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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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                                   FORM 10-K

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(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, 2002

                                      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

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

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

                                 220 Mill Road
                        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 October 15, 2002 there were 271,108,606 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 $425,859,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

   PART III--Portions of the definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on December 19, 2002 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 develop and market intelligent optical networking products that enable
telecommunications service providers to cost effectively transform the capacity
created by their fiber optic networks into usable bandwidth to deliver a broad
range of telecommunications services. Our current and prospective customer base
includes incumbent local exchange carriers (also known as Regional Bell
Operating Companies or RBOCs), Interexchange Carriers (IXCs), international
incumbent operators (also known as Postal Telephone and Telegraph operators or
PTTs), international competitive carriers, Internet Service Providers (ISPs),
emerging service providers, non-traditional telecommunications service
providers, and other large corporate and government organizations with their
own private fiber networks.

   We commenced operations in February 1998 and shipped our first product in
May 1999. In September 2000, we acquired Sirocco Systems, Inc., a U.S. company
headquartered in Wallingford, Connecticut ("Sirocco"), which broadened our
switching product portfolio to include intelligent optical networking products
designed for the metropolitan or edge segment of the network. Revenue increased
from $11.3 million for the fiscal year ended July 31, 1999 to $198.1 million
for the fiscal year ended July 31, 2000 and $374.7 million for the fiscal year
ended July 31, 2001. During the latter half of fiscal 2001, a rapid and
significant decrease in capital spending by telecommunications service
providers began to impact Sycamore's business. Over the course of fiscal 2002,
capital spending by service providers continued to decline and market
conditions worsened. As a consequence, beginning in the second half of fiscal
2001 and continuing through fiscal 2002, our revenue steadily declined. Total
revenue for fiscal 2002 was $65.2 million, a decrease of 83% compared to fiscal
2001. As market conditions deteriorated, we took steps to reduce our cost
structure, decrease cash consumption and eliminate certain product lines and
feature sets by implementing restructuring programs in the third quarter of
fiscal 2001, and in the first and fourth quarters of fiscal 2002. These
restructuring programs included reductions in workforce, facilities
consolidations, the discontinuation of certain product offerings, and the write
down of excess inventory and other impaired assets, as described in detail in
Note 10 to our consolidated financial statements. During the fourth quarter of
fiscal 2002, as a component of our third restructuring program, we made a
strategic decision to exit the stand-alone optical line transport system market
and to focus Sycamore's business on optical switching. While we have taken
actions to reduce our cost structure, we anticipate that we will continue to
incur operating losses unless the overall economic environment improves and our
revenue increases significantly compared to current levels.

   Although Sycamore's current and prospective customers have sharply decreased
their capital spending on optical networking systems over the past 12 to 18
months due to adverse market conditions, we continue to believe that our
industry presents long-term growth opportunities. We believe that the legacy
technologies that have been used to build the existing voice-centric public
network do not provide a scalable, cost-effective network foundation to support
the requirements of the mobile and high-speed data applications that will

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ultimately drive network growth. As data and mobile traffic on the network
grows, we believe that service providers will require new solutions to relieve
network congestion, improve service profitability and capitalize on the service
opportunities presented by new communications applications. Our intelligent
optical switching products are designed to create an intelligent optical
network infrastructure that will enable telecommunications service providers to
easily scale their networks, minimize ongoing capital and operational costs to
achieve greater service profitability and reduce the time it takes to introduce
and provision new 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, more data-optimized, network infrastructure.

Industry Background

  Challenges Facing Telecommunications Service Providers

   Over the past decade, the telecommunications industry has been reshaped by
regulatory changes, capital investment, technology innovation, and customer
demand. Data traffic across the public network has grown significantly, driven
by applications such as Internet access, electronic mail, electronic commerce
and remote network access by telecommuters. Mobile communication applications
have proliferated and wireless voice services are emerging as a competitive
alternative to traditional fixed-line telephone services for residential
applications. Over the past five years, service providers invested heavily in
the deployment of fiber optic cable to create the raw capacity needed to
transport vast amounts of network traffic. Though current market challenges are
impacting near term capital investment in network infrastructure, it is clear
that with this capacity now in place, the next step is to economically
transform that capacity into usable bandwidth that can be delivered to
customers in the form of differentiated services whenever and wherever it is
needed as mobile and data driven network traffic continues to grow.

   In order to support new and competitive service offerings, the underlying
public network infrastructure continues to evolve. The existing public network
was originally designed to support traditional telephony traffic, which has
very different characteristics than data traffic. Generally, individual fixed
line voice calls consume very little bandwidth for short periods of time and
they are most often terminated within a local city environment. Overall growth
in fixed line voice traffic has been relatively slow and predictable, which has
allowed for long-term network planning and gradual network expansion. Unlike
voice traffic, data traffic has experienced rapid growth in recent years and it
has continued to grow despite the market downturn. In contrast to traditional
voice applications, data applications can consume vast amounts of bandwidth for
long periods of time and "data calls" are far less predictable than voice calls
relative to the duration of each connection and the distance that traffic is
required to travel from origin to destination. Because the growth and pattern
of data traffic is inherently unpredictable, it is difficult to plan and
anticipate network expansion requirements well in advance of customer demand.

   To rise to competitive challenges and accommodate a more mobile and data
centric communications environment requires that greater levels of automation,
flexibility, and scalability be introduced into the public network
infrastructure. By creating a more agile intelligent optical network
infrastructure, telecommunications service providers will be able to improve
service profitability, accelerate the service provisioning process and create a
flexible network foundation to introduce a range of new services.

  Existing Public Network Transmission Infrastructure and Limitations

   Historically, to build the infrastructure of their networks,
telecommunications service providers laid fiber optic cable and installed
optical transmission equipment to "light" the fiber to create capacity.
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 transform that capacity into usable
bandwidth that can be delivered to a customer in the form of a voice or data
service.

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   In a traditional public network transmission infrastructure, the ability to
manage network traffic resides in the SONET/SDH equipment. Specifically,
Add/Drop Multiplexers (ADMs) and Digital Cross Connects (DCXs) have been used
to convert traffic from electrical to optical format for transport and routing
across the optical network. The optical fiber itself is only a physical
transmission medium with no embedded intelligence. Typically deployed in a
ring-based architecture, the SONET/SDH equipment allocates half of the
bandwidth available on the ring 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 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 capital constrained environment, a large-scale upfront investment
in capital equipment in advance of demand is difficult to justify. Conversely,
long lead times for service delivery can negatively impact a service provider's
ability to compete for business. To retain existing accounts and attract new
customers without sacrificing profitability 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. Supporting a "just-in-time" investment
and service delivery model requires a public network architecture that
facilitates efficient resource management, scales easily and provides
sufficient flexibility to support a wide range of service and bandwidth
requirements.

The Sycamore Solution

   We develop and market a family of software-based integrated intelligent
optical switching products that enable service providers to quickly and
cost-effectively create an intelligent optical network to deliver large amounts
of bandwidth in the form of voice and data services. Our products provide the
tools to enable service providers to better utilize and manage their existing
optical networks, lower the operating costs associated with managing these
networks and speed the service provisioning process, while providing a
migration path to a next generation, agile intelligent optical network.

  Key benefits of our solution include the following:

   Improves Network Flexibility and Scalability. Our software-based optical
switching 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 effectively and efficiently identify idle bandwidth,
increase network utilization and upgrade their network infrastructure and
services. This improved flexibility and scalability enables service providers
to more easily expand their network infrastructure, support new 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 shifts in customer demand for
service. Our products are designed to shorten the time it takes for service
providers to derive and distribute bandwidth across their networks, thereby
enabling our customers to introduce network services quickly in response to
their customers' demand. We believe that this capability is particularly
important for service providers because it enables them to expand their
networks based on current, rather than forecasted, market demand for their
services.

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   Facilitates Introduction of New 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
expand the services they offer their customers. We believe that these added
features provide revenue opportunities for our customers and enable them to
differentiate their network services from those of their competitors. We have
designed a comprehensive network management solution that 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 in SONET/SDH
equipment. Our products are designed with features that facilitate a gradual
migration from existing SONET/SDH networks to more flexible data optimized
intelligent optical 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 networking
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 component technology in combination with
sophisticated software intelligence, our products are designed to minimize both
the upfront capital costs and ongoing operational costs associated with an
infrastructure build. Our products consolidate the functionality of multiple
network elements, such as ADMs, DCXs and DWDM transport equipment, which
enables significant capital savings as well as greater operational efficiencies
through a simplified network architecture and reduced power consumption, real
estate and maintenance costs. Operational costs are also 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 switching product
portfolio, complemented by our network management capabilities, 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, Integrated Optical Switching Solutions to Customers. We
offer a full range of intelligent optical switching products to our customers.
Our switching 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 optical switches have been designed to facilitate the
transition to a data-optimized network environment. A data-optimized
intelligent optical network provides greater flexibility than a traditional
SONET/SDH network by providing for more direct routes between network points,
better utilization of bandwidth and

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more efficient network restoration schemes in the event of a fiber or circuit
failure. When the SN 16000 optical switch is combined with our SN 3000 optical
edge switches, telecommunications service providers can deploy an integrated
"all switched" intelligent optical network infrastructure from the core to the
edge of their network.

   Advance Partnerships and Alliances with Large Telecommunications Equipment
Providers. As a company with a comprehensive portfolio of integrated,
intelligent optical switching products, partnerships and alliances with large
telecommunications equipment providers that lack such products offer the
potential to expand our access to a broader set of customers around the world.
For example, during the fourth quarter of fiscal 2002, Sycamore established a
strategic alliance with Siemens Information and Communications Networks (ICN)
for the resale of our SN 16000 optical switch by the Siemens ICN sales force,
as well as for joint product development to integrate our respective network
management systems and our SN 16000 optical switch with Siemens' optical
transmission systems.

   Collaborate With Customers To Generate Demand For New Services. We work
collaboratively with our customers to help them identify and create new
services for their end-user customers. Our professional and customer services
teams provide assistance in such areas as network planning, design and
implementation 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 enhance the value proposition of our
products.

   Utilize Software-Based Product Architecture. Our products utilize a
standards-based software-centric architecture that permits greater flexibility,
enhanced interoperability and expanded network management capabilities. The
common architecture is designed to reduce the complexity of introducing new
software 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 switching
products are linked by a common network management system, SILVX NMS and rely
on a common networking software suite, Broadleaf(TM).

   Incorporate Commercially Available Optical Hardware Components. We use
commercially available optical hardware components in our products when
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, minimize the use of working capital for inventory
purchases, and to maintain our focus on the development of value-added software
and the integration of hard-optics components into our products.

   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 inserted into the
network as optical networking 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.

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Products and Technology

  Product Architecture

   Our software-based intelligent optical switching products are designed to
enable service providers to leverage their optical network infrastructure to
deliver a broad range of end-to-end services to meet the bandwidth intensive
needs of data applications.

   Our products are designed to provide:

  .  Lower operating costs by automating manual and time-consuming service
     provisioning processes and reducing the space and power requirements
     associated with legacy solutions;

  .  Capital cost benefits through the delivery of high capacity systems in
     compact form factors and the ability to select the optimal capacity for
     the traffic parameters of each network site;

  .  A simplified and more manageable network architecture by consolidating
     multiple functional elements or network devices into a single system;

  .  Faster service delivery capabilities by enabling automated end-to-end
     provisioning of services;

  .  The ability to simplify network expansion and upgrade through advanced
     software capabilities;

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

  .  Access to new revenue opportunities for service providers through advanced
     features that support a wide range of value-added service offerings.

   We believe that the acceptance and implementation of intelligent optical
networking technology by service providers is being driven by requirements to
lower network operations costs, network scaling requirements and service
demands. 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 switching 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 offer service providers tools to continue evolving their
networks without requiring the replacement of existing infrastructure. In
addition, the architecture is designed to allow 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 and system self-inventory
allow service providers to quickly respond to customer needs.

   SONET/SDH Functionality. Our products are designed to provide the optical
interfaces and management and restoration capabilities traditionally offered on
SONET/SDH equipment.

   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 switching products, providing a
cost-effective integrated switching and transport solution to our customers.

   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.
SilvxManager(TM), our network management platform delivers 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.

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Sycamore's Intelligent Optical Networking Products

   SN 3000. The SN 3000 is an optical edge switch that is designed to perform
aggregation, grooming and switching functions, primarily in mid-range traffic
density environments and in the metropolitan segment of the network. The SN
3000 is a highly redundant system designed for central office applications. Due
to its space efficient design, the SN 3000 is intended to provide extremely
high port density in a compact architecture. 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 16000 SC. The SN 16000 SC (Single Chassis) is a high-density, single
chassis intelligent optical grooming switch for efficient circuit routing in
regional core networks and cost-efficient aggregation of traffic in dense metro
networks. The SN 16000 SC has been designed to integrate smoothly into existing
network environments containing products from a variety of optical networking
vendors.

   SN 16000. The SN 16000 is a high capacity multi-chassis 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 highly scalable core
network. The SN 16000 supports incremental network growth through a modular
architecture and has been designed to integrate smoothly into existing network
environments.

   SILVX NMS(R). The SILVX optical network management system provides
end-to-end management of services across a service provider's optical network.
SILVX simplifies network configuration, network provisioning and network
management by automating many of today's manual and labor-intensive network
management processes via advanced software. Additionally, SILVX allows service
providers to offer network management-based services to their customers.

Customers

   Our target customer base includes incumbent local exchange carriers (also
known as Regional Bell Operating Companies or RBOCs), Interexchange Carriers
(IXCs), international incumbent operators (also known as Postal Telephone and
Telegraph operators or PTTs), international competitive carriers, Internet
Service Providers (ISPs), emerging service providers, non-traditional
telecommunications service providers and other large corporate and government
organizations with their own private fiber networks.

   During the year ended July 31, 2002, shipments of products to two customers,
Vodafone Group PLC and NTT Communications, a subsidiary of Nippon Telephone and
Telegraph Corporation, accounted for 45% and 20% of our revenue, respectively.
During the years ended July 31, 2001 and 2000, shipments of products to one
customer, Williams Communications Group, Inc., accounted for 47% and 92% of our
revenue, respectively. During the year ended July 31, 2001, shipments to
another customer, 360networks inc., accounted for 11% of our revenue.
International revenue was 87% of total revenue during the year ended July 31,
2002, compared to 35% of total revenue during the year ended July 31, 2001, and
an insignificant amount for the year ended July 31, 2000. See "Segment
Information" in Note 2 to our consolidated financial statements for additional
details.

   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. Many of these emerging
service providers have experienced severe financial difficulties, causing them
to dramatically reduce their capital expenditures, and in many cases, file for
bankruptcy protection. As a result, we believe that sales to emerging service
providers are likely to remain at reduced levels. 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. After
adding several incumbent service providers to our customer base during the past
two years, a large percentage of our revenue is now derived from incumbent
service providers, including Vodafone and NTT Communications. However,
incumbent service

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providers have also recently slowed their capital expenditures significantly
and this trend is resulting in longer than anticipated sales evaluation cycles.
Many incumbent service providers have historically financed their capital
expenditures using significant amounts of debt. In recent months, many of these
incumbent service providers have come under increased scrutiny from credit
rating agencies and investors due to their relatively high debt levels, which
may limit their ability to make future equipment purchases, and which limits
our ability to forecast future revenue.

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, 2002,
our sales and marketing organization consisted of 65 employees, located at our
headquarters in Chelmsford, Massachusetts, and various domestic and
international sales and support office locations.

   Our marketing objectives include building market awareness and acceptance of
Sycamore and our products as well as generating qualified customer leads. We
participate in conferences, 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 the business and trade
media, and industry analysts.

   Currently, the primary focus of our sales efforts is on developing strong
relationships with incumbent service providers through both direct and indirect
sales channels. Our sales and presales engineering organizations work
collaboratively with both existing and prospective customers to help them
identify and create new services that they can offer to their end-user
customers.

   In addition, we provide comprehensive post-sales customer support including
network planning and deployment, technical assistance centers and logistics
support. Our customer support organization leverages a network of highly
qualified service partners to extend our reach and capabilities.

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. We believe that we can
continue to enhance our technologies to improve the scalability, performance
and reliability of our intelligent optical networking products. We also plan to
continue to enhance our network management software to enable our customers to
deliver new or enhanced services using our intelligent optical networking
products. We have made, and intend to continue to make, substantial investments
in research and development. Research and development expenses were $109.7
million, $159.6 million and $71.9 million, respectively, for the years ended
July 31, 2002, 2001, and 2000. As of July 31, 2002, we had 255 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 capital spending restrictions
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. Some 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. We believe that being able to demonstrate strong
financial viability is becoming an increasingly important consideration to our
customers in making their purchasing decisions. In addition, many of our
competitors have more extensive customer bases and broader customer
relationships than us, including relationships with our potential customers.

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   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 consolidation of functional
     elements into fewer physical devices;

  .  Provide effective network management; and

  .  Provide a cost-effective solution for service providers.

   In addition, we believe that our knowledge of telecommunications
infrastructure requirements and experience 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 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. Although we believe the protection afforded by our patents, patent
applications, trademarks, trade secret, copyright laws and contractual
restrictions has value, the rapidly changing technology in the networking
industry and uncertainties in the legal process makes our future success
dependent primarily on the innovative skills, technology expertise and
management abilities of our employees rather than on protection afforded by
patent, trademark, trade secret and copyright laws.

   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 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.

                                      10

<PAGE>

   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. Currently, the majority
of our products are produced under an agreement with Jabil Circuit, Inc., who
provides comprehensive manufacturing services, including assembly, test,
control and shipment to our customers, and procures materials on our behalf.
This contract has indefinite terms and is cancelable by either party with
advance notice. 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.

   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.

   We currently purchase several key components, including commercial digital
signal processors, CPUs, field programmable gate arrays, switch fabric, 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.

   Throughout the current downturn in the telecommunications industry, the
optical component industry has been downsizing manufacturing capacity while
consolidating product lines from earlier acquisitions. Recently, one of our
suppliers announced its intention to exit the market for optical components,
and several of our other suppliers have announced reductions of their product
offerings. These announcements, or similar decisions by other suppliers, could
result in reduced competition and higher prices for the components we purchase.
In addition, the loss of a source of supply for key components could require us
to incur additional costs to redesign our products that use those components.
If any of these events occurred, our results of operations could be materially
adversely affected.

Employees

   As of July 31, 2002, we had a total of 445 employees of which:

  .  255 were in research and development,

  .  65 were in sales and marketing,

  .  40 were in customer service and support,

  .  29 were in manufacturing, and

  .  56 were in finance and administration.


                                      11

<PAGE>

   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.

Executive Officers

   Set forth below is information concerning our current executive officers and
their ages as of October 24, 2002.

<TABLE>
<CAPTION>
Name              Age Position
----              --- --------
<S>               <C> <C>
Daniel E. Smith   53  President, Chief Executive Officer and Director
Frances M. Jewels 37  Chief Financial Officer, Vice President, Finance and Administration,
                        Treasurer and Secretary
John E. Dowling   49  Vice President, Operations
Araldo Menegon    43  Vice President, Worldwide Sales and Support
Kevin J. Oye      44  Vice President, Systems and Technology
</TABLE>

   Daniel E. Smith has served as our President, Chief Executive Officer and as
a member of our Board of Directors since October 1998. From June 1997 to July
1998, Mr. Smith was Executive Vice President and General Manager of the Core
Switching Division of Ascend Communications, Inc., a provider of wide area
network switches and access data networking equipment. Mr. Smith was also a
member of the board of directors of Ascend Communications, Inc. during that
time. From April 1992 to June 1997, Mr. Smith served as President and Chief
Executive Officer and a member of the board of directors of Cascade
Communications Corp.

   Frances M. Jewels has served as our Vice President of Finance and
Administration, Treasurer and Secretary since June 1999 and Chief Financial
Officer since July 1999. From June 1997 to June 1999, Ms. Jewels served as Vice
President and General Counsel of Ascend Communications, Inc. From April 1994 to
June 1997, Ms. Jewels served as Corporate Counsel of Cascade Communications
Corp. Prior to April 1994, Ms. Jewels practiced law in private practice and,
prior to that, practiced as a certified public accountant.

   John E. Dowling has served as our Vice President of Operations since August
1998. From July 1997 to August 1998, Mr. Dowling served as Vice President of
Operations of Aptis Communications, a manufacturer of carrier-class access
switches for network service providers. Mr. Dowling served as Vice President of
Operations of Cascade Communications Corp. from May 1994 to June 1997.

   Araldo Menegon has served as our Vice President, Worldwide Sales and Support
since August 2002. From April 2001 to June 2002, Mr. Menegon served as Senior
Vice President of Worldwide Sales and Field Operations for Tenor Networks, a
provider of networking equipment. From August 1999 to March 2001, Mr. Menegon
served as Area Operations Director for Cisco Systems, Inc. From July 1997 to
July 1999, Mr. Menegon served as Director of Service Provider Operations for
Cisco Canada. Prior to joining Cisco in July of 1996, Mr. Menegon spent 14
years with NCR and held several senior management positions, including an
international assignment with NCR's Pacific Group from January 1988 to February
1992.

   Kevin J. Oye has served as our Vice President, Systems and Technology since
November 2001. From October 1999 through November 2001, Mr. Oye served as our
Vice President, Business Development. From March 1998 to October 1999, Mr. Oye
served as Vice President, Strategy and Business Development at Lucent
Technologies, Inc. and from September 1993 to March 1998, Mr. Oye served as the
Director of Strategy, Business Development, and Architecture at Lucent
Technologies, Inc. From June 1980 to September 1993, Mr. Oye held various
positions with AT&T Bell Laboratories where he was responsible for advanced
market planning as well as development and advanced technology management.

                                      12

<PAGE>

ITEM 2. PROPERTIES

   We currently lease four facilities in Chelmsford, Massachusetts, containing
approximately 388,000 square feet in the aggregate. In Wallingford,
Connecticut, we currently lease 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. We also maintain smaller offices to provide sales and
customer support at various domestic and international locations. These
facilities are presently adequate for our needs, and we do not expect to
require additional space during fiscal 2003. We own 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
our corporate headquarters, if we should require additional facilities over the
next several years.

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 (the "Individual
Defendants") 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
consolidated into a single action and an amended complaint was filed on April
19, 2002. The amended complaint was filed on behalf of persons who purchased
the Company's common stock between October 21, 1999 and December 6, 2000. The
amended complaint alleges 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
Registration Statements and Prospectuses 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 amended complaint alleges claims against the
Company, several of the Company's officers and directors and the underwriters
under Sections 11 and 15 of the Securities Act. It also alleges claims against
the Company, the individual defendants and the underwriters under Sections
10(b) and 20(a) of the Securities Exchange Act. The action against the Company
is being coordinated with over three hundred other nearly identical actions
filed against other companies. The actions seek damages in an unspecified
amount. A motion to dismiss addressing issues common to the companies and
individuals who have been sued in these actions was filed on July 15, 2002. An
opposition to that motion was filed on behalf of the plaintiffs and a reply
brief was filed on behalf of the companies. The fully briefed issues are now
pending before the court and oral arguments are currently scheduled for October
29, 2002. On October 9, 2002, the court dismissed the Individual Defendants
from the case without prejudice based upon Stipulations of Dismissal filed by
the plaintiffs and the Individual Defendants. The Company believes that the
claims against it are without merit and intends to defend against the
complaints vigorously. 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 Company's
results of operations or financial position.

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

   None.

                                      13

<PAGE>

                                    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 2002:
                Fourth Quarter ended July 31, 2002.... $3.86 $2.80
                Third Quarter ended April 27, 2002....  5.01  3.44
                Second Quarter ended January 26, 2002.  6.44  4.31
                First Quarter ended October 27, 2001..  7.48  3.29
</TABLE>

<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>

   As of July 31, 2002, there were approximately 1,668 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.

                                      14

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following selected financial data has been derived from our consolidated
financial statements and 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 elsewhere in this report. The historical results are not
necessarily indicative of results to be expected for any future period.

<TABLE>
<CAPTION>


                                                                                            Period from
                                                                                             Inception
                                                           Year Ended July 31,            (Feb. 17, 1998)
                                                ----------------------------------------      through
                                                   2002       2001      2000      1999     July 31, 1998
                                                ---------  ---------  --------  --------  ---------------
                                                          (in thousands, except per share data)
<S>                                             <C>        <C>        <C>       <C>       <C>
Consolidated Statement of Operations Data:
Revenue........................................ $  65,174  $ 374,746  $198,137  $ 11,330      $    --
Cost of revenue................................   152,704    317,796   106,419     8,587           --
                                                ---------  ---------  --------  --------      -------
   Gross profit (loss).........................   (87,530)    56,950    91,718     2,743           --
Operating expenses:
   Research and development....................   109,654    159,607    71,903    17,979          714
   Sales and marketing.........................    39,687     83,478    30,650     4,064           92
   General and administrative..................    10,166     16,820     9,824     3,056          247
   Stock compensation..........................    22,812     62,092    19,634     3,547            5
   Restructuring charges and related asset
     impairments...............................   124,990     81,926        --        --           --
   Acquisition costs...........................        --      4,948        --        --           --
                                                ---------  ---------  --------  --------      -------
       Total operating expenses................   307,309    408,871   132,011    28,646        1,058
                                                ---------  ---------  --------  --------      -------
Loss from operations...........................  (394,839)  (351,921)  (40,293)  (25,903)      (1,058)
Losses on investments..........................   (24,845)        --        --        --           --
Interest and other income, net.................    40,027     85,299    41,706       850          108
                                                ---------  ---------  --------  --------      -------
Income (loss) before income taxes..............  (379,657)  (266,622)    1,413   (25,053)        (950)
Income tax expense.............................        --     13,132       745        --           --
                                                ---------  ---------  --------  --------      -------
Net income (loss).............................. $(379,657) $(279,754) $    668  $(25,053)     $  (950)
                                                =========  =========  ========  ========      =======
Basic net income (loss) per share.............. $   (1.49) $   (1.18) $   0.00  $  (1.32)     $ (0.17)
Diluted net income (loss) per share............ $   (1.49) $   (1.18) $   0.00  $  (1.32)     $ (0.17)
   Shares used in per-share calculation--basic.   254,663    237,753   166,075    18,919        5,677
   Shares used in per-share calculation--
     diluted...................................   254,663    237,753   233,909    18,919        5,677
</TABLE>

<TABLE>
<CAPTION>
                                                        As of July 31,
                                       -----------------------------------------------
                                          2002       2001       2000     1999    1998
                                       ---------- ---------- ---------- ------- ------
                                                        (in thousands)
<S>                                    <C>        <C>        <C>        <C>     <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments $1,043,545 $1,248,549 $1,517,103 $47,889 $4,599
Working capital.......................    636,530    783,665  1,147,131  59,292  4,549
Total assets..........................  1,118,575  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).. $1,038,523 $1,387,860 $1,591,118 $ 6,691 $ (349)
</TABLE>

                                      15

<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 in this report. Except for the
historical information contained herein, we 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 and capital market conditions; conditions specific to the
telecommunications, Internet and related industries; the commercial success of
the Company's line of intelligent optical networking products; the Company's
reliance on a limited number of customers; new product introductions and
enhancements by the Company and its competitors; the length and variability of
the sales cycles for the Company's products; competition; manufacturing and
sourcing risks; variations in the Company's 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 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 to
deploy new services. Since our inception in February 1998, our revenue
increased from $11.3 million for the fiscal year ended July 31, 1999 to $374.7
million for the fiscal year ended July 31, 2001. Our revenue was $65.2 million
for the fiscal year ended July 31, 2002, a decrease of 83% compared to fiscal
year 2001.

   Our rapid growth in revenue from fiscal year 1999 through the first half of
fiscal year 2001 reflected a strong economic environment for telecommunications
service providers, driven by strong capital markets and by changes in the
regulatory environment, in particular those brought about by the
Telecommunications Act of 1996. These factors enabled the entry of a
significant number of new companies into the telecommunications services
industry, typically referred to as emerging service providers. The entry of
emerging service providers into the market also increased the competitive
pressure on incumbent service providers that had traditionally offered
telecommunications services, causing them to increase their capital
expenditures above their historical levels during this period.

   Beginning in the third quarter of fiscal 2001, our revenue declined
significantly due to unfavorable economic conditions caused by a rapid and
significant decrease in capital spending by telecommunications service
providers. 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. Since then, many emerging service providers have experienced severe
financial difficulties, and in many cases, have filed for bankruptcy
protection, or have liquidated their assets and are no longer in business. This
trend was compounded by decisions by incumbent service providers to slow their
capital expenditures significantly, in part due to reduced competitive pressure
from emerging service providers. In addition, many incumbent service providers
have found their prospects for raising additional capital through the issuance
of debt or equity securities to be greatly reduced, causing them to decrease
capital expenditures to the minimum amount required to support their existing
customer commitments. These conditions are currently impacting many of our
current and prospective customers, and make any recovery in capital spending
extremely difficult to forecast. As a result of these factors, our revenue was
$65.2 million in fiscal 2002, a decrease of 83% compared to fiscal 2001. Our
revenue has been, and continues to be, negatively impacted by these unfavorable
economic conditions.

                                      16

<PAGE>

   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, the effects of product volumes and
manufacturing efficiencies, component limitations, the mix of products and
services sold, increases in material and labor costs, loss of cost savings due
to changes in component pricing or charges incurred if we do not correctly
anticipate product demand, competitive pricing, and possible exposure to excess
and obsolete inventory charges. While we have taken actions to reduce our cost
structure, we anticipate that we will continue to incur operating losses unless
the overall economic environment improves and our revenue increases
significantly compared to current levels. During the last half of fiscal 2001
and the full year of fiscal 2002, we incurred substantial operating losses
totaling $693.2 million, which includes net restructuring and related asset
impairment charges totaling $382.5 million. During the fourth quarter of fiscal
2002, as a component of our third restructuring program, we made a strategic
decision to focus our business on optical switching and discontinue the
development of our stand-alone transport products. At this time, we have
limited visibility into future revenue and cannot predict when, or if, the
economic environment and the demand for our products will improve.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

   Management's discussion and analysis of its financial condition and results
of operations are based upon our consolidated financial statements. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosure of contingent liabilities. We evaluate these
estimates on an ongoing basis, including those relating to bad debts,
inventories, valuation of investments, warranty obligations, restructuring
liabilities and asset impairments, litigation and other contingencies.
Estimates are based on our historical experience and other assumptions that are
considered reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates. To the extent there are material differences between our
estimates and the actual results, our future results of operations will be
affected.

   We believe that the following critical accounting policies represent the
most significant judgments and estimates used in the preparation of our
consolidated financial statements, because changes in such estimates can
materially affect the amount of our reported net income or loss. When products
are shipped to customers, we evaluate whether all of the fundamental criteria
for revenue recognition have been met. The most significant judgments for
revenue recognition typically involve whether there are any significant
uncertainties regarding customer acceptance and whether collectibility can be
considered reasonably assured. In addition, some of the Company's transactions
consist of multiple element arrangements which must be analyzed to determine
the relative fair value of each element, the amount of revenue to be recognized
upon shipment, if any, and the period and conditions under which deferred
revenue should be recognized. After customers have been invoiced, management
evaluates the outstanding accounts receivable balances until they are
collected, to determine whether an allowance for doubtful accounts should be
recorded. In the event of a sudden deterioration in a particular customer's
financial condition, additional provisions for doubtful accounts may be
required, such as the specific provision that we recorded in the fourth quarter
of fiscal 2001. We accrue for the estimated cost of product warranties at the
time revenue is recognized, based primarily on our historical experience. If
actual warranty claims exceed the amounts accrued, additional warranty charges
would be required which would reduce gross margins in future periods.

   We continuously monitor our inventory balances and provisions are recorded
for any differences between the cost of the inventory and its estimated market
value, based on assumptions about future demand and market conditions. We
believe that the accounting estimates relating to the net realizable value of
our inventories is a critical accounting estimate because it is based primarily
on our estimate of future inventory demand and usage, which requires us to make
significant assumptions about future sales and market conditions. While such
assumptions may change significantly from period to period, the net realizable
value of inventories is measured using the best information available as of the
balance sheet date. To the extent that a severe decline in forecasted demand
occurs, significant charges for excess inventory are likely to occur, such as
the $102.4 million charge we recorded in the first quarter of fiscal 2002. Once
inventory has been written down to its estimated net realizable

                                      17

<PAGE>

value, its carrying value cannot be increased due to subsequent changes in
demand forecasts. Accordingly, if inventory previously written down to its net
realizable value is subsequently sold, we may realize improved gross profit
margins on these transactions. During the third and fourth quarters of fiscal
2002, we recorded credits totaling $10.8 million to cost of revenue relating to
inventory charges that were originally recorded in the first quarter of fiscal
2002. These credits related to favorable settlements of inventory purchase
commitments with contract manufacturers, and to a lesser extent, sales of
inventory that had been previously written down.

   During the third quarter of fiscal 2001 and the first and fourth quarters of
fiscal 2002, we recorded charges for restructuring and related asset
impairments totaling $422.0 million, including inventory related charges of
$186.4 million. These restructuring activities required us to make numerous
assumptions and estimates, including future revenue levels and product mix, the
timing of and the amounts received for subleases of excess facilities, the fair
values of impaired assets, the amounts of other than temporary impairments of
strategic investments, and the potential legal matters, administrative expenses
and professional fees associated with the restructuring activities. The
estimates and assumptions relating to the restructuring activities are
continually monitored and evaluated, and if these estimates and assumptions
change, we may be required to record additional charges or credits against the
reserves previously recorded for these restructuring activities. For example,
during the third and fourth quarters of fiscal 2002, we recorded credits
totaling $3.8 million to operating expenses, due to various changes in
estimates relating to the restructuring charges that had been recorded in the
third quarter of fiscal 2001 and the first quarter of fiscal 2002. These
credits included decreases in the potential legal matters associated with the
restructuring activities, partially offset by increases in the projected
liabilities relating to facility consolidations. As of July 31, 2002, we had
$19.4 million accrued as part of our restructuring liability relating to
facility consolidations, based on our best estimate of the available sublease
rates and terms at the present time. In the event that we are unsuccessful in
subleasing any of the restructured facilities, we could incur additional
restructuring charges and cash outflows in future periods totaling $6.2
million, which represents the amount of the assumed sublease recoveries that
have been incorporated into the current estimate.

Results of Operations

  Fiscal Years ended July 31, 2002 and 2001

Revenue

   Revenue decreased 83% or $309.5 million to $65.2 million for fiscal 2002
compared to $374.7 million for fiscal 2001. Product revenue declined by 88% or
$313.0 million while service revenue increased by 19% or $3.5 million compared
to fiscal 2001. The decrease in product revenue was due to the decline in the
overall economic environment and deteriorating conditions in the
telecommunications industry, in particular the significant reductions in
capital spending by our target customers. The increase in service revenue was
due to revenue from maintenance and other services associated with product
shipments that occurred in previous periods. Two customers accounted for 45%
and 20% of our revenue in fiscal 2002, whereas two different customers
accounted for 47% and 11% of our revenue in fiscal 2001. No other customer
accounted for more than 10% of our revenue in fiscal 2002 or 2001.
International revenue represented 87% of total revenue in fiscal 2002, compared
to 35% of total revenue in fiscal 2001. We anticipate that international
revenue will continue to represent a significant portion of total revenue in
fiscal 2003.

   Sales to emerging service providers, which had represented a significant
percentage of our revenue in fiscal 2001, were relatively insignificant in
fiscal 2002, and we expect this trend to continue for the foreseeable future.
While we have redirected our marketing efforts towards incumbent service
providers, these customers typically have longer sales evaluation cycles than
emerging service providers, and many incumbent service providers have also
announced significant reductions in their capital expenditure budgets.
Accordingly, 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

   Total cost of revenue decreased $165.1 million to $152.7 million for fiscal
2002 compared to $317.8 million for fiscal 2001. Total cost of revenue was 234%
of revenue for fiscal 2002, compared to 85% of revenue for fiscal 2001. Cost of
revenue for fiscal 2002 included a net charge of $91.6 million relating to
excess inventory

                                      18

<PAGE>

due to a significant reduction in the Company's sales forecasts in the first
quarter of fiscal 2002. The original charge of $102.4 million, recorded in the
first quarter of fiscal 2002, was reduced by credits totaling $10.8 million due
to changes in estimates, the majority of which related to favorable settlements
with contract manufacturers. Cost of revenue for fiscal 2001 included an
inventory write-down of $84.0 million associated with the consolidation and
elimination of certain product lines. Cost of revenue for fiscal 2002 included
$1.8 million of stock compensation expense, compared to $3.1 million for fiscal
2001. Excluding the effect of the inventory write-downs and stock compensation
charges, total cost of revenue as a percentage of revenue was 91% for fiscal
2002, compared to 62% for fiscal 2001. Excluding the impact of these charges,
the increase in total cost of revenue as a percentage of revenue reflects the
overall decrease in revenue and lower utilization of certain fixed
manufacturing and customer support costs.

   Cost of revenue for services decreased $12.6 million to $24.5 million for
fiscal 2002 compared to $37.1 million for fiscal 2001, due primarily to the
overall decrease in revenue levels and the decrease in customer support costs
due to the Company's restructuring activities. In addition to the costs
associated with supporting existing customers, cost of revenue for services
includes costs to support evaluations and trials for potential customers, such
as incumbent service providers which typically have relatively long sales
evaluation cycles.

Research and Development Expenses

   Research and development expenses decreased $49.9 million to $109.7 million
for fiscal 2002 compared to $159.6 million for fiscal 2001. The decrease was
primarily due to reduced costs for project related materials and a decrease in
personnel related expenses due to the Company's restructuring activities, which
resulted in a consolidation of product offerings and more focused development
efforts.

Sales and Marketing Expenses

   Sales and marketing expenses decreased $43.8 million to $39.7 million for
fiscal 2002 compared to $83.5 million for fiscal 2001. The decrease was
primarily due to reduced costs for personnel and related expenses due to the
Company's restructuring activities as well as decreased program marketing costs.

General and Administrative Expenses

   General and administrative expenses decreased $6.6 million to $10.2 million
for fiscal 2002 compared to $16.8 million for fiscal 2001. The decrease was
primarily due to reduced costs for personnel and related expenses due to the
Company's restructuring activities.

Stock Compensation Expense

   Total stock compensation expense decreased $40.6 million to $24.6 million
for fiscal 2002 compared to $65.2 million for fiscal 2001. For fiscal 2002,
$1.8 million of stock compensation expense was classified as cost of revenue
and $22.8 million was classified as operating expenses. 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. The significant decrease was primarily due to $36.3 million of expense
recorded during the first quarter of fiscal 2001, upon the accelerated vesting
of certain restricted stock and stock options in connection with our
acquisition of Sirocco Systems, Inc. ("Sirocco"). The remaining decrease was
primarily due to headcount reductions associated with the Company's
restructuring activities, offset partially by the amortization of restricted
stock issued pursuant to the Company's Stock Option Exchange Offer in the
fourth quarter of fiscal 2001. Stock compensation expense is expected to impact
our reported results of operations through the fourth quarter of fiscal 2005.

Restructuring Charges and Related Asset Impairments

   Beginning in the third quarter of fiscal 2001, unfavorable economic
conditions and reduced capital spending by telecommunications service providers
negatively impacted our operating results in a progressive and

                                      19

<PAGE>

increasingly severe manner. As a result, we have enacted three separate
business restructuring programs, the first in the third quarter of fiscal 2001
(the "fiscal 2001 restructuring"), the second in the first quarter of fiscal
2002 (the "first quarter fiscal 2002 restructuring"), and the third in the
fourth quarter of fiscal 2002 (the "fourth quarter fiscal 2002 restructuring").
As a result of the combined activity under all of the restructuring actions,
during the year ended July 31, 2002, we recorded a total net charge of $241.5
million, which was classified in the statement of operations as follows: cost
of revenue--$91.7 million, operating expenses--$125.0 million, and
non-operating expense--$24.8 million. The originally recorded restructuring
charges were subsequently reduced by credits totaling $14.6 million (cost of
revenue--$10.8 million and operating expenses--$3.8 million). Details regarding
each of the restructuring actions are as follows:

  Fiscal 2001 Restructuring:

   As a result of the unfavorable conditions referred to above, we 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 of 131 employees,
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 excess inventory charge of $84.0 million relating
to the discontinued product lines, which was classified as cost of revenue.

   The restructuring charges and related asset impairments recorded in the
third quarter of fiscal 2001, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Accrual                            Accrual
                              Total              Fiscal 2001 Balance at Fiscal 2002             Balance at
                          Restructuring Non-cash    Cash      July 31,     Cash                  July 31,
                             Charge     Charges   Payments      2001     Payments   Adjustments    2002
                          ------------- -------- ----------- ---------- ----------- ----------- ----------
<S>                       <C>           <C>      <C>         <C>        <C>         <C>         <C>
Workforce reduction......   $  4,174    $   829    $ 2,823    $   522     $   380     $  142     $    --
Facility consolidations
  and certain other costs     24,437      1,214      1,132     22,091       4,287      1,994      15,810
Inventory and asset
  write-downs............    137,285     84,972     13,923     38,390      38,390         --          --
                            --------    -------    -------    -------     -------     ------     -------
Total....................   $165,896    $87,015    $17,878    $61,003     $43,057     $2,136     $15,810
                            ========    =======    =======    =======     =======     ======     =======
</TABLE>

   The fiscal 2001 restructuring program was substantially completed during the
first half of fiscal 2002. During the fourth quarter of fiscal 2002, we
recorded a net $2.1 million credit to operating expenses due to changes in
estimates. The changes in estimates consisted primarily of $4.7 million of
additional facility consolidation charges due to less favorable sublease
assumptions, offset by a $6.7 million reduction in the potential legal matters
associated with the restructuring activities. The remaining cash payments
consist of facility consolidation charges that will be paid over the respective
lease terms through fiscal 2007 and potential legal matters and administrative
expenses associated with the restructuring activities.

  First Quarter Fiscal 2002 Restructuring:

   As a result of a continued decline in overall economic conditions and
further reductions in capital spending by telecommunications service providers,
we implemented a second restructuring program in the first quarter of fiscal
2002, designed to further reduce expenses to align resources with long-term
growth opportunities. The restructuring program included a workforce reduction,
consolidation of excess facilities, and charges related to excess inventory and
other asset impairments.

                                      20

<PAGE>

   As a result of the restructuring program, we recorded restructuring charges
and related asset impairments of $77.3 million classified as operating expenses
and an excess inventory charge of $102.4 million classified as cost of revenue.
In addition, we recorded charges totaling $22.7 million classified as a
non-operating expense, relating to impairments of investments in non-publicly
traded companies that were determined to be other than temporary. The following
paragraphs provide detailed information relating to the restructuring charges
and related asset impairments which were recorded during the first quarter of
fiscal 2002.

  Workforce reduction

   The restructuring program resulted in the reduction of 239 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the first quarter of fiscal 2002. We recorded a
workforce reduction charge of approximately $7.1 million relating primarily to
severance payments and fringe benefits. In addition we also reduced the number
of temporary and contract workers employed by us.

  Consolidation of facilities and certain other costs

   We recorded a charge of $17.2 million relating to the consolidation of
excess facilities and certain other costs. The total charge includes $11.2
million related to the write-down of certain land, as well as lease
terminations and non-cancelable lease costs relating to abandoned facilities.
We also recorded other restructuring costs of $6.0 million relating primarily
to potential legal matters, administrative expenses and professional fees in
connection with the restructuring activities.

  Inventory and asset write-downs

   We recorded a charge of $155.5 million relating to the write-down of
inventory to its net realizable value and the impairment of certain other
assets. The total charge includes $102.4 million of inventory write-downs and
non-cancelable purchase commitments for inventory which was recorded as part of
cost of revenue. This excess inventory charge was due to a severe decline in
the forecasted demand for our products. We also recorded charges totaling $53.1
million for asset impairments, including the assets related to our vendor
financing agreements and fixed assets that were abandoned by us. Since revenue
had been recognized under the vendor financing agreements on a cash basis, the
amount of the impairment loss was limited to the cost of the systems shipped to
the vendor financing customers, which had been classified in other long-term
assets.

  Losses on investments

   We recorded charges totaling $22.7 million for impairments of investments in
non-publicly traded companies that were determined to be other than temporary.
The impairment charges were classified as a non-operating expense.

   The restructuring charges and related asset impairments recorded in the
first quarter of fiscal 2002, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         Accrual
                              Original                                  Balance at
                            Restructuring Non-cash   Cash                July 31,
                               Charge     Charges  Payments Adjustments    2002
                            ------------- -------- -------- ----------- ----------
<S>                         <C>           <C>      <C>      <C>         <C>
Workforce reduction........   $  7,106    $    173 $ 6,106    $   827     $   --
Facility consolidations and
  certain other costs......     17,181       8,572   1,684        835      6,090
Inventory and asset write-
  downs....................    155,451     102,540  41,358     10,804        749
Losses on investments......     22,737      22,737      --         --         --
                              --------    -------- -------    -------     ------
Total......................   $202,475    $134,022 $49,148    $12,466     $6,839
                              ========    ======== =======    =======     ======
</TABLE>

                                      21

<PAGE>

   The first quarter fiscal 2002 restructuring program was substantially
completed during the fourth quarter of fiscal 2002. During the third and fourth
quarters of fiscal 2002, we recorded credits totaling $10.8 million to cost of
revenue due to changes in estimates, the majority of which related to favorable
settlements with contract manufacturers for non-cancelable inventory purchase
commitments. In addition, during the fourth quarter of fiscal 2002, we recorded
a credit to operating expenses of $1.7 million relating to various changes in
estimates. The changes in estimates consisted of $0.9 million of additional
facility consolidation charges, offset by a $1.7 million reduction in the
potential legal matters associated with the restructuring activities and the
reversal of an accrued liability of $0.8 million for workforce reductions. The
remaining cash payments consist primarily of facility consolidation charges
that will be paid over the respective lease terms through fiscal 2005 and
potential legal matters and administrative expenses associated with the
restructuring activities.

  Fourth Quarter Fiscal 2002 Restructuring:

   As a result of continued weakness in overall economic conditions and capital
spending by telecommunications service providers, we implemented a third
restructuring program in the fourth quarter of fiscal 2002, designed to further
reduce expenses 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. This included discontinuing the development of our
standalone transport products, including the SN 8000 Intelligent Optical
Transport Node and the SN 10000 Intelligent Optical Transport System.

   As a result of the restructuring program, we recorded restructuring charges
and related asset impairments of $51.5 million classified as operating
expenses. In addition, we recorded a charge of $2.1 million classified as a
non-operating expense, relating to impairments of investments in non-publicly
traded companies that were determined to be other than temporary. As a result
of the combined impact of the first quarter and fourth quarter fiscal 2002
restructuring programs, we expect pretax savings of approximately $95 million
in annual operating expenses, as compared to the levels immediately preceding
the restructuring programs. The following paragraphs provide detailed
information relating to the restructuring charges and related asset impairments
which were recorded during the fourth quarter of fiscal 2002.

  Workforce reduction

   The restructuring program resulted in the reduction of 225 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the fourth quarter of fiscal 2002. We recorded
a workforce reduction charge of approximately $8.7 million relating primarily
to severance payments and fringe benefits. In addition we also reduced the
number of temporary and contract workers employed by us.

  Consolidation of facilities and certain other costs

   We recorded a charge of $20.1 million relating to the consolidation of
excess facilities and certain other costs, including $5.6 million for lease
terminations and non-cancelable lease costs relating to abandoned facilities.
We also recorded other restructuring costs of $14.5 million relating to
potential legal matters, contractual commitments, administrative expenses and
professional fees related to the restructuring activities.

  Asset write-downs

   We recorded charges totaling $22.6 million for asset impairments, which
related primarily to fixed assets that were disposed of or that we abandoned,
due to the rationalization of our product offerings and the consolidation of
excess facilities.

                                      22

<PAGE>

  Losses on investments

   We recorded a charge of $2.1 million for impairments of investments in
non-publicly traded companies that were determined to be other than temporary.
The impairment charge was classified as a non-operating expense.

   The restructuring charges and related asset impairments recorded in the
fourth quarter of fiscal 2002, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 Accrual
                                                    Total                       Balance at
                                                Restructuring Non-cash   Cash    July 31,
                                                   Charge     Charges  Payments    2002
                                                ------------- -------- -------- ----------
<S>                                             <C>           <C>      <C>      <C>
Workforce reduction............................    $ 8,713    $   814   $2,059   $ 5,840
Facility consolidations and certain other costs     20,132         --      454    19,678
Asset write-downs..............................     22,637     22,637       --        --
Losses on investments..........................      2,108      2,108       --        --
                                                   -------    -------   ------   -------
Total..........................................    $53,590    $25,559   $2,513   $25,518
                                                   =======    =======   ======   =======
</TABLE>

   The remaining cash expenditures relating to workforce reductions will be
substantially paid by the first quarter of fiscal 2003. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2006.

Acquisition Costs

   Acquisition costs for the first quarter of fiscal 2001 were $4.9 million
related to the acquisition of Sirocco. These costs included legal and
accounting services and other professional fees associated with the transaction.

Interest and Other Income, Net

   Interest and other income, net decreased $45.3 million to $40.0 million for
fiscal 2002 compared to $85.3 million for fiscal 2001. The decrease in interest
and other income was primarily attributable to lower interest rates and a lower
average cash balance during fiscal 2002.

Provision for Income Taxes

   We did not provide for income taxes for fiscal 2002 due to the significant
net loss incurred during the year and the significant uncertainty as to the
realization of our deferred tax assets. In fiscal 2001, we recorded a provision
for income taxes of $13.1 million. The provision for income taxes for fiscal
2001 consisted 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.

  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,

                                      23

<PAGE>

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.

Cost of Revenue

   Cost of revenue increased $211.4 million to $317.8 million for fiscal 2001
compared to $106.4 million for fiscal 2000. Cost of revenue for fiscal 2001
included $3.1 million of stock compensation expense, compared to $1.4 million
for fiscal 2000. Excluding stock compensation expense, 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 excluding stock compensation
expense 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.

Stock Compensation Expense

   Total stock compensation expense was $65.2 million for fiscal 2001, an
increase of $44.1 million from $21.1 million for fiscal 2000. For fiscal 2001,
$3.1 million of stock compensation expense was classified as cost of revenue
and $62.1 million was classified as operating expenses. 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 of
expense attributable to the acceleration of options and restricted stock
relating to the acquisition of Sirocco. 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. Stock
compensation expense relating to these grants is expected to affect our results
of operations through the fourth quarter of fiscal 2005.

                                      24

<PAGE>

   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.

   Upon the completion of the Exchange Offer, options to purchase approximately
15.9 million shares were originally expected to be granted in the second
quarter of fiscal 2002, no sooner than six months and one day from June 20,
2001. However, due to the effect of employee terminations, which were primarily
due to our fiscal 2002 restructuring programs as described in Note 10 to the
consolidated financial statements, the number of options which were granted in
the second quarter of fiscal 2002 related to the Exchange Offer was
approximately 12.6 million shares. 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 were granted with an
exercise price of $4.89 per share, equal to the fair market value of our common
stock on the date of 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. An aggregate of approximately 28.6 million shares of our
common stock were either exchanged for all outstanding shares of Sirocco or
reserved for issuance under outstanding Sirocco stock options assumed by us 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 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.

                                      25

<PAGE>

   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 131
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 payments and fringe benefits. In
addition we also reduced the number of temporary and contract workers employed
by us.

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

   The restructuring program was substantially completed during the first half
of fiscal 2002. Facility consolidation charges will be paid over the respective
lease terms through fiscal 2007.

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 investments,
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

                                      26

<PAGE>

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.

Liquidity and Capital Resources

   Total cash, cash equivalents and investments were $1.04 billion at July 31,
2002. Included in this amount were cash and cash equivalents of $172.7 million,
compared to $492.5 million at July 31, 2001. The decrease in cash and cash
equivalents of $319.8 million was attributable to cash used in operating
activities of $202.5 million and cash used in investing activities of $122.1
million, offset by cash provided by financing activities of $4.8 million.

   Cash used in operating activities of $202.5 million consisted of the net
loss for the period of $379.7 million, adjusted for non-cash charges totaling
$226.0 million and changes in working capital totaling $48.8 million, the most
significant components of which were a decrease in accounts payable of $56.4
million, offset by a decrease in accounts receivable of $23.4 million. Non-cash
charges included depreciation and amortization, restructuring charges and
related asset impairments, and stock compensation. Cash used in investing
activities of $122.1 million consisted primarily of net purchases of
investments of $115.0 million and purchases of property and equipment of $15.9
million. Cash provided by financing activities of $4.8 million consisted
primarily of the proceeds received from employee stock plan activity.

   During the first quarter of fiscal 2002, each of our two major vendor
financing customers experienced a significant deterioration in their financial
condition. As a result, we determined that we were unlikely to realize any
significant proceeds from these vendor financing agreements. Accordingly, we
recorded an impairment charge for the assets related to these financing
agreements, which consisted of the cost of the systems shipped to the vendor
financing customers, and had been classified in other long-term assets.

   As a result of the financial demands of major network deployments, service
providers are continuing to request financing assistance from their suppliers.
From time to time we have provided extended payment terms on trade receivables
to certain key customers to assist them with their network deployment plans. In
addition, we may provide or commit to extend additional credit or credit
support, such as vendor financing, to our customers, as we consider appropriate
in the course of our business. 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.

   Currently, our primary source of liquidity comes from our cash and cash
equivalents and investments, which totaled $1.04 billion at July 31, 2002. Our
investments are classified as available-for-sale and consist of securities that
are readily convertible to cash, including certificates of deposits, commercial
paper and government securities, with original maturities ranging from 90 days
to three years. At July 31, 2002, $509.4 million of investments with maturities
of less than one year were classified as short-term investments, and $361.5
million of investments with maturities of greater than one year were classified
as long-term investments. At current revenue levels, we anticipate that some
portion of our existing cash and cash equivalents and investments will continue
to be consumed by operations. Our accounts receivable, while not considered a
primary source of liquidity, represents a concentration of credit risk because
the accounts receivable balance at any point in time typically consists of a
relatively small number of customer account balances. At July 31, 2002, more
than 90% of our accounts receivable balance was attributable to three
international customers. As of July 31, 2002, we do not have any outstanding
debt or credit facilities, and do not anticipate entering into any debt or
credit agreements in the foreseeable future. Our fixed commitments for cash
expenditures consist primarily of payments under operating leases totaling
$29.5 million, as described in Note 5 to the consolidated financial statements.

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

Related Party Transactions

   Our strategic investments in privately held companies include an investment
of $2.2 million in Tejas Networks India Private Limited ("Tejas"), which was
made during the fiscal year ended July 31, 2001. The Chairman of the Board of
Sycamore also serves as the Chairman of the Board of Tejas. We have no
obligation to provide any additional funding to Tejas, and have not engaged in
any material transactions with Tejas since the date of our original investment.

Recent Accounting Pronouncements

   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. The Company does not have any
goodwill or other intangible assets relating to business combinations or any
intangible assets acquired outside of a business combination. Accordingly, the
adoption of SFAS No. 142 did not have a material impact on the Company's
financial position or results of operations.

   In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses the financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. Accordingly, the Company will be
required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The
adoption of SFAS No. 144 is not expected to have a material impact on the
Company's financial position or results of operations.

   In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses the accounting for disposal
and exit activities, and supercedes EITF 94-3. SFAS No. 146 is required to be
adopted for disposal activities initiated after December 31, 2002. Under SFAS
No. 146, certain types of restructuring charges will be recorded as they are
incurred over time, rather than being accrued at the time of management's
commitment to an exit plan as specified by EITF 94-3. The adoption of SFAS No.
146 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

OUR BUSINESS HAS BEEN ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND MARKET
CONDITIONS

   As a result of unfavorable economic conditions and a sudden and severe
decline in the purchasing patterns of our customers, our revenue began to
decline in the third quarter of fiscal 2001, and we have incurred significant
operating losses since that time. The economic downturn and reduced capital
spending by telecommunications service providers has also resulted in longer
selling cycles with extended trial periods for new equipment purchases. While
we have implemented restructuring and cost control programs to reduce our
business expenses, our costs are largely based on the requirements that we
believe are necessary to support sales to incumbent service providers, and a
high percentage of our expenses are, and will continue to be, fixed. As a

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result, we currently expect to continue to incur operating losses unless
revenue increases significantly above the current levels.

   In addition to the economic downturn and the decline in capital spending by
telecommunications service providers, the ongoing situation following the
September 2001 terrorist acts and the related military actions appears to have
added additional uncertainty to an already weak overall economic environment.
Further acts of war or terrorism, or related effects such as disruptions in air
transportation, enhanced security measures and political instability in certain
foreign countries, may adversely affect our business, operating results and
financial condition. Although the overall economy in the United States has
shown some preliminary signs of recovery in recent months, the
telecommunications equipment industry has remained severely depressed. Our
business and results of operations have been and will continue to be seriously
harmed if current economic conditions do not improve.

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, 2002, our SN 3000
Optical Edge Switch, SN 16000 and SN 16000 SC Intelligent Optical Switches and
Silvx Manager Network Management System are the only products that are
currently available for sale to customers. To be successful, we believe that we
must continually enhance the capabilities of our existing products, and
successfully develop and introduce new products. 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.

   Our line of intelligent optical networking products enables the creation of
a fundamentally different, more flexible and data-centric network architecture
than those created by traditional SONET/SDH-based network equipment that has
historically been used by incumbent service providers for optical networking.
While we believe that our mesh-based architecture offers significant
competitive advantages over traditional SONET/SDH-based equipment, we are
directing our sales efforts towards incumbent service providers, many of which
have made significant investments in SONET/SDH-based equipment. If we are
unable to convince incumbent service providers to deploy our intelligent
optical networking solutions and transition their networks toward more
flexible, data-centric mesh architectures, our business and results of
operations will be seriously harmed.

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. During fiscal 2002,
Vodafone accounted for 45% of our revenue and NTT Communications accounted for
20% of our revenue. In fiscal 2001, Williams Communications accounted for 47%
of our revenue and 360networks accounted for 11% of our revenue. In fiscal
2000, Williams accounted for 92% of our revenue. In any given quarter, a
relatively small number of customers typically comprise a large percentage of
total revenue, though the composition of these customers may vary from quarter
to quarter.

   Through fiscal 2001, a large percentage of our sales were made to emerging
service providers such as Williams and 360networks. Many of these emerging
service providers have experienced severe financial difficulties, causing them
to dramatically reduce their capital expenditures, and in many cases, file for
bankruptcy protection. As a result, we believe that sales to emerging service
providers are likely to remain at reduced levels. To be successful, we will
need to increase our sales to incumbent service providers, which typically have
longer sales evaluation cycles and have also reduced their capital spending
plans. In addition, we have relatively limited

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<PAGE>

experience in selling our products to incumbent service providers. There can be
no assurance that we will be successful in increasing our sales to incumbent
service providers.

   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. Many incumbent service providers have recently
announced reductions in their capital expenditure budgets, reduced their
revenue forecasts, or announced restructurings. 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 REMAIN AT REDUCED LEVELS IN THE NEAR TERM

   Beginning in the third quarter of fiscal 2001, our gross margins declined
significantly compared to historical levels. After excluding the effect of
special charges and stock compensation expense, our gross profit was 9% of
revenue in fiscal 2002, as compared to 38% of revenue in fiscal 2001, and 47%
of revenue in the first half of fiscal 2001, which represents the period
immediately prior to the start of the current economic downturn. We currently
anticipate that gross margins are likely to continue to be adversely affected
by several factors, including reduced demand for our products, the effects of
product volumes and manufacturing efficiencies, component limitations, the mix
of products and services sold, increases in material and labor costs, loss of
cost savings due to changes in component pricing or charges incurred if we do
not correctly anticipate product demand, competitive pricing, and possible
exposure to excess and obsolete inventory charges, such as the charge which
occurred in the first quarter of fiscal 2002.

CURRENT ECONOMIC CONDITIONS COMBINED WITH OUR LIMITED OPERATING HISTORY MAKES
FORECASTING DIFFICULT

   Current economic conditions in the telecommunications industry, combined
with our limited operating history, make it difficult to accurately forecast
revenue, and there is limited historical data upon which to base our planned
operating expenses. At the present time, our operating expenses are largely
based on the requirements that we believe are necessary to support sales to
incumbent service providers, and a high percentage of these expenses are and
will continue to be fixed. Our ability to sell products and the level of
success, if any, we may achieve depend, among other things, upon the level of
demand for intelligent optical networking products, which continues to be a
rapidly evolving market. In addition, we continue to have limited visibility
into the capital spending plans of our current and prospective customers, which
increases the difficulty of forecasting our revenue or predicting any recovery
in capital spending trends. We have directed our sales efforts towards
incumbent service providers, many of which have historically financed their
capital expenditures using significant amounts of debt. In recent months, many
of these incumbent service providers have come under increased scrutiny from
credit rating agencies and investors due to their relatively high debt levels,
which may limit their ability to make future equipment purchases. We expect
that these conditions are likely to continue to limit our ability to forecast
our revenue. If operating results are below the expectations of our investors
and market analysts, this could cause declines in the price of our common stock.

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

   Beginning in the third quarter of fiscal 2001, our revenue has declined
considerably and we have incurred significant operating losses since that time.
As of July 31, 2002, we had an accumulated deficit of $681.1 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
restructuring programs designed to decrease the Company's

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<PAGE>

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 will need to generate significantly higher revenue over the current levels
in order 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. 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, beginning in the third quarter of fiscal 2001, our
revenue declined due to a sudden and severe decline in the purchasing patterns
of our customers, and as a result, we have incurred significant operating
losses since that time. 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;

  .  capital spending constraints by our target customers;

  .  the length and variability of the sales cycle for our products, which we
     believe is increasing in length, due to overall market conditions and our
     emphasis on selling to incumbent service providers;

  .  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;

  .  changes in accounting rules, such as any future requirement to record
     expenses for employee stock option grants made at fair market value;

  .  actual events, circumstances, outcomes and amounts differing from
     judgments, assumptions, and estimates used in determining the values of
     certain assets, liabilities and other items reflected in our financial
     statements; and

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

   While we have implemented restructuring and cost control programs, we plan
to continue to invest in our business, to continue to maintain a strong product
development and customer support infrastructure that will

                                      31

<PAGE>

enable us to move quickly when economic conditions improve. Our operating
expenses are largely based on the requirements that we believe are necessary to
support sales to incumbent service providers, and a high percentage of our
expenses are, and will continue to be, fixed. As a result, we currently expect
to continue to incur operating losses unless revenue increases significantly
above the current levels.

   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 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,
our future operating results may be below our expectations or those of public
market analysts and investors, and our net sales may continue to decline or
recover at a slower rate than anticipated by us or analysts and investors. In
either 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, as we have directed our
sales efforts towards incumbent service providers. 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 our products, we believe that most 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

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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.

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

   Our future success will depend on our attracting additional customers. Due
to the overall economic downturn in our industry and the financial difficulties
experienced by emerging service providers and certain incumbent service
providers, the number of potential customers for our products at the current
time has been reduced. Our ability to attract new customers could also 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.

OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS

   International sales represented 87% of total revenue in fiscal 2002, and we
expect that international sales will continue to represent a significant
portion of our revenue. Doing business internationally requires significant
management attention and financial resources to successfully develop direct and
indirect sales channels and to support customers in international markets.
While international sales currently represent a high percentage of total
revenue, these sales are concentrated within a relatively small number of
customers. We may not be able to maintain or expand international market demand
for our products.

   We have relatively 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 in
     compliance with local laws and customs;

  .  reliance on working with distribution partners for the resale of our
     products in certain markets and for certain types of product offerings,
     such as the integration of our products into third-party product offerings;

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

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

  .  unexpected changes in regulatory requirements, including trade protection
     measures and import and licensing requirements;

  .  certification requirements;

  .  currency fluctuations;

  .  reduced protection for intellectual property rights in some countries;

  .  potentially adverse tax consequences; and

  .  political and economic instability, particularly in emerging markets.

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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 OR OTHER
COMPONENTS IS DISRUPTED

   We currently purchase several key components, including commercial digital
signal processors, CPUs, field programmable gate arrays, switch fabric, 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 disruption in supply could
seriously impact our revenue and results of operations.

   Throughout the downturn in the telecommunications industry, the optical
component industry has been downsizing manufacturing capacity while
consolidating product lines from earlier acquisitions. Recently, one of our
suppliers announced its intention to exit the market for optical components,
and several of our other suppliers have announced reductions of their product
offerings. These announcements, or similar decisions by other suppliers, could
result in reduced competition and higher prices for the components we purchase.
In addition, the loss of a source of supply for key components could require us
to incur additional costs to redesign our products that use those components.
If any of these events occurred, our results of operations could be materially
adversely affected.

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 contract
manufacturers to manufacture our products in accordance with our specifications
and to fill orders on a timely basis. Currently, the majority of our products
are produced under an agreement with Jabil Circuit, Inc., which provides
comprehensive manufacturing services, including assembly, test, control and
shipment to our customers, and procures material on our behalf. During the
normal course of business, we may provide demand forecasts to our contract
manufacturers up to six months prior to scheduled delivery of products to our
customers. If we overestimate our requirements, the contract manufacturers may
assess cancellation penalties or we may have excess inventory which could
negatively impact our gross margins. During the first quarter of fiscal 2002,
we recorded an excess inventory charge of $102.4 million due to a severe
decline in our forecasted revenue. A portion of this charge was related to
inventory purchase commitments. If we underestimate our requirements, the
contract manufacturers may have inadequate inventory which could interrupt
manufacturing of our products and result in delays in shipment to our customers
and revenue recognition. We could also incur additional charges to manufacture
our products to meet our customer deployment schedules.

   We may not be able to effectively manage our relationship with our contract
manufacturers, and such contract manufacturers may not meet our future
requirements for timely delivery. Our contract manufacturers also build
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. In addition, our reliance on contract manufacturers
limits our ability to control the manufacturing processes of our products,
which exposes us to risks including the unpredictability of manufacturing
yields and a reduced ability to control the quality of finished products.

   The contract manufacturing industry is a highly competitive,
capital-intensive business with relatively low profit margins. In addition,
there have been a number of major acquisitions within the contract manufacturing

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<PAGE>

industry in recent periods. While to date there has been no significant impact
on our contract manufacturers, future acquisitions could potentially have an
adverse effect on our working relationship with our contract manufacturers. For
example, in the event of a major acquisition involving one of our contract
manufacturers, difficulties could be encountered in the merger integration
process that could negatively impact our working relationship. 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 for any
reason, we may lose revenue and damage our customer relationships.

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

   The market for intelligent optical networking products continues to evolve,
and has been 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.

   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.

WE WILL NOT RETAIN CUSTOMERS OR ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE
AND MEET SPECIFIC CUSTOMER REQUIREMENTS OR IF OUR PRODUCTS DO NOT INTEROPERATE
WITH OUR CUSTOMERS' EXISTING NETWORKS

   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 ensure 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.

   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. Specifically,

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<PAGE>

incumbent service providers typically have less evolutionary networks that
contain more generations of products. Our products must interoperate with all
of the products within our customers' 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 or orders for our products could be cancelled.
This would also seriously harm our reputation, all of which could seriously
harm our business and prospects.

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.

   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 the 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. Furthermore, as we are increasingly directing our
sales efforts towards incumbent service providers which typically have longer
sales evaluation cycles, we believe that being able to demonstrate strong
financial viability is becoming an increasingly important consideration to our
customers in making their purchasing decisions.

   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. Recently, one of our larger competitors, Ciena
Corporation, completed the acquisition of another company in our industry, ONI
Systems. Over the past two years, the market valuations of the majority of
companies in our industry have

                                      36

<PAGE>

declined significantly, and many companies have experienced dramatic decreases
in revenue due to decreased customer demand in general, a smaller customer base
due to the financial difficulties impacting emerging service providers,
reductions in capital expenditures by incumbent service providers, 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.

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

   The market for intelligent optical networking products continues to evolve.
In recent periods, there has been a sharp decline in capital spending by our
current and prospective customers. 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.

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 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 service
providers rather than incumbent service providers. We believe that it is
important for us to increase our sales to incumbent service providers,
including incumbent local exchange carriers such as the Regional Bell Operating
Companies ("RBOCs"). Incumbent service providers typically have longer sales
evaluation cycles than emerging service providers, and

                                      37

<PAGE>

we have limited experience in selling our products to incumbent service
providers. In addition, we are currently investing in product certification
standards such as the OSMINE standard, which will be necessary for us to
increase our sales to the RBOCs. Recently, we successfully completed two OSMINE
processes for all of our switching products. While we have made a commitment to
invest resources in obtaining these certification standards, there is no
assurance that such efforts will enable us to increase our sales to incumbent
service providers. Any failure to establish or maintain strong customer
relationships would likely have a material adverse effect on our business and
results of operations.

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. However, beginning in the third quarter of fiscal
2001, our headcount levels have been reduced significantly, due primarily to
our restructuring activities. At July 31, 2002, we had a total of 445
employees, which represents a reduction of approximately 60% from headcount
levels immediately prior to the restructuring actions. Our initial growth,
followed by more recent headcount reductions, 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-based
awards which are intended to represent an integral component of their
compensation package. These stock-based awards 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 become parties to
claims of this kind or other claims relating to our employees, or that those
claims will not result in material litigation. In response to changing business
conditions, we have terminated approximately 600 employees since the third
quarter of fiscal 2001, and as a result, we 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 the merits of such actions. In addition, such claims
could divert the attention of our management away from our operations.


                                      38

<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. In the course of our business, we may receive claims of
infringement or otherwise become aware of potentially relevant patents or other
intellectual property rights held by other parties. We evaluate the validity
and applicability of these intellectual property rights, and determine in each
case whether we must negotiate licenses or cross-licenses to incorporate or use
the proprietary technologies in our products.

   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.

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. We completed the acquisition of Sirocco Systems, Inc. in

                                      39

<PAGE>

September 2000, and may consider making other acquisitions from time to time.
In the event of an acquisition, we could:

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

  .  consume cash, which would reduce the amount of cash available for other
     purposes;

  .  incur debt;

  .  assume liabilities;

  .  increase our ongoing operating expenses and level of fixed costs;

  .  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, will also involve
numerous risks, including:

  .  problems combining the purchased operations, technologies or products;

  .  unanticipated costs;

  .  diversion of management's attention from other business issues and
     opportunities;

  .  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.

   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, 2002, we have made strategic investments in privately held
companies totaling approximately $26.0 million, and we may decide to make
additional investments in the future. In fiscal 2002, we recorded impairment
losses of $24.8 million relating to these investments. These types of
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 continue to receive requests for financing assistance from customers and
potential customers and we expect these requests to continue. We believe the
ability to offer financing assistance can be a competitive factor in obtaining
business. From time to time we have provided extended payment terms on trade
receivables to certain key customers to assist them with their network
deployment plans. In addition, we may provide or commit to extend additional
credit or credit support, such as vendor financing, to our customers 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

                                      40

<PAGE>

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, such as the
losses that we incurred during the first quarter of fiscal 2002.

   During the first quarter of fiscal 2002, we experienced losses relating to
our two existing vendor financing customers, as each of them experienced a
significant deterioration in their financial condition. As a result, we
determined that we were unlikely to realize any significant proceeds from these
vendor financing agreements. Accordingly, we recorded an impairment charge for
the assets related to these financing agreements, which consisted of the cost
of the systems shipped to the vendor financing customers, and had been
classified in other long-term assets.

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.

   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 follow-on 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 Note 11 to the consolidated financial
statements for additional details regarding these cases.

                                      41

<PAGE>

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, 2002, options to purchase a total of 36.1 million shares of
our common stock were outstanding. 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, 2002, our officers, directors and entities affiliated with
them, in the aggregate, beneficially owned approximately 39.6% of our
outstanding common stock. These stockholders, if acting together, would be able
to significantly influence 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 debt securities. These
available-for-sale investments 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, 2002, the fair
value of the portfolio would decline by approximately $1.6 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 investment portfolio.

Exchange Rate Sensitivity

   We operate primarily in the United States, and the majority of our sales
since inception have been made in US dollars. However, our business has become
increasingly global, with international revenue representing 87% of total
revenue in fiscal 2002, and we expect that international sales will continue to
represent a significant portion of our revenue. Fluctuations in foreign
currencies may have an impact on our financial results, although to date the
impact has not been material. 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.

                                      42

<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>                                                                                              <C>
Report of Independent Accountants...............................................................  44

Consolidated Balance Sheets as of July 31, 2002 and 2001........................................  45

Consolidated Statements of Operations for the years ended July 31, 2002, 2001 and 2000..........  46

Consolidated Statements of Stockholders' Equity for the years ended July 31, 2002, 2001 and 2000  47

Consolidated Statements of Cash Flows for the years ended July 31, 2002, 2001 and 2000..........  48

Notes to Consolidated Financial Statements......................................................  49
</TABLE>

                                      43

<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, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2002 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 19, 2002, except for
Note 11, as to which the date is
October 23, 2002

                                      44

<PAGE>

                            SYCAMORE NETWORKS, INC.

                          CONSOLIDATED BALANCE SHEETS

                       (in thousands, except par value)

<TABLE>
<CAPTION>
                                                                                  July 31, 2002 July 31, 2001
                                                                                  ------------- -------------
                                     ASSETS
                                     ------
<S>                                                                               <C>           <C>
Current assets:
   Cash and cash equivalents.....................................................  $  172,658    $  492,500
   Short-term investments........................................................     509,350       332,471
   Accounts receivable, net of allowance for doubtful accounts of $4,684 and
     $4,773 at July 31, 2002 and July 31, 2001, respectively.....................      18,187        41,477
   Inventories...................................................................      12,940        66,939
   Prepaids and other current assets.............................................       3,447        13,739
                                                                                   ----------    ----------
       Total current assets......................................................     716,582       947,126
Property and equipment, net......................................................      32,696       106,625
Long-term investments............................................................     361,537       423,578
Other assets.....................................................................       7,760        73,992
                                                                                   ----------    ----------
       Total assets..............................................................  $1,118,575    $1,551,321
                                                                                   ==========    ==========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
   Accounts payable..............................................................  $    6,104    $   62,513
   Accrued compensation..........................................................       3,896         7,198
   Accrued expenses..............................................................      13,148        18,001
   Accrued restructuring costs...................................................      48,167        61,003
   Deferred revenue..............................................................       4,978         6,607
   Other current liabilities.....................................................       3,759         8,139
                                                                                   ----------    ----------
       Total current liabilities.................................................      80,052       163,461
                                                                                   ----------    ----------
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, 2002 and July 31, 2001..............................          --            --
   Common stock, $.001 par value; 2,500,000 shares authorized and 273,681 shares
     issued at July 31, 2002 and July 31, 2001...................................         274           274
   Additional paid-in capital....................................................   1,732,846     1,738,505
   Accumulated deficit...........................................................    (681,086)     (301,429)
   Deferred compensation.........................................................     (17,910)      (54,110)
   Treasury stock, at cost; 1,933 and 680 shares held at July 31, 2002
     and July 31, 2001, respectively.............................................        (158)         (126)
   Accumulated other comprehensive income........................................       4,557         4,746
                                                                                   ----------    ----------
       Total stockholders' equity................................................   1,038,523     1,387,860
                                                                                   ----------    ----------
       Total liabilities and stockholders' equity................................  $1,118,575    $1,551,321
                                                                                   ==========    ==========
</TABLE>

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

                                      45

<PAGE>

                            SYCAMORE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                   (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                               Year Ended July 31,
                                                                         ------------------------------
                                                                            2002            2001           2000
                                                                         ---------       ---------       --------
<S>                                                                      <C>             <C>             <C>
Revenue
   Product.............................................................. $  43,516       $ 356,582       $194,108
   Service..............................................................    21,658          18,164          4,029
                                                                         ---------       ---------       --------
       Total revenue....................................................    65,174         374,746        198,137
                                                                         ---------       ---------       --------
Cost of revenue
   Product..............................................................   126,373         277,545         98,721
   Service..............................................................    24,516          37,119          6,265
   Stock compensation...................................................     1,815           3,132          1,433
                                                                         ---------       ---------       --------
       Total cost of revenue............................................   152,704         317,796        106,419
                                                                         ---------       ---------       --------
Gross profit (loss).....................................................   (87,530)         56,950         91,718
Operating expenses:
   Research and development (exclusive of non-cash stock compensation
     expense of $9,866, $34,203 and $9,685).............................   109,654         159,607         71,903
   Sales and marketing (exclusive of non-cash stock compensation
     expense of $10,713, $24,308 and $7,014)............................    39,687          83,478         30,650
   General and administrative (exclusive of non-cash stock compensation
     expense of $2,233, $3,581 and $2,935)..............................    10,166          16,820          9,824
   Stock compensation...................................................    22,812          62,092         19,634
   Restructuring charges and related asset impairments..................   124,990          81,926             --
   Acquisition costs....................................................        --           4,948             --
                                                                         ---------       ---------       --------
       Total operating expenses.........................................   307,309         408,871        132,011
                                                                         ---------       ---------       --------
Loss from operations....................................................  (394,839)       (351,921)       (40,293)
Losses on investments...................................................   (24,845)             --             --
Interest and other income, net..........................................    40,027          85,299         41,706
                                                                         ---------       ---------       --------
Income (loss) before income taxes.......................................  (379,657)       (266,622)         1,413
Income tax expense......................................................        --          13,132            745
                                                                         ---------       ---------       --------
Net income (loss)....................................................... $(379,657)      $(279,754)      $    668
                                                                         =========       =========       ========
Basic net income (loss) per share....................................... $   (1.49)      $   (1.18)      $   0.00
Diluted net income (loss) per share..................................... $   (1.49)      $   (1.18)      $   0.00
       Shares used in per-share calculation--basic......................   254,663         237,753        166,075
       Shares used in per-share calculation--diluted....................   254,663         237,753        233,909
</TABLE>

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

                                      46

<PAGE>

                            SYCAMORE NETWORKS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                (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, 1999.............  94,896   $ 95  $   58,398   $ (26,003)   $(360)   $ (25,439)     --   $  --      $   --
                                    -------   ----  ----------   ---------    -----    ---------  ------   -----      ------
Net income.........................      --     --          --         668       --           --      --      --          --
Unrealized gain on investments, 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)     --      --          --
Stock compensation expense.........      --     --       6,188          --       --       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 investments.....      --     --          --          --       --           --      --      --        (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)     --      --          --
Stock compensation expense.........      --     --         915          --       --       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
                                    -------   ----  ----------   ---------    -----    ---------  ------   -----      ------
Net loss...........................      --     --          --    (379,657)      --           --      --      --          --
Unrealized loss on investments.....      --     --          --          --       --           --      --      --        (189)

Total comprehensive loss...........
Treasury stock purchases...........      --     --                      --       --           --   3,716    (319)         --
Issuance of common stock under
 employee stock plans..............      --     --       4,878          --       --           --  (2,463)    287          --
Stock compensation expense.........      --     --       2,209          --       --       22,418      --      --          --
Adjustments to deferred
 compensation for terminated
 employees.........................      --     --     (13,782)         --       --       13,782      --      --          --
Compensation expense relating to
 stock option acceleration.........      --     --       1,036          --       --           --      --      --          --
                                    -------   ----  ----------   ---------    -----    ---------  ------   -----      ------
Balance, July 31, 2002............. 273,681   $274  $1,732,846   $(681,086)   $  --    $ (17,910)  1,933   $(158)     $4,557
                                    =======   ====  ==========   =========    =====    =========  ======   =====      ======
</TABLE>
<TABLE>
<CAPTION>

                                        Total
                                    Stockholders'
                                       Equity
                                    -------------
<S>                                 <C>
Balance, July 31, 1999.............  $    6,691
                                     ----------
Net income.........................         668
Unrealized gain on investments, 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               --
Stock compensation expense.........      21,067
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 investments.....        (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               --
Stock compensation expense.........      65,224
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
                                     ----------
Net loss...........................    (379,657)
Unrealized loss on investments.....        (189)
                                     ----------
Total comprehensive loss...........    (379,846)
Treasury stock purchases...........        (319)
Issuance of common stock under
 employee stock plans..............       5,165
Stock compensation expense.........      24,627
Adjustments to deferred
 compensation for terminated
 employees.........................          --
Compensation expense relating to
 stock option acceleration.........       1,036
                                     ----------
Balance, July 31, 2002.............  $1,038,523
                                     ==========
</TABLE>

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

                                      47

<PAGE>

                            SYCAMORE NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (in thousands)

<TABLE>
<CAPTION>
                                                                             Year Ended July 31,
                                                                    ------------------------------------
                                                                        2002         2001         2000
                                                                    -----------   ----------  -----------
<S>                                                                 <C>           <C>         <C>
Cash flows from operating activities:
   Net income (loss)............................................... $  (379,657)  $ (279,754) $       668
   Adjustments to reconcile net income (loss) to net cash provided
     by (used in) operating activities:
       Depreciation and amortization...............................      41,900       35,500        6,325
       Restructuring charges and related asset impairments.........     159,581       52,476           --
       Stock compensation..........................................      24,627       65,224       21,067
       Provision for doubtful accounts.............................         (89)       5,530           --
       Deferred income taxes.......................................          --       14,049      (11,569)
       Tax benefit from employee stock plans.......................          --        3,208        7,325
Changes in operating assets and liabilities:
   Accounts receivable.............................................      23,379       (3,600)     (31,997)
   Inventories.....................................................         833      (62,678)     (33,131)
   Prepaids and other current assets...............................      10,292        6,751      (15,017)
   Deferred revenue................................................      (1,629)     (23,101)      29,236
   Accounts payable................................................     (56,409)      13,483       43,073
   Accrued expenses and other liabilities..........................     (12,535)       8,527       18,454
   Accrued restructuring costs.....................................     (12,836)      61,003           --
                                                                    -----------   ----------  -----------
Net cash provided by (used in) operating activities................    (202,543)    (103,382)      34,434
                                                                    -----------   ----------  -----------
Cash flows from investing activities:
   Purchases of property and equipment.............................     (15,915)    (115,454)     (42,473)
   Purchases of investments........................................  (1,161,410)    (703,526)  (1,378,008)
   Maturities of investments.......................................   1,046,383    1,034,327      302,924
   Minority equity investments.....................................          --       (9,004)     (17,000)
   Decrease (increase) in other assets.............................       8,797      (45,551)      (1,471)
                                                                    -----------   ----------  -----------
Net cash provided by (used in) investing activities................    (122,145)     160,792   (1,136,028)
                                                                    -----------   ----------  -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net.....................       5,165        7,174    1,490,704
   Purchase of treasury stock......................................        (319)        (531)          --
   Payments received for notes receivable..........................          --          262          198
   Proceeds from notes payable.....................................          --           --        1,761
   Payments on notes payable.......................................          --       (1,780)      (5,413)
                                                                    -----------   ----------  -----------
Net cash provided by financing activities..........................       4,846        5,125    1,487,250
                                                                    -----------   ----------  -----------
Net increase (decrease) in cash and cash equivalents...............    (319,842)      62,535      385,656
Adjustment to conform fiscal year of Sirocco.......................          --           --        3,440
Cash and cash equivalents, beginning of period.....................     492,500      429,965       40,869
                                                                    -----------   ----------  -----------
Cash and cash equivalents, end of period........................... $   172,658   $  492,500  $   429,965
                                                                    ===========   ==========  ===========
Supplemental cash flow information:
   Cash paid for interest..........................................          --   $      264  $       216
   Cash paid for income taxes......................................          --          885        3,764
Supplementary non cash activity:
   Issuance of common stock in exchange for notes receivable.......          --           --          100
   Conversion of preferred stock into common stock.................          --           --       55,771
</TABLE>

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

                                      48

<PAGE>

                            SYCAMORE NETWORKS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business:

   Sycamore Networks, Inc. (the "Company") was incorporated in Delaware on
February 17, 1998. The Company develops and markets 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 to deploy new services.

2. Significant Accounting Policies:

   The accompanying financial statements of the Company reflect the application
of certain significant accounting policies as described below. The Company
considers the following to be its most critical accounting policies and
estimates: revenue recognition, allowances for doubtful accounts, warranty
reserves, inventory valuation, and restructuring liabilities and asset
impairments. The Company believes these accounting policies are critical
because changes in such estimates can materially affect the amount of the
Company's reported net income or loss. See detailed discussion under the
caption "Critical Accounting Policies and Estimates" in Management's Discussion
and Analysis of Financial Condition and Results of Operations.

  Principles of Consolidation

   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 the 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 was accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16. Accordingly, the
consolidated financial statements for all prior periods presented were 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.

                                      49

<PAGE>

   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
                                                            (February 17,
                                      Year Ended Year Ended     1998)
                                       July 31,   July 31,     through
                                         2000       1999    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>

  Cash Equivalents and Investments

   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 investments, 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 investments was determined based on quoted market prices at the
reporting date for those instruments. As of July 31, 2002 and 2001, investments
consisted of (in thousands):


<TABLE>
<CAPTION>
                                     Amortized Fair Market Unrealized
                                       Cost       Value    Gain/(Loss)
                                     --------- ----------- -----------
         <S>                         <C>       <C>         <C>
         July 31, 2002:
            Certificate of deposits. $ 21,685   $ 21,727     $   42
            Commercial paper........  363,305    365,027      1,722
            Government securities...  481,340    484,133      2,793
                                     --------   --------     ------
                Total............... $866,330   $870,887     $4,557
                                     ========   ========     ======
                                     Amortized Fair Market Unrealized
                                       Cost       Value    Gain/(Loss)
                                     --------- ----------- -----------
         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
                                     ========   ========     ======
</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, 2002 and 2001, $0.5 million and $26.0
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. During the year ended
July 31, 2002, the Company recorded impairment charges totaling $24.8 million
against the value of these investments, due to other than temporary declines in
value. No impairment charges were recorded during the years ended July 31, 2001
and July 31, 2000.

                                      50

<PAGE>

  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 warranty accrual was $5.5
million and $7.6 million at July 31, 2002 and 2001, respectively.

   The Company's transactions may 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. While each
individual transaction varies according to the terms of the purchase order or
sales agreement, a typical multiple element arrangement may include some or all
of the following components: product shipments, installation services,
maintenance and training. The total sales price is allocated based on the
relative fair value of each component, generally the price charged for each
component when sold separately. For the product portion, revenue is recognized
upon shipment if there are no significant uncertainties regarding customer
acceptance. If uncertainties regarding customer acceptance exist, revenue is
recognized when such uncertainties are resolved. For installation services,
revenue is typically recognized upon receipt of documentation from the customer
that the services have been performed. For maintenance and training services,
revenue is recognized when the services are performed.

  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.

                                      51

<PAGE>

  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 bears to the total of current
and anticipated future gross revenue for that product or (ii) the straight-line
method over the 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,
investments and accounts receivable. The Company invests its excess cash
primarily in deposits with commercial banks, high-quality corporate securities
and U.S. government securities. For the year ended July 31, 2002, two
international customers accounted for 45% and 20% of the Company's revenue,
respectively. For the years ended July 31, 2001 and 2000, one domestic customer
accounted for 47% and 92% 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 generally does not require collateral for sales to
customers, and the Company's accounts receivable balance at any point in time
typically consists of a relatively small number of customer account balances.
At July 31, 2002, more than 90% of the Company's accounts receivable balance
was attributable to three international customers. At July 31, 2001, more than
75% of the Company's accounts receivable balance was attributable to four
international customers.

   Many emerging service providers, from which the Company had derived a large
percentage of its revenue through fiscal 2001, have experienced severe
financial difficulties, causing them to dramatically reduce their capital
expenditures, and in some cases, file for bankruptcy protection. As a result,
the Company is directing its sales efforts towards incumbent service providers,
which typically have longer sales evaluation cycles than emerging service
providers. 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

                                      52

<PAGE>

quality control and enhance working relationships with suppliers. These
purchases are made under existing contracts or purchase orders. The failure of
a supplier, including a 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.

  Allowance for Doubtful Accounts

   The Company evaluates its outstanding accounts receivable balances on an
ongoing basis to determine whether an allowance for doubtful accounts should be
recorded. Activity in the Company's allowance for doubtful accounts is
summarized as follows:

<TABLE>
<CAPTION>
                                                     Year Ended July 31,
                                                     -------------------
                                                      2002    2001  2000
                                                     ------  ------ ----
                                                       (in thousands)
       <S>                                           <C>     <C>    <C>
       Beginning balance............................ $4,773  $   -- $--
       Additions charged to expenses................    (89)  5,530  --
       Deductions...................................     --     757  --
                                                     ------  ------ ---
       Ending balance............................... $4,684  $4,773 $--
                                                     ======  ====== ===
</TABLE>

  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 all periods presented, the unrealized gain or loss on
investments, which is recorded as a component of stockholders' equity, was the
only difference between the reported net income (loss) and total comprehensive
income (loss).

  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 and warrants
outstanding.

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

<TABLE>
<CAPTION>
                                                          Year Ended July 31,
                                                    ------------------------------------
                                                       2002         2001        2000
                                                     ---------    ---------    --------
                                                    (in thousands, except per share data)
<S>                                                 <C>          <C>          <C>
Numerator:
   Net income (loss)............................... $(379,657)   $(279,754)   $    668
Denominator:
   Weighted-average shares of common stock
     outstanding...................................   272,162      272,929     223,999
   Weighted-average shares subject to repurchase...   (17,499)     (35,176)    (57,924)
                                                     ---------    ---------    --------
Shares used in per-share calculation--basic........   254,663      237,753     166,075
                                                     =========    =========    ========
Weighted-average shares of common stock outstanding   254,663      237,753     223,999
Weighted common stock equivalents..................        --           --       9,910
                                                     ---------    ---------    --------
Shares used in per-share calculation--diluted......   254,663      237,753     233,909
                                                     =========    =========    ========
Net income (loss) per share:
   Basic........................................... $   (1.49)   $   (1.18)   $   0.00
                                                     =========    =========    ========
   Diluted......................................... $   (1.49)   $   (1.18)   $   0.00
                                                     =========    =========    ========
</TABLE>

                                      53

<PAGE>

   Options to purchase 36.1 million, 19.5 million and 4.6 million shares of
common stock at average exercise prices of $8.33, $15.87 and $78.86 have not
been included in the computation of diluted net income (loss) per share for the
years ended July 31, 2002, 2001 and 2000, respectively, as their effect would
have been anti-dilutive. Warrants to purchase 150,000 shares of common stock at
an exercise price of $11.69 have not been included in the computation of
diluted net loss per share for the years ended July 31, 2002 and 2001, as their
effect would have been anti-dilutive.

  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, 2002, the geographical distribution of
revenue was as follows: United States--13%, England--47%, Japan--20% and all
other countries--20%. For the year ended July 31, 2001, the geographical
distribution of revenue was as follows: United States--65%, Canada--11%, and
all other countries--24%. For the year ended July 31, 2000, substantially all
of the Company's revenue was derived in the United States. Long-lived assets
consist entirely of property and equipment and are principally located in the
United States for all periods presented.

  Recent Accounting Pronouncements

   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. The Company does not have any
goodwill or other intangible assets relating to business combinations or any
intangible assets acquired outside of a business combination. Accordingly, the
adoption of SFAS No. 142 did not have a material impact on the Company's
financial position or results of operations.

   In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses the financial accounting and
reporting for the disposal of long-lived assets. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. Accordingly, the Company will be
required to adopt SFAS No. 144 in the first quarter of fiscal 2003. The
adoption of SFAS No. 144 is not expected to have a material impact on the
Company's financial position or results of operations.

   In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses the accounting for disposal
and exit activities, and supercedes EITF 94-3. SFAS No. 146 is required to be
adopted for disposal activities initiated after December 31, 2002. Under SFAS
No. 146, certain types of restructuring charges will be recorded as they are
incurred over time, rather than being accrued at the time of management's
commitment to an exit plan as specified by EITF 94-3. The adoption of SFAS No.
146 is not expected to have a material impact on the Company's financial
position or results of operations.

                                      54

<PAGE>

3. Inventories

   Inventories consisted of the following at July 31, 2002 and 2001 (in
thousands):

<TABLE>
<CAPTION>
                                         2002    2001
                                        ------- -------
                        <S>             <C>     <C>
                        Raw materials.. $ 3,609 $25,299
                        Work in process     964  18,849
                        Finished goods.   8,367  22,791
                                        ------- -------
                                        $12,940 $66,939
                                        ======= =======
</TABLE>

4. Property and Equipment

   Property and equipment consisted of the following at July 31, 2002 and 2001
(in thousands):

<TABLE>
<CAPTION>
                                                        2002      2001
                                                      --------  --------
       <S>                                            <C>       <C>
       Computer software and equipment............... $ 61,983  $118,671
       Land..........................................    4,000    12,288
       Furniture and office equipment................    1,435     3,692
       Leasehold improvements........................    2,625     6,396
                                                      --------  --------
                                                        70,043   141,047
       Less accumulated depreciation and amortization  (37,347)  (34,422)
                                                      --------  --------
                                                      $ 32,696  $106,625
                                                      ========  ========
</TABLE>

   Depreciation and amortization expense was $41.9 million, $35.5 million and
$6.3 million for the years ended July 31, 2002, 2001 and 2000, respectively.

5. Commitments and Contingencies

  Operating Leases

   Rent expense under operating leases was $4.0 million, $5.2 million and $2.0
million for the years ended July 31, 2002, 2001 and 2000, respectively. At July
31, 2002, future minimum lease payments under all non-cancelable operating
leases are as follows (in thousands):

<TABLE>
                  <S>                                 <C>
                  2003............................... $ 7,018
                  2004...............................   6,479
                  2005...............................   6,273
                  2006...............................   3,703
                  2007...............................   6,025
                                                      -------
                  Total future minimum lease payments $29,498
                                                      =======
</TABLE>

   Included in the amounts shown above is $22.2 million relating to excess
facilities for which the Company has abandoned and recorded charges for lease
terminations and non-cancelable lease costs as part of its restructuring
activities (Note 10). After incorporating sublease assumptions and lease
termination costs for the various facilities, the amounts accrued as part of
the restructuring liability for facilities consolidations totaled $19.4 million
at July 31, 2002.

  Vendor Financing

   As a result of the financial demands of major network deployments, service
providers are continuing to request financing assistance from their suppliers.
From time to time we have provided extended payment terms

                                      55

<PAGE>

on trade receivables to certain key customers to assist them with their network
deployment plans. In addition, we may provide or commit to extend additional
credit or credit support, such as vendor financing, to our customers, as we
consider appropriate in the course of our business. 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. Currently, we do not have any
outstanding customer financing commitments.

   During the first quarter of fiscal 2002, each of our two major vendor
financing customers experienced a significant deterioration in their financial
condition. As a result, we determined that we were unlikely to realize any
significant proceeds from these vendor financing agreements. Accordingly, we
recorded an impairment charge for the assets related to these financing
agreements. Since revenue had been recognized under the vendor financing
agreements on a cash basis, the amount of the impairment loss was limited to
the cost of the systems shipped to the vendor financing customers, which had
been classified in other long-term assets.

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, 2002, 2001
and 2000 is derived in the United States.

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

<TABLE>
<CAPTION>
                                                          July 31,
                                                   ----------------------
                                                   2002   2001     2000
                                                   ---- -------  --------
      <S>                                          <C>  <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,
                                                  ----------------------------
                                                     2002      2001      2000
                                                  ---------  --------  -------
 <S>                                              <C>        <C>       <C>
 Statutory federal income tax (benefit).......... $(132,880) $(93,318) $   495
 State taxes, net of federal benefit.............   (11,851)   (8,446)     140
 Non-deductible stock compensation...............     6,151    19,542    7,362
 Utilization of net operating loss and tax credit
   carryforwards.................................        --        --   (7,639)
 Valuation allowance.............................   142,533    97,115       --
 Other...........................................    (3,953)   (1,761)     387
                                                  ---------  --------  -------
                                                  $      --  $ 13,132  $   745
                                                  =========  ========  =======
</TABLE>

                                      56

<PAGE>

   The significant components of the Company's net deferred tax assets as of
July 31, 2002 and 2001 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        2002       2001
                                                     ---------  ---------
     <S>                                             <C>        <C>
     Assets:
        Net operating loss and credit carryforwards. $ 244,778  $ 110,228
        Restructuring and related accruals..........    43,812     39,244
        Accruals....................................     5,281      6,406
        Depreciation................................     7,989      3,241
        Other, net..................................     5,800      6,008
                                                     ---------  ---------
            Total net deferred tax assets...........   307,660    165,127
        Valuation allowance.........................  (307,660)  (165,127)
                                                     ---------  ---------
                                                     $      --  $      --
                                                     =========  =========
</TABLE>

   During the year ended July 31, 2002, due to the sustained level of
cumulative net losses, the Company did not record a benefit for taxes currently
payable. In addition, the Company recorded an increase to the valuation
allowance of $142.5 million to offset the increase in the net deferred tax
assets, since the Company believes it is more likely than not that the net
deferred tax assets will not be realized. 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. No tax benefit associated with the Company's stock plans was
recorded during the year ended July 31, 2002.

   The Company had federal and state tax net operating loss carryforwards at
July 31, 2002 of approximately $578.5 million and $212.7 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 $161.2 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 $7.8 million and $3.1 million respectively, which will begin to
expire in 2018 and 2013, respectively.

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, 2002 or
July 31, 2001.

  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.

   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

                                      57

<PAGE>

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 97,354,986 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, 2002, there
were 4,193,479 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
no shares of restricted stock during the year ended July 31, 2002, 1,675,027
shares of restricted stock during the year ended July 31, 2001, and no shares
of restricted stock during the year ended July 31, 2000. As of July 31, 2002,
there were 7,679,916 shares of restricted stock subject to repurchase by the
Company through fiscal 2005 at their original issuance prices, ranging from
$0.00 to $0.39.

  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% of the lower of the
fair market value of the common stock at the beginning or end of each six-month
offering

                                      58

<PAGE>

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, 2002, 2001 and 2000, 1,079,619,
148,473 and 101,021 shares of common stock were issued under the plan,
respectively. At July 31, 2002, 1,170,381 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 1,680,000 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, 90,000 and 270,000 options under the Director Plan
during the years ended July 31, 2002, 2001 and 2000, respectively. At July 31,
2002, 1,410,000 shares were available for grant under the Director Plan.

  Deferred Stock Compensation

   In connection with the grant of certain stock options and restricted shares
to employees during the years ended July 31, 2001 and 2000, the Company
recorded deferred stock compensation of $14.4 million and $102.3 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 is
recorded as a component of stockholders' equity and is amortized over the
vesting periods of the related options and restricted shares. During the years
ended July 31, 2002, 2001 and 2000, the Company recorded compensation expense
relating to these options and restricted shares totaling $24.6 million, $64.3
million and $14.9 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 years ended July 31,
2002 and 2001, the Company reversed deferred stock compensation of $13.8
million and $8.8 million, respectively, 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, 2002, 2001, and 2000, the Company granted
15,000, 5,500 and 273,054 shares of fully vested non-forfeitable common stock
awards to non-employees, respectively, and recognized compensation expense of
$30,000, $22,000 and $6.2 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, 2002, 2001 and 2000,
respectively: weighted-average risk free interest rates of 5.0%, 4.0% and 5.2%,
weighted-average expected option life of 2, 3 and 4 years, no dividend yield
and 90%, 90% and 85% 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. This warrant remains outstanding at
July 31, 2002.

  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

                                      59

<PAGE>

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 at that
time. Due to cancellations of restricted stock relating to employee
terminations, which were primarily due to the Company's fiscal 2002
restructuring programs as described in Note 10, the total deferred compensation
relating to the Exchange Offer was reduced to approximately $7.3 million. 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.

   Upon the completion of the Exchange Offer, options to purchase approximately
15.9 million shares were originally expected to be granted in the second
quarter of fiscal 2002, no sooner than six months and one day from June 20,
2001. However, due to the effect of employee terminations, which were primarily
due to the Company's fiscal 2002 restructuring programs as described in Note
10, the number of options which were granted in the second quarter of fiscal
2002 related to the Exchange Offer was approximately 12.6 million shares. 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 were granted with an exercise price of $4.89 per share, equal
to the fair market value of the Company's common stock on the date of grant.

  Stock Option Activity

   Stock option activity under all of the Company's stock plans during the
three years ended July 31, 2002 is summarized as follows:

<TABLE>
<CAPTION>
                                         Number of   Weighted Average
                                          Shares      Exercise Price
                                        -----------  ----------------
           <S>                          <C>          <C>
           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
                                        ===========       ======
           Options granted.............  23,503,385         4.27
           Options exercised...........  (1,382,738)        1.18
           Options canceled............  (5,585,817)       19.40
                                        -----------       ------
           Outstanding at July 31, 2002  36,051,732       $ 8.33
                                        ===========       ======
</TABLE>

                                      60

<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, 2002, 2001 and 2000 would have been
adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                      Year Ended July 31,
                                                ------------------------------
                                                   2002       2001      2000
                                                ---------  ---------  --------
 <S>                                            <C>        <C>        <C>
 Pro forma net loss (in thousands)............. $(496,125) $(531,502) $(97,374)
 Pro forma basic and diluted net loss per share $   (1.95) $   (2.24) $  (0.59)
</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,
                                      ---------------------------
                                         2002      2001     2000
                                      ---------  -------  -------
              <S>                     <C>        <C>      <C>
              Risk free interest rate       3.3%     5.0%     6.5%
              Dividend yield.........         0%       0%       0%
              Expected volatility....       100%      90%      85%
              Expected life.......... 3.5 years  5 years  5 years
</TABLE>

   The weighted average grant date fair value of stock awards granted during
the years ended July 31, 2002, 2001 and 2000 was $2.87, $30.70 and $41.88 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 prices for options granted at fair value were
$4.27, $41.73 and $97.97 for fiscal 2002, 2001 and 2000, respectively. The
weighted average fair values for options granted at fair value were $2.87,
$30.17 and $69.55 for fiscal 2002, 2001 and 2000, respectively. The weighted
average exercise prices for options granted below fair value were $134.63 and
$3.71 for fiscal 2001 and 2000, respectively. The weighted average fair values
of options granted below fair value were $102.58 and $16.33 for fiscal 2001 and
2000, respectively. No options were granted below fair value in fiscal 2002.

   The following table summarizes information about stock options outstanding
at July 31, 2002:

<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>
      $ 0.10-$  3.33   5,711,278     7.1     $ 1.64   2,366,432      $ 1.67
      $ 3.34-$  4.56  10,378,695     9.6     $ 3.54   1,343,160      $ 3.73
      $ 4.60-$  4.89  11,758,013     9.4     $ 4.89   3,016,154      $ 4.89
      $ 4.95-$ 12.67   6,201,462     8.1     $ 8.70   2,727,284      $ 8.96
      $13.50-$172.13   2,002,284     8.0     $71.28     876,307      $74.16
      --------------  ----------     ---     ------  ----------      ------
      $ 0.10-$172.13  36,051,732     8.8     $ 8.33  10,329,337      $10.95
      =============   ==========     ===     ======  ==========      ======
</TABLE>

   At July 31, 2001 and 2000, approximately 3.9 million and 0.4 million
outstanding options were exercisable, respectively. The weighted average
exercise prices for outstanding options were $15.87 and $16.60 at July 31, 2001
and 2000, respectively.

                                      61

<PAGE>

  Treasury Stock

   At July 31, 2002, the Company held 1.9 million shares of treasury stock,
recorded at the acquisition cost of $0.2 million. At July 31, 2001, the Company
held 0.7 million 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 restricted stock and options exercised prior
to vesting. The shares of treasury stock held are reissued upon the exercise of
options or the issuance of other stock based equity awards.

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 $1.0 million and $1.1 million to the
plan during fiscal 2002 and 2001, respectively, and made no contributions in
fiscal 2000.

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, 2002, the Company did not engage in any material
transactions with Tejas. 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

   Beginning in the third quarter of fiscal 2001, unfavorable economic
conditions and reduced capital spending by telecommunications service providers
negatively impacted the Company's operating results in a progressive and
increasingly severe manner. As a result, the Company has enacted three separate
business restructuring programs, the first in the third quarter of fiscal 2001
(the "fiscal 2001 restructuring"), the second in the first quarter of fiscal
2002 (the "first quarter fiscal 2002 restructuring"), and the third in the
fourth quarter of fiscal 2002 (the "fourth quarter fiscal 2002 restructuring").
As a result of the combined activity under all of the restructuring actions,
during the year ended July 31, 2002, the Company recorded a total net charge of
$241.5 million, which was classified in the statement of operations as follows:
cost of revenue--$91.7 million, operating expenses--$125.0 million, and
non-operating expense--$24.8 million. The originally recorded restructuring
charges were subsequently reduced by credits totaling $14.6 million (cost of
revenue--$10.8 million and operating expenses--$3.8 million). Details regarding
each of the restructuring actions are as follows:

  Fiscal 2001 Restructuring:

   As a result of the unfavorable conditions referred to above, 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 of 131
employees, 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

                                      62

<PAGE>

$81.9 million classified as operating expenses and an excess inventory charge
of $84.0 million relating to the discontinued product lines, which was
classified as cost of revenue.

   The restructuring charges and related asset impairments recorded in the
third quarter of fiscal 2001, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Accrual                            Accrual
                              Total              Fiscal 2001 Balance at Fiscal 2002             Balance at
                          Restructuring Non-cash    Cash      July 31,     Cash                  July 31,
                             Charge     Charges   Payments      2001     Payments   Adjustments    2002
                          ------------- -------- ----------- ---------- ----------- ----------- ----------
<S>                       <C>           <C>      <C>         <C>        <C>         <C>         <C>
Workforce reductions.....   $  4,174    $   829    $ 2,823    $   522     $   380     $  142     $    --
Facility consolidations
  and certain other costs     24,437      1,214      1,132     22,091       4,287      1,994      15,810
Inventory and asset
  write-downs............    137,285     84,972     13,923     38,390      38,390         --          --
                            --------    -------    -------    -------     -------     ------     -------
Total....................   $165,896    $87,015    $17,878    $61,003     $43,057     $2,136     $15,810
                            ========    =======    =======    =======     =======     ======     =======
</TABLE>

   The fiscal 2001 restructuring program was substantially completed during the
first half of fiscal 2002. During the fourth quarter of fiscal 2002, the
Company recorded a net $2.1 million credit to operating expenses due to changes
in estimates. The changes in estimates consisted primarily of $4.7 million of
additional facility consolidation charges due to less favorable sublease
assumptions, offset by a $6.7 million reduction in the potential legal matters
associated with the restructuring activities. The remaining cash payments
consist of facility consolidation charges that will be paid over the respective
lease terms through fiscal 2007 and potential legal matters and administrative
expenses associated with the restructuring activities.

  First Quarter Fiscal 2002 Restructuring:

   As a result of a continued decline in overall economic conditions and
further reductions in capital spending by telecommunications service providers,
the Company implemented a second restructuring program in the first quarter of
fiscal 2002, designed to further reduce expenses to align resources with
long-term growth opportunities. The restructuring program included a workforce
reduction, consolidation of excess facilities, and charges related to excess
inventory and other asset impairments.

   As a result of the restructuring program, the Company recorded restructuring
charges and related asset impairments of $77.3 million classified as operating
expenses and an excess inventory charge of $102.4 million classified as cost of
revenue. In addition, the Company recorded charges totaling $22.7 million
classified as a non-operating expense, relating to impairments of investments
in non-publicly traded companies that were determined to be other than
temporary. The following paragraphs provide detailed information relating to
the restructuring charges and related asset impairments which were recorded
during the first quarter of fiscal 2002.

  Workforce reduction

   The restructuring program resulted in the reduction of 239 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the first quarter of fiscal 2002. The Company
recorded a workforce reduction charge of approximately $7.1 million relating
primarily to severance payments and fringe benefits. In addition the number of
temporary and contract workers employed by the Company was also reduced.

                                      63

<PAGE>

  Consolidation of facilities and certain other costs

   The Company recorded a charge of $17.2 million relating to the consolidation
of excess facilities and certain other costs. The total charge includes $11.2
million related to the write-down of certain land, as well as lease
terminations and non-cancelable lease costs relating to abandoned facilities.
The Company also recorded other restructuring costs of $6.0 million relating
primarily to potential legal matters, administrative expenses and professional
fees in connection with the restructuring activities.

  Inventory and asset write-downs

   The Company recorded a charge of $155.5 million relating to the write-down
of inventory to its net realizable value and the impairment of certain other
assets. The total charge includes $102.4 million of inventory write-downs and
non-cancelable purchase commitments for inventory which was recorded as part of
cost of revenue. This excess inventory charge was due to a severe decline in
the forecasted demand for the Company's products. The Company also recorded
charges totaling $53.1 million for asset impairments, including the assets
related to the Company's vendor financing agreements and fixed assets that were
abandoned by the Company. Since revenue had been recognized under the vendor
financing agreements on a cash basis, the amount of the impairment loss was
limited to the cost of the systems shipped to the vendor financing customers,
which had been classified in other long-term assets.

  Losses on investments

   The Company recorded charges totaling $22.7 million for impairments of
investments in non-publicly traded companies that were determined to be other
than temporary. The impairment charges were classified as a non-operating
expense.

   The restructuring charges and related asset impairments recorded in the
first quarter of fiscal 2002, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                             Accrual
                                                  Original                                  Balance at
                                                Restructuring Non-cash   Cash                July 31,
                                                   Charge     Charges  Payments Adjustments    2002
                                                ------------- -------- -------- ----------- ----------
<S>                                             <C>           <C>      <C>      <C>         <C>
Workforce reduction............................   $  7,106    $    173 $ 6,106    $   827     $   --
Facility consolidations and certain other costs     17,181       8,572   1,684        835      6,090
Inventory and asset write-downs................    155,451     102,540  41,358     10,804        749
Losses on investments..........................     22,737      22,737      --         --         --
                                                  --------    -------- -------    -------     ------
Total..........................................   $202,475    $134,022 $49,148    $12,466     $6,839
                                                  ========    ======== =======    =======     ======
</TABLE>

   The first quarter fiscal 2002 restructuring program was substantially
completed during the fourth quarter of fiscal 2002. During the third and fourth
quarters of fiscal 2002, the Company recorded credits totaling $10.8 million to
cost of revenue due to changes in estimates, the majority of which related to
favorable settlements with contract manufacturers for non-cancelable inventory
purchase commitments. In addition, during the fourth quarter of fiscal 2002,
the Company recorded a credit to operating expenses of $1.7 million relating to
various changes in estimates. The changes in estimates consisted of $0.9
million of additional facility consolidation charges, offset by a $1.7 million
reduction in the potential legal matters associated with the restructuring
activities and the reversal of an accrued liability of $0.8 million for
workforce reductions. The remaining cash payments consist primarily of facility
consolidation charges that will be paid over the respective lease terms through
fiscal 2005 and potential legal matters and administrative expenses associated
with the restructuring activities.

                                      64

<PAGE>

  Fourth Quarter Fiscal 2002 Restructuring:

   As a result of continued weakness in overall economic conditions and capital
spending by telecommunications service providers, the Company implemented a
third restructuring program in the fourth quarter of fiscal 2002, designed to
further reduce expenses 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. This included discontinuing the development
of the Company's standalone transport products, including the SN 8000
Intelligent Optical Transport Node and the SN 10000 Intelligent Optical
Transport System.

   As a result of the restructuring program, the Company recorded restructuring
charges and related asset impairments of $51.5 million classified as operating
expenses. In addition, the Company recorded a charge of $2.1 million classified
as a non-operating expense, relating to impairments of investments in
non-publicly traded companies that were determined to be other than temporary.
The following paragraphs provide detailed information relating to the
restructuring charges and related asset impairments which were recorded during
the fourth quarter of fiscal 2002.

  Workforce reduction

   The restructuring program resulted in the reduction of 225 regular employees
across all business functions and geographic regions. The workforce reductions
were substantially completed in the fourth quarter of fiscal 2002. The Company
recorded a workforce reduction charge of approximately $8.7 million relating
primarily to severance payments and fringe benefits. In addition the number of
temporary and contract workers employed by the Company was also reduced.

  Consolidation of facilities and certain other costs

   The Company recorded a charge of $20.1 million relating to the consolidation
of excess facilities and certain other costs, including $5.6 million for lease
terminations and non-cancelable lease costs relating to abandoned facilities.
The Company also recorded other restructuring costs of $14.5 million relating
to potential legal matters, contractual commitments, administrative expenses
and professional fees related to the restructuring activities.

  Asset write-downs

   The Company recorded charges totaling $22.6 million for asset impairments,
which related primarily to fixed assets that were disposed of or that the
Company abandoned, due to the rationalization of the Company's product
offerings and the consolidation of excess facilities.

  Losses on investments

   The Company recorded a charge of $2.1 million for impairments of investments
in non-publicly traded companies that were determined to be other than
temporary. The impairment charge was classified as a non-operating expense.

   The restructuring charges and related asset impairments recorded in the
fourth quarter of fiscal 2002, and the reserve activity since that time, are
summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           Accrual
                                              Total                       Balance at
                                          Restructuring Non-cash   Cash    July 31,
                                             Charge     Charges  Payments    2002
                                          ------------- -------- -------- ----------
<S>                                       <C>           <C>      <C>      <C>
Workforce reduction......................    $ 8,713    $   814   $2,059   $ 5,840
Facility consolidations and certain other
  costs..................................     20,132         --      454    19,678
Asset write-downs........................     22,637     22,637       --        --
Losses on investments....................      2,108      2,108       --        --
                                             -------    -------   ------   -------
Total....................................    $53,590    $25,559   $2,513   $25,518
                                             =======    =======   ======   =======
</TABLE>

                                      65

<PAGE>

   The remaining cash expenditures relating to workforce reductions will be
substantially paid by the first quarter of fiscal 2003. Facility consolidation
charges will be paid over the respective lease terms through fiscal 2006.

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 (the "Individual
Defendants") 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
consolidated into a single action and an amended complaint was filed on April
19, 2002. The amended complaint was filed on behalf of persons who purchased
the Company's common stock between October 21, 1999 and December 6, 2000. The
amended complaint alleges 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
Registration Statements and Prospectuses 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 amended complaint alleges claims against the
Company, several of the Company's officers and directors and the underwriters
under Sections 11 and 15 of the Securities Act. It also alleges claims against
the Company, the individual defendants and the underwriters under Sections
10(b) and 20(a) of the Securities Exchange Act. The action against the Company
is being coordinated with over three hundred other nearly identical actions
filed against other companies. The actions seek damages in an unspecified
amount. A motion to dismiss addressing issues common to the companies and
individuals who have been sued in these actions was filed on July 15, 2002. An
opposition to that motion was filed on behalf of the plaintiffs and a reply
brief was filed on behalf of the companies. The fully briefed issues are now
pending before the court and oral arguments are currently scheduled for October
29, 2002. On October 9, 2002, the court dismissed the Individual Defendants
from the case without prejudice based upon Stipulations of Dismissal filed by
the plaintiffs and the Individual Defendants. The Company believes that the
claims against it are without merit and intends to defend against the
complaints vigorously. 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 Company's
results of operations or financial position.

                                      66

<PAGE>

12. Selected Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                        October 27, January 26, April 27, July 31,
                                                           2001        2002       2002      2002
                                                        ----------- ----------- --------- --------
                                                         (in thousands, except per share amounts)
<S>                                                     <C>         <C>         <C>       <C>
Consolidated Statement of Operations Data:
Revenue................................................  $  21,243   $ 21,800   $ 13,582  $  8,549
Cost of revenue........................................    123,132     19,838      3,492     6,242
                                                         ---------   --------   --------  --------
Gross profit (loss)....................................   (101,889)     1,962     10,090     2,307
                                                         ---------   --------   --------  --------
Operating expenses:
   Research and development............................     36,515     25,985     25,541    21,613
   Sales and marketing.................................     13,704     11,379      8,870     5,734
   General and administrative..........................      3,190      2,614      2,186     2,176
   Stock compensation..................................      5,767      7,141      5,101     4,803
   Restructuring charges and related asset impairments.     77,306         --         --    47,684
                                                         ---------   --------   --------  --------
       Total operating expenses........................    136,482     47,119     41,698    82,010
                                                         ---------   --------   --------  --------
Loss from operations...................................   (238,371)   (45,157)   (31,608)  (79,703)
Losses on investments..................................    (22,737)        --         --    (2,108)
Interest and other income, net.........................     13,173      9,808      8,765     8,281
                                                         ---------   --------   --------  --------
Loss before income taxes...............................   (247,935)   (35,349)   (22,843)  (73,530)
Income tax expense.....................................         --         --         --        --
                                                         ---------   --------   --------  --------
Net loss...............................................  $(247,935)  $(35,349)  $(22,843) $(73,530)
                                                         =========   ========   ========  ========
Basic net loss per share...............................  $   (1.00)  $  (0.14)  $  (0.09) $  (0.28)
                                                         =========   ========   ========  ========
Diluted net loss per share.............................  $   (1.00)  $  (0.14)  $  (0.09) $  (0.28)
                                                         =========   ========   ========  ========
</TABLE>

<TABLE>
<CAPTION>
                                                        October 28, January 27, April 28,  July 31,
                                                           2000        2001       2001       2001
                                                        ----------- ----------- ---------  --------
                                                          (in thousands, except per share amounts)
<S>                                                     <C>         <C>         <C>        <C>
Consolidated Statement of Operations Data:
Revenue................................................  $120,448    $149,243   $  54,203  $ 50,852
Cost of revenue........................................    65,782      79,599     132,734    39,681
                                                         --------    --------   ---------  --------
Gross profit (loss)....................................    54,666      69,644     (78,531)   11,171
                                                         --------    --------   ---------  --------
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
   Stock compensation..................................    41,110       5,972       6,850     8,160
   Acquisition costs...................................     4,948          --          --        --
   Restructuring charges and related asset impairments.        --          --      81,926        --
                                                         --------    --------   ---------  --------
       Total operating expenses........................   103,199      74,713     159,815    71,144
                                                         --------    --------   ---------  --------
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)
                                                         ========    ========   =========  ========
</TABLE>

                                      67

<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" in Part I
hereof and set forth under the caption "Election of Directors" appearing in the
Company's definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders to be held on December 19, 2002, which will be filed with the
Securities and Exchange Commission not later than 120 days after July 31, 2002,
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

   The information appearing under the heading "Executive Officers" in Part I
hereof and set forth under the caption "Compensation and Other Information
Concerning Executive Officers" in the Company's definitive Proxy Statement for
the 2002 Annual Meeting of Stockholders to be held on December 19, 2002, which
will be filed with the Securities and Exchange Commission not later than 120
days after July 31, 2002, is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
        RELATED STOCKHOLDER MATTERS

   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 2002 Annual Meeting of Stockholders to be held on December
19, 2002, which will be filed with the Securities and Exchange Commission not
later than 120 days after July 31, 2002, is incorporated herein by reference.

   The following table provides information as of July 31, 2002 regarding the
number of shares of the Company's common stock that may be issued under the
Company's equity compensation plans. The table includes the 1998 Plan, 1999
Plan, Director Plan and Employee Stock Purchase Plan, all of which have been
approved by the Company's stockholders. The table does not include a total of
396,221 shares of the Company's common stock issuable upon the exercise of
outstanding options under the Sirocco 1998 Plan. These options were assumed by
the Company through its acquisition of Sirocco, and no additional options may
be granted under this plan. The weighted-average exercise price of these
options is $8.37 per share.

<TABLE>
<CAPTION>
                                                                                       Number of Securities
                                                                                      Remaining Available for
                                               Number of Securities Weighted-Average   Future Issuance Under
                                                to be Issued Upon   Exercise Price of   Equity Compensation
                                                   Exercise of         Outstanding       Plans (Excluding
                                               Outstanding Options, Options, Warrants Securities Reflected in
                Plan Category                  Warrants and Rights     and Rights           Column (a))
                -------------                  -------------------- ----------------- -----------------------
                                                       (a)                 (b)                  (c)
<S>                                            <C>                  <C>               <C>
Equity Compensation Plans Approved by Security
  Holders.....................................      35,655,511(1)         $8.33             64,153,635(2)
                                                    ==========            =====             ==========
</TABLE>
--------
(1) Excludes purchase rights accruing under the Employee Stock Purchase Plan,
    pursuant to which 1,170,381 shares are reserved for issuance at July 31,
    2002. 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 shares necessary to restore the
    number of shares available for purchase to 2,250,000. Participants may
    purchase common stock at a price equal to 85% of the lower of the fair
    market value of the common stock on the first day or the last day of each
    six-month offering period. Contributions under the Employee Stock Purchase
    Plan are limited to 10% of an employee's eligible compensation not to
    exceed amounts allowed by the Internal Revenue Code.
(2) Includes 1,170,381 shares relating to the Employee Stock Purchase Plan.

                                      68

<PAGE>

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 2002 Annual Meeting of Stockholders to be held on December 19, 2002, which
will be filed with the Securities and Exchange Commission not later than 120
days after July 31, 2002, is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

   Not applicable.

                                      69

<PAGE>

                                    PART IV

ITEM 15. 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 43 are filed as part of this report.

      2. Exhibits

<TABLE>
<CAPTION>
Number                                         Exhibit Description
------                                         -------------------
<S>    <C>
  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)

 10.7  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)

 10.14 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)
</TABLE>

                                      70

<PAGE>

<TABLE>
<CAPTION>
  Number                                         Exhibit Description
  ------                                         -------------------
<S>         <C>
   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)

   10.20    Separation Agreement between Sycamore Networks, Inc. and Ryker Young (11)

   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)

   99.1 (a) Certification of Chief Executive Officer

   99.1 (b) Certification of Chief Financial Officer
</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 10-K 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.
(11)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly period ended January 26, 2002 filed with the
    Commission on March 4, 2002.
    +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 June 20, 2002, the Company filed a report on Form 8-K announcing a
restructuring of its operations and providing guidance on its projected revenue
and results of operations for its fiscal fourth quarter ending July 31, 2002.

                                      71

<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 24th day of October, 2002.

                                          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 24th day of October, 2002.

             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
      Frances M. Jewels      and Administration, Secretary and Treasurer

     /s/  TIMOTHY BARROWS  Director
    ----------------------
       Timothy Barrows

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

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

    ---------------------- Director
       Paul W. Chisholm

                                      72

<PAGE>

                                CERTIFICATIONS

I, Daniel E. Smith, certify that:

    1. I have reviewed this annual report on Form 10-K of Sycamore Networks,
       Inc.;

    2. Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements were made, not misleading with respect to the period
       covered by this annual report;

    3. Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and
       cash flows of the Registrant as of, and for, the periods presented in
       this annual report.

Date:  October 24, 2002

                                                 /S/  DANIEL E. SMITH
                                           _____________________________________
                                                      Daniel E. Smith
                                               President and Chief Executive
                                                          Officer

I, Frances M. Jewels, certify that:

    1. I have reviewed this annual report on Form 10-K of Sycamore Networks,
       Inc.;

    2. Based on my knowledge, this annual report does not contain any untrue
       statement of a material fact or omit to state a material fact necessary
       to make the statements made, in light of the circumstances under which
       such statements were made, not misleading with respect to the period
       covered by this annual report;

    3. Based on my knowledge, the financial statements, and other financial
       information included in this annual report, fairly present in all
       material respects the financial condition, results of operations and
       cash flows of the Registrant as of, and for, the periods presented in
       this annual report.

Date: October 24, 2002

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

                                      73

<PAGE>

                                 EXHIBIT INDEX

<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)

  10.7 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)

 10.14 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)
</TABLE>

                                      74

<PAGE>

<TABLE>
<CAPTION>
 Number                                    Exhibit Description
 ------                                    -------------------
<C>       <S>

 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)

 10.20    Separation Agreement between Sycamore Networks, Inc. and Ryker Young (11)

  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)

  99.1(a) Certification of Chief Executive Officer

  99.1(b) Certification of Chief Financial Officer
</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 10-K 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.
(11)Incorporated by reference to Sycamore Networks, Inc.'s Quarterly Report on
    Form 10-Q for the quarterly
     periodended January 26, 2002 filed with the Commission on March 4, 2002.

+   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.

                                      75