as part of
cost of revenue. The restructuring charge also includes $53.3 million of
impaired assets which largely relate to the rationalization of the Company's
future product offerings and contract settlements associated with the
discontinuance of certain product offerings.

   A summary of the restructuring charges and related asset impairments is
outlined as follows (in thousands):

<TABLE>
<CAPTION>
                                              Total
                                          Restructuring   Cash   Non-cash Accrual
                                             Charge     Payments Charges  Balance
                                          ------------- -------- -------- -------
<S>                                       <C>           <C>      <C>      <C>
Work-force reductions....................   $  4,174    $ 2,823  $   829  $   522
Facility consolidations and certain other
  costs..................................     24,437      1,132    1,214   22,091
Inventory and assets write-downs.........    137,285     13,923   84,972   38,390
                                            --------    -------  -------  -------
Ending balance at July 31, 2001..........   $165,896    $17,878  $87,015  $61,003
                                            ========    =======  =======  =======
</TABLE>

   The remaining cash expenditures relating to workforce reductions will be
substantially paid in the first quarter of fiscal 2002. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2007. The
Company expects to substantially complete its restructuring program during the
first half of fiscal 2002.

11. Litigation

   Beginning on July 2, 2001, several purported class action complaints were
filed in the United States District Court for the Southern District of New York
against the Company and several of its officers and directors and the
underwriters for the Company's initial public offering on October 21, 1999.
Some of the complaints also include the underwriters for the Company's
follow-on offering on March 14, 2000. The complaints were filed on behalf of
persons who purchased the Company's common stock during specified periods, all
beginning on October 21 or October 22, 1999 and ending on various dates, the
latest of which is August 10, 2001. The complaints are similar and allege
violations of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, primarily based on the assertion that the
Company's lead underwriters, the Company and the other named defendants made
material false and misleading statements in the Company's prospectus
incorporated in its registration statements on Form S-1 filed with the SEC in
October 1999 and March 2000 because of the failure to disclose (a) the alleged
solicitation and receipt of excessive and undisclosed commissions by the
underwriters in connection with the allocation of shares of common stock to
certain investors in the Company's public offerings and (b) that certain of the
underwriters allegedly had entered into agreements with investors whereby
underwriters agreed to allocate the public offering shares in exchange for
which the investors agreed to make additional purchases of stock in the
aftermarket at pre-determined prices. The complaints allege claims against the
Company, several of the Company's officers and directors and the underwriters
under Sections 11 and 15 of the Securities Act. The complaints also allege
claims solely against the underwriter defendants under Section 12(a)(2) of the
Securities Act and some of the complaints allege claims against the individual
defendants under Section 10(b) of the Exchange Act. The complaints are
currently in the process of being consolidated into a single action. The
actions seeks damages in an unspecified amount. The Company believes that the
claims against it are without merit and intends to defend against the
complaints vigorously. The Company is aware that at least 170 companies have
been named in nearly identical lawsuits that have been filed by some of the
same law firms. The Company is not currently able to estimate the possibility
of loss or range of loss, if any, relating to these claims.

   The Company is subject to legal proceedings, claims, and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the results of
our operations or our financial position.

                                      53

<PAGE>

12. Selected Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                        October 28, January 27, April 28,  July 31,
                                                           2000        2001       2001       2001
                                                        ----------- ----------- ---------  --------
<S>                                                     <C>         <C>         <C>        <C>
Consolidated Statement of Operations Data:
Revenue................................................  $120,448    $149,243   $  54,203  $ 50,852
Cost of revenue........................................    64,139      79,111     132,254    39,160
                                                         --------    --------   ---------  --------
Gross profit (loss) (1)................................    56,309      70,132     (78,051)   11,692
                                                         --------    --------   ---------  --------
Operating expenses:
   Research and development............................    35,679      42,314      44,407    37,207
   Sales and marketing.................................    17,400      21,870      22,213    21,995
   General and administrative..........................     4,062       4,557       4,419     3,782
   Amortization of stock compensation..................    42,753       6,460       7,330     8,681
   Acquisition costs...................................     4,948          --          --        --
   Restructuring charges and related asset impairments.        --          --      81,926        --
                                                         --------    --------   ---------  --------
       Total operating expenses........................   104,842      75,201     160,295    71,665
                                                         --------    --------   ---------  --------
Loss from operations...................................   (48,533)     (5,069)   (238,346)  (59,973)
Interest and other income, net.........................    22,329      26,295      18,940    17,735
                                                         --------    --------   ---------  --------
Income (loss) before income taxes......................   (26,204)     21,226    (219,406)  (42,238)
Income tax expense.....................................        --       7,429       5,703        --
                                                         --------    --------   ---------  --------
Net income (loss)......................................  $(26,204)   $ 13,797   $(225,109) $(42,238)
Basic net income (loss) per share......................  $  (0.11)   $   0.06   $   (0.94) $  (0.17)
                                                         ========    ========   =========  ========
Diluted net income (loss) per share....................  $  (0.11)   $   0.05   $   (0.94) $  (0.17)
                                                         ========    ========   =========  ========
(1) Exclusive of non-cash stock compensation expense of  $  1,643    $    488   $     480  $    521
<CAPTION>

                                                        October 30, January 29, April 29,  July 31,
                                                           1999        2000       2000       2000
                                                        ----------- ----------- ---------  --------
<S>                                                     <C>         <C>         <C>        <C>
Consolidated Statement of Operations Data:
Revenue................................................  $ 19,510    $ 29,049   $  59,183  $ 90,395
Cost of revenue........................................    10,340      15,396      31,367    47,883
                                                         --------    --------   ---------  --------
   Gross profit (1)....................................     9,170      13,653      27,816    42,512
                                                         --------    --------   ---------  --------
Operating expenses:
   Research and development............................     9,329      12,888      19,564    30,122
   Sales and marketing.................................     3,453       4,955       8,162    14,080
   General and administrative..........................       956       1,764       2,869     4,235
   Amortization of stock compensation..................     3,289       3,365       4,800     9,613
                                                         --------    --------   ---------  --------
       Total operating expenses........................    17,027      22,972      35,395    58,050
                                                         --------    --------   ---------  --------
Loss from operations...................................    (7,857)     (9,319)     (7,579)  (15,538)
Interest and other income, net.........................       484       4,299      13,249    23,674
                                                         --------    --------   ---------  --------
Income (loss) before income taxes......................    (7,373)     (5,020)      5,670     8,136
Income tax expense.....................................        --          --          --       745
                                                         --------    --------   ---------  --------
Net income (loss)......................................  $ (7,373)   $ (5,020)  $   5,670  $  7,391
Basic net income (loss) per share......................  $  (0.15)   $  (0.03)  $    0.03  $   0.03
                                                         ========    ========   =========  ========
Diluted net income (loss) per share....................  $  (0.15)   $  (0.03)  $    0.02  $   0.03
                                                         ========    ========   =========  ========
(1) Exclusive of non-cash stock compensation expense of  $    261    $    339   $     371  $    460
</TABLE>

                                      54

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

   None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information set forth under the heading "Executive Officers of the
Registrant" in Part I hereof and set forth under the caption "Election of
Directors" appearing in the Company's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on December 13, 2001, which will be
filed with the Securities and Exchange Commission not later than 120 days after
July 31, 2001, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

   The information appearing at the end of Part I and the forth under the
caption "Compensation and Other Information Concerning Directors and Officers"
in the Company's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on December 13, 2001, which will be filed with the
Securities and Exchange Commission not later than 120 days after July 31, 2001,
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Company's definitive Proxy
Statement for the 2001 Annual Meeting of Stockholders to be held on December
13, 2001, which will be filed with the Securities and Exchange Commission not
later than 120 days after July 31, 2001, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the 2001 Annual Meeting of Stockholders to be held on December 13, 2001, which
will be filed with the Securities and Exchange Commission not later than 120
days after July 31, 2001, is incorporated herein by reference.

                                      55

<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

   (a) 1. Financial Statements

      The financial statements listed in the accompanying Index to Consolidated
   Financial Statements on page 34 are filed as part of this report.

   2. Exhibits

<TABLE>
<CAPTION>
Number                                       Exhibit Description
------                                       -------------------
<C>     <S>
  2.1   Agreement and Plan of Merger, dated as of June 5, 2000, by and among Sycamore Networks,
        Inc., Tropical Acquisition Corporation and Sirocco Systems, Inc. (6)

  3.1   Amended and Restated Certificate of Incorporation of the Company (3)

  3.2   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
        Company (3)

  3.3   Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
        Company (9)

  3.4   Amended and Restated By-Laws of the Company (3)

  4.1   Specimen common stock certificate (1)

  4.2   See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-
        Laws of the Registrant defining the rights of holders of common stock of the Company (3)(9)

  4.3   Second Amended and Restated Investor Rights Agreement dated February 26, 1999, as
        amended by Amendment No. 1 dated as of July 23, 1999 (1)

  4.4   Amendment No. 2 dated as of August 5, 1999 to the Second Amended and Restated Investor
        Rights Agreement dated February 26, 1999 (3)

  4.5   Amendment No. 3 dated as of September 20, 1999 to the Second Amended and Restated
        Investor Rights Agreement dated February 26, 1999 (3)

  4.6   Amendment No. 4 dated as of February 11, 2000 to the Second Amended and Restated
        Investor Rights Agreement dated February 26, 1999 (3)

 10.1   1998 Stock Incentive Plan, as amended (1)

 10.2   1999 Non-Employee Directors' Option Plan (1)

+10.3   Purchase and License Agreement between Sycamore Networks, Inc. and Williams
        Communications, Inc. dated March 5, 1999 (1)

+10.4   Addendum to Purchase and License Agreement between Sycamore Networks, Inc. and
        Williams Communications, Inc. dated November 21, 1999 (3)

+10.5   Manufacturing Services Agreement between Sycamore Networks, Inc. and Celestica
        Corporation dated February 9, 2000 (3)

 10.7   1999 Stock Incentive Plan, as amended (10)

 10.9   Form of Indemnification Agreement between Sycamore, the Directors of Sycamore
        Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17,
        1999 (2)

10.10   Form of Change in Control Agreement between Sycamore Networks, Inc. and executive
        officers of Sycamore Networks, Inc. each dated November 17, 1999 (2)

10.11   Promissory Note and Pledge Agreement dated October 20, 1999 between Sycamore
        Networks, Inc. and Kevin Oye, Vice President of Business Development (2)
</TABLE>

                                      56

<PAGE>

<TABLE>
<CAPTION>
Number                                     Exhibit Description
------                                     -------------------
<C>      <S>
 10.14   Lease Agreement between Sycamore Networks, Inc. and Farley White Associates, LLC dated
         March 23, 2000 (4)

 10.15   Sirocco Systems, Inc. 1998 Stock Plan (7)

 10.16   Purchase and Sale Agreement dated as of October 13, 2000 between Vesper Park, LLC and
         Sycamore Networks, Inc. (8)

 10.17   Lease dated as of October 27, 2000, between Sycamore Networks, Inc. and BCIA New
         England Holdings LLC for One Executive Drive, Chelmsford, Massachusetts (9)

+10.19   Manufacturing Services Agreement between Sycamore Networks, Inc. and Jabil Circuit, Inc.
         (10)

  99.2   Escrow Agreement dated as of September 7, 2000 by and among Sycamore Networks, Inc.,
         the Stockholder Representative named therein and the Escrow Agent named therein (5)

  21.1   List of subsidiaries

  23.1   Consent of PricewaterhouseCoopers LLP

  24.1   Power of Attorney (see signature page)
</TABLE>
--------
 (1)Incorporated by reference to Sycamore Networks, Inc.'s Registration
    Statement on Form S-1 (Registration Statement No. 333-84635).
 (2)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended October 31, 1999 filed with the
    Commission on December 13, 1999.
 (3)Incorporated by reference to Sycamore Networks Inc.'s Registration
    Statement on Form S-1 (Registration Statement No. 333-30630).
 (4)Incorporated by reference to Sycamore Networks Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended April 29, 2000 filed with the
    Commission on June 12, 2000.
 (5)Incorporated by reference to Sycamore Networks, Inc.'s Registration
    Statement on Form S-4 (Registration Statement No. 333-40146).
 (6)Incorporated by reference to Sycamore Networks, Inc.'s Current Report on
    Form 8-K filed with the Commission on June 12, 2000.
 (7)Incorporated by reference to Sycamore Networks, Inc.'s Annual Report on
    Form 10K for the annual period ended July 31, 2000 filed with the
    Commission on October 24, 2000.
 (8)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended October 28, 2000 filed with the
    Commission on December 12, 2000.
 (9)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended January 27, 2001 filed with the
    Commission on March 13, 2001.
(10)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended April 28, 2001 filed with the
    Commission on June 12, 2001.
    +Confidential treatment granted for certain portions of this Exhibit
     pursuant to Rule 406 promulgated under the Securities Act, which portions
     are omitted and filed separately with the Securities and Exchange
     Commission.

   (b) Reports on Form 8-K:

      On May 18, 2001, the Company filed a report on Form 8-K containing
   financial information including the consolidated balance sheets, related
   consolidated statements of operations, and statements of stockholders'
   equity (deficit) and cash flows for the fiscal years ended July 31, 2000 and
   July 31, 1999, and the period from inception (February 17, 1998) through
   July 31, 1998 pertaining to the retroactive effect of the September 7, 2000
   business combination of Sycamore Networks, Inc. and Sirocco Systems, Inc.,
   which was accounted for as a pooling of interests.

                                      57

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Chelmsford, Commonwealth of Massachusetts, on this 18th day of September, 2001.

                                          SYCAMORE NETWORKS, INC.

                                             /S/ DANIEL E. SMITH
                                          By: _________________________________
                                             Daniel E. Smith
                                             President and Chief Executive
                                             Officer

                       POWER OF ATTORNEY AND SIGNATURES

   Know all persons by these presents, that each person whose signature appears
below constitutes and appoints Gururaj Deshpande, Daniel E. Smith and Frances
M. Jewels, jointly and severally, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.

   Pursuant to the requirements of the Securities Act, this Annual Report on
Form 10-K has been signed below by the following persons in the capacities
indicated on this 18th day of September, 2001.

           Name                                 Title
           ----                                 -----

   /S/ GURURAJ DESHPANDE Chairman of the Board of Directors
   ---------------------
     Gururaj Deshpande

    /S/ DANIEL E. SMITH  President, Chief Executive Officer and Director
   ---------------------
      Daniel E. Smith

   /S/ FRANCES M. JEWELS Chief Financial Officer, Vice President, Finance and
   ---------------------  Administration, Secretary and Treasurer
     Frances M. Jewels

    /S/ TIMOTHY BARROWS
   ---------------------
      Timothy Barrows    Director

     /S/ PAUL J. FERRI
   ---------------------
       Paul J. Ferri     Director

   /S/ JOHN W. GERDELMAN
   ---------------------
     John W. Gerdelman   Director

                                      58