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UNITED STATES

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, 2005                                                 
| ̈ |  | 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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



220 Mill Road

Chelmsford, Massachusetts 01824

(Address of principal executive office)



(978) 250-2900

(Registrants telephone number, including area code)



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



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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.



Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x        No ̈.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x.



As of July 31, 2005 there were 276,046,565 shares outstanding of the registrants common stock, $0.001 par value.
As of January 29, 2005 the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $608,183,185.



DOCUMENTS INCORPORATED BY REFERENCE



PART IIIPortions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 19, 2005 are incorporated by
reference into Part III (Items 10, 11, 12, 13 and 14) to this Form 10-K.



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PART I



|ITEM 1. | BUSINESS
|------- | --------



We incorporated under the laws of the State of Delaware on February 17, 1998 and shipped our first product in May 1999. We completed our initial
public offering on October 21, 1999 and a follow-on public offering on March 14, 2000. Our principal executive offices are located at 220 Mill Road, Chelmsford, Massachusetts 01824. Our telephone number is (978) 250-2900, and our
website address is www.sycamorenet.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available through the Securities and Exchange Commissions
(SEC) website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these reports with the SEC.



Overview



Sycamore develops and markets optical networking products for telecommunications service providers worldwide. Sycamore also offers services relating to
such products such as installation, maintenance, technical assistance, and customer training. Our current and prospective customers include domestic and international wireline and wireless network service providers and government entities with
private fiber networks (collectively referred to as service providers). Our optical networking product portfolio includes fully integrated edge-to-core optical switching products, network management products and design and planning
tools. We believe that our products enable network operators to efficiently and cost-effectively provision and manage optical network capacity to support a wide range of voice, video and data services.



In early 2001, the telecommunications industry began a severe decline which
had a significant impact on our business. This decline and the resulting spending constraints by service providers in the optical networking market, which continued for several years, caused a decrease in the demand for our products which had an
adverse impact on our revenue and profitability. In response to these adverse market conditions and to reposition the Company to changing market requirements, we enacted four separate restructuring programs through the third quarter of fiscal 2005,
which reduced our cost structure and focused our business on our optical switching product portfolio. As a result of these restructuring programs we incurred net charges totaling $403.6 million, comprised as follows: $175.4 million of net charges
related to excess inventory, $203.4 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments, as described in detail in Note 10 to our consolidated financial statements.



While we do not anticipate dramatic changes taking place in the optical
market in the short term, industry trends such as the consolidation of service providers and the promise of a more favorable regulatory environment in the U.S. could, we believe, serve to ease some of the barriers that have hindered investments in
optical networks during the past several years. In addition, continued growth in broadband access and next-generation wireless applications may result in increased demand for bandwidth in optical networks over time.



Recently, spending constraints in the optical networking market may be
beginning to ease modestly as service providers respond to increased market demand for broadband network services. Drivers for this demand include broadband internet access, high-speed wireless applications and other high bandwidth-intensive
communications requirements. As a result, our revenues increased over the past two fiscal years as we met capacity expansion requirements for existing customers and introduced our products and services to new customers.



Total revenue for fiscal 2005 was $65.4 million, an increase of 46.9%
compared to fiscal 2004. Total revenue for fiscal 2004 was $44.5 million, an increase of 16.4% compared to fiscal 2003. Our net losses for fiscal 2005 and 2004 were $23.8 million and $44.8 million, respectively, and we have incurred a cumulative net
loss of $838.5 million as of July 31, 2005.See our consolidated financial statements for additional details.



We continue to maintain a significant cost structure relative to our revenue, particularly within the research and development organization, which we
believe is necessary to continue to provide innovative optical



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networking solutions to meet our current and prospective customers needs. We believe that these investments have enabled us to advance our technology
and secure new business. In addition, we have made investments in our general and administration organization to respond to changes in regulatory requirements, specifically the Sarbanes-Oxley Act of 2002.



While projecting a return to modest growth, industry reports remain cautious
regarding capital spending in the optical networking market. Moreover, Sycamores target market, the optical switching segment, remains a very small percentage of the total market and the number of optical switching opportunities worldwide is
limited. Competition for these opportunities is intense and includes considerable pricing pressure. We believe that market trends will continue to shift toward fewer suppliers in the network and a greater emphasis on strategic vendor relationships,
in which a single vendor will provide a broad set of networking solutions to the customer. As a result, we believe that large incumbent suppliers will continue to have certain competitive advantages for the foreseeable future. These competitive
advantages include well-established customer relationships, broad product portfolios, pricing leverage and large service and support teams.



Despite the challenges we face as a vendor focused exclusively on optical switching, we have made progress in improving our operating performance and
securing new business in a difficult market environment. As we remain focused on improvements in the performance of our stand-alone optical switching business, our management and Board will continue to consider other strategic options that may serve
to maximize shareholder value. These options include, but are not limited to: (i) acquisitions of, or mergers or other combinations with, companies with either complementary technologies or in adjacent market segments, (ii) alliances with
or a sale to another entity, and (iii) recapitalization alternatives, including stock buybacks, cash distributions or cash dividends.



Industry Background



Industry Trends



The worlds telecommunications infrastructure is largely supported by fiber optic networks primarily owned and operated by service providers.
Following deregulation and privatization in the global telecommunications industry during the late 1990s, there were many new entrants into the service provider market. Emerging service providers built networks and began competing with
incumbent service providers in an effort to accommodate rapid traffic growth and projected growth in demand for bandwidth and telecommunication services. In early 2001, however, due to excess capacity resulting from the over building of the
telecommunications infrastructure, service providers began curtailing their capital spending for network build-outs. As a result, there was a slowdown in service provider equipment purchases and a sharp decline in demand for networking equipment.
During this time period, numerous service providers failed and sought bankruptcy protection.



Despite the decline in the telecommunications industry discussed above, overall data traffic on service provider networks continued to grow as consumers and businesses increasingly used these networks for applications
such as electronic mail, web browsing, electronic commerce, and other voice, video and data services. During the past two years, the telecommunications industry as a whole began to emerge from this period of decline. In response to increased demand
for broadband services by consumers and businesses, wireline and wireless service providers began to increase capital spending in certain segments of their service networks.



Optical networking



Optical networks are high-capacity telecommunications networks based on optical technologies and components that enable service providers to create and
distribute high-speed bandwidth to support their network services.



Although the decline in the telecommunications industry discussed above directly impacted investments in optical networks during this period, some service providers continued to adopt new optical networking products in



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their core networks to help them more efficiently utilize existing bandwidth and cost-effectively expand capacity to support new service and application
requirements. During the past two years, as demand for broadband services by consumers and businesses increased, wireline and wireless service providers began to modestly increase capital spending in their infrastructure networks, including certain
segments of the optical network.



We believe that a service
providers competitive advantage and differentiation comes from its ability to provide bandwidth when and where needed and to create and offer new services quickly and cost-effectively. Given the global competitive landscape within the
telecommunications industry, we believe that many service providers will want to optimize their capital expenditures, lower their operating costs and improve the profitability of their voice and data services.



Most service providers own and operate traditional optical networks that
originally were designed primarily to support voice traffic. These traditional optical networks impose a number of limitations on a service providers ability to offer services which provide a competitive advantage due to the following factors:



| |  |  | Networks initially designed for voice traffic. Service providers initially built and operated their traditional optical networks to transmit voice traffic using specialized
equipment and sophisticated operational processes. As a result, these traditional optical networks cannot easily or cost-effectively accommodate the growing levels of data traffic across the network.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inefficient utilization of network capacity. In traditional optical networks, at most one half of the available capacity is used for delivering services. The other portion
remains idle in the event of a network failure. This traditional architecture supports the high-availability requirements of traditional voice services, but is inefficient for data traffic, which is more dynamic in nature and does not always require
the same level of protection.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expensive to build and operate. Building traditional optical networks is a capital-intensive process, and requires the interconnection and management of multiple network
devices. These separate devices require substantial space and power, and increase the cost and complexity of network operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Time consuming, complex service delivery. In traditional optical networks, the delivery of high-speed services is a highly complex, labor-intensive process that requires a
highly skilled workforce and can take months to complete.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficult and expensive network expansion. Adding or changing high-speed services in traditional optical networks is difficult and expensive. As a result, service providers
cannot quickly or cost-effectively respond to unplanned changes in their customers demand or accommodate rapid increases in data network traffic.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Limited ability to offer new services. Traditional optical network services are optimized for voice, not data. The inefficient nature of traditional optical networks limits
the types of high-speed services that can be offered to customers. In addition, the high cost of creating and managing high-speed services in traditional optical networks impacts a service providers market competitiveness.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Sycamore Solution



Sycamores optical switching solutions enable service providers to
transition from inefficient, voice-centric networks to more efficient, data-optimized networks. We believe that our advanced hardware capabilities and software allow service providers to transform their existing network infrastructure into a more
flexible network that enables them to efficiently and cost-effectively provision and manage optical network capacity to support business and consumer voice and data services to their customers. We believe that our fully integrated, edge-to-core
optical switching products reduce service providers capital and operating costs, simplify network operations, and provide the foundation for a new generation of optical network services. Key benefits of Sycamores optical switching
solutions include:



| |  |  | Improved network design. Using our expertise in optical technology, network management, data networking, and advanced hardware and software systems design,
we develop innovative optical
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | switching products that lower the costs of building and managing optical networks, and optimize the network for the growing level of data traffic.
| | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improved utilization of network capacity.Our fully integrated optical switching products exchange real-time information about network traffic to enable better utilization of
otherwise idle capacity, improve network efficiencies, and adapt more dynamically to data traffic patterns.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cost-effective solution.Our products replace multiple traditional networking devices with a single, compact optical switching system which simplifies the network
architecture. Our products are designed to reduce initial capital expenditures and ongoing operating costs and simplify the management of network services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rapid service delivery.Our optical switching products enable service providers to rapidly deliver high-speed services, simplify operational procedures and automate
labor-intensive provisioning and network management processes. In some cases the time it takes service providers to deliver revenue-generating services to their customers is decreased from months to nearly real-time.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Easy network expansion.Our optical switching products enable service providers to easily and cost-effectively increase bandwidth when and where needed. In addition, the
ability of our optical switches to communicate real-time information enables the network to quickly respond to rapid increases in data-oriented network traffic.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Creation of new services.Our products enable service providers to create new high-speed services and deliver such services more efficiently and cost-effectively. As a
result, service providers can generate new sources of revenue and further differentiate their high-speed service offerings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Compatible with existing network devices.We designed our standards-based products to be compatible with existing network devices, enabling service providers to protect their
traditional network investments while easily and cost-effectively transitioning to a more flexible and efficient high-speed service infrastructure. In addition, we offer comprehensive network management, planning and administration software that
communicates with existing network management systems through common standards and interfaces.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Edge-to-core optical switching.Our optical switching product portfolio, along with our comprehensive management capabilities, is designed to enable service
providers to extend the benefits of optical networking from the edge to the core of the optical network.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sycamores Strategy



Despite the challenges we face as a vendor focused exclusively on optical switching, we have made progress in improving our operating performance and
securing new business in a difficult market environment. While we remain focused on improvements in the performance of our stand-alone optical switching business, management and the Board will continue to consider other strategic options that may
serve to maximize shareholder value. These options include, but are not limited to (i) acquisitions of, or mergers or other combinations with, companies with either complementary technologies or in adjacent market segments, (ii) alliances
with or a sale to another entity, and (iii) recapitalization alternatives, including stock buybacks, cash distributions or cash dividends.



Key elements of our strategy include the following:



| |  |  | Expand our customer base. We intend to actively pursue additional new customers both domestically and internationally, while continuing to expand our relationships with
existing customers. We intend to pursue new customers via direct sales efforts as well as through strategic partners. We believe that data traffic growth will cause service providers to seek optical networking solutions that will optimize network
capacity and transition their networks toward a more flexible and data-optimized infrastructure.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand strategic relationships including resellers. Our sales and marketing efforts involve building and broadening strategic relationships, particularly
with resellers, to expand our access to a broader set of
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | customers around the world. We believe that such strategic relationships may address portions of the market, such as the government market or certain
international markets, that we cannot reach with our own sales force without a significant investment of time and resources.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Target incumbent service providers. We will target sales to incumbent service providers. Since incumbent service providers have the largest fiber optic infrastructure, we
believe that our optical networking solutions offer them the most cost-effective way to expand and operate their networks and offer new revenue-generating services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintain research and development investment. We believe that continued investment in research and development is necessary in order to continue to provide innovative optical
networking solutions that meet our current and prospective customers needs. In order to provide such products to our customers, we believe we must make significant and sustained investment in research and development. We believe that this
investment in research and development was necessary even during periods when our revenue declined as a result of the decreased demand for our optical networking products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintain sales and customer service investment. We believe that continued investment in sales and customer service is necessary in order to expand and support our customer
base both domestically and internationally. We believe that ongoing sales and customer service is critical to successful long-term relationships with, and follow-on sales to, our current and prospective customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Manage costs and preserve cash. We believe that our cash position coupled with no long-term debt differentiates us from our competition. While we continue to invest in
strategic areas of the business, we also continue to focus on cost management and cash preservation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Outsource manufacturing. We outsource the manufacturing of our products and purchase key components from third parties. Outsourcing enables us to reduce expenses and focus on
our core competencies such as product development, sales and customer service.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Drive 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 service 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sycamores Optical Networking Products



Sycamores optical networking product portfolio includes fully integrated edge-to-core optical switching products, network management products and design and planning tools.



Optical switching.Our family of optical switches, including the SN
16000 SC, the SN 16000 and the SN 3000, are designed to enable service providers to provision and manage network bandwidth more efficiently in the metropolitan, regional, and core segments of the optical network. The SN 16000 SC is a single chassis
system that provides optimal traffic management for the metropolitan and regional segments of the network. The SN 16000 is a multi-chassis system that provides optimal traffic management at the core of the optical network. The SN 3000 provides
optimal traffic management in metropolitan networks. Our optical switches combine multiple functions in a single, highly compact system and address different capacity requirements within various segments of the network. As a result, our optical
switches enable service providers to lower costs, simplify network operations, optimize network capacity and transition their networks towards more flexible, efficient, and data-optimized infrastructures.



Network management. SILVX®, our optical network management system, provides end-to-end management of services
across a service providers optical switched network. SILVX provides comprehensive network management, planning and administration tools that communicate with existing network management systems through common standards. SILVX simplifies
network configuration, service provisioning and network



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management by automating many labor-intensive operational processes. The combination of SILVX and our sophisticated networking software allows the SN 3000,
SN 16000 SC and SN 16000 to exchange real-time information about network traffic, thereby enabling service providers to quickly provision services and more efficiently manage network capacity. In addition, SILVX allows service providers to model a
broad range of optical network architectures, forecast and plan for capacity expansion, and analyze network traffic.



Services. We offer complete engineering, furnishing, installation and testing services as well as comprehensive customer support from multiple
locations worldwide.



Customers



Our current and prospective customers include domestic and international
wireline and wireless network service providers and government entities with private fiber networks (collectively referred to as service providers). We expect that substantially all of our revenue will continue to be generated from a
limited number of customers. We had eight product revenue customers as of July 31, 2005.



During the year ended July 31, 2005, four customers, Vodafone Group PLC, Sprint Government Systems Division (as a reseller to the federal government), Sprint Corporation and NTT Communications, a subsidiary of
Nippon Telephone and Telegraph Corporation accounted for 36%, 24%, 12% and 11% of our revenue, respectively. During the year ended July 31, 2004, four customers, Sprint Government Systems Division, Vodafone Group PLC, Neuf Telecom and NTT
Communications accounted for 41%, 27%, 13% and 13% of our revenue, respectively. During the year ended July 31, 2003, three customers, Vodafone Group PLC, Neuf Telecom and NTT Communications accounted for 43%, 22% and 14% of our revenue,
respectively. International revenue was 63% of total revenue during the year ended July 31, 2005, compared to 59% of total revenue during the year ended July 31, 2004, and 91% of total revenue during the year ended July 31, 2003. See
Concentrations and Significant Customer Information and Segment Information in Note 2 to our consolidated financial statements and Item 7. Managements Discussion and Analysis of Financial Condition and Results of
OperationsFactors that May Affect Future ResultsOur business is subject to risks from international operations for additional details.



Our contracts with customers typically include the purchase of our hardware products, right to use fees, the license of our SILVX network management
system, and in some cases, maintenance and support services. These contracts include terms and arrangements, including payment, delivery and termination that we believe are customary and standard in our industry. None of our customers are
contractually committed to purchase any minimum quantities of products from us and orders are generally cancelable prior to shipment. In addition, the federal government may terminate their contracts with any party at any time. As a result, we do
not disclose our order backlog, since we believe that our order backlog at any particular date is not necessarily indicative of actual revenue for any future period.



Sales and Marketing



There are a limited number of current and prospective optical switch customers in each geographic market. Each service provider owns and operates a unique
fiber optic network. The network complexity affects the integration of our optical networking products into each service providers network. As a result, sales are made on a customer-by-customer basis and the sales cycle may extend beyond one year.



We sell our products worldwide through a direct sales force
with a local presence in several locations around the world. In certain markets, we also have strategic distribution partners, independent marketing representatives or independent sales consultants. We intend to further establish relationships with
select distribution and marketing partners to extend our reach to serve new markets.



The primary focus of our sales efforts is to continue to develop strong relationships with incumbent service providers and resellers. Our sales and presales engineering organizations work collaboratively with both
current



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and prospective customers to identify optical switching applications that help optimize their network as well as create new services that they can offer to
their customers. We also 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.



In
support of our sales efforts, we conduct marketing programs to position and promote market awareness of Sycamore and our products. We also participate in conferences, trade shows and provide marketing information on our website. In addition, we
conduct public relations activities, including interviews and demonstrations for the business and trade media, and industry analysts.



Research and Development



We believe that ongoing investment in research and development is necessary in order to continue to provide innovative optical networking solutions that
meet our current and prospective customers needs. We believe that our current and prospective customers can utilize optical networking solutions that will allow them to optimize bandwidth and capacity management while also allowing them to
reduce their capital expenditures and operating costs. In order to provide such products to our customers, we believe we must make significant and sustained investment in research and development. Our research and development effort focuses
primarily on improvements to the features and functionality of existing products and the development of new products. Sycamore intends to focus its research and development efforts on optical switching and may pursue strategic alliances or
acquisitions to address current and prospective customers needs.



Our research and development expenditures were $42.7 million, $45.7 million and $52.4 million for the years ended July 31, 2005, 2004 and 2003, respectively. All of our expenditures for research and development, as well as stock-based
compensation expense relating to research and development of $0.8 million, $2.8 million and $3.0 million, for the years ended July 31, 2005, 2004 and 2003, respectively, have been expensed as incurred. As of July 31, 2005, we had
approximately 162 employees involved in research and development.



Competition



The number of optical switching
opportunities worldwide is limited. Competition for these opportunities is intense and includes considerable pricing pressure. Based on the current level of spending by telecommunications service providers, we expect that competition will continue
to be very intense.



Sycamores competition includes large
incumbent suppliers of network infrastructure equipment and optical networking equipment, such as Alcatel, Ciena, Cisco, Huawei, Lucent, Nortel, Tellabs, and ZTE. Many of our established competitors have longer operating histories and greater
financial, technical, sales, marketing, manufacturing and field resources and are able to devote greater resources to the research and development of new products than we do. In addition, these competitors generally have more diverse product lines
which allow them the flexibility to price their products more aggressively and absorb the significant cost structure associated with optical switching research and development across their entire business. Most of our competitors also have more
extensive customer bases and broader customer relationships than us, including relationships with our prospective customers in their local geographies. In addition, we continue to see new entrants into the optical networking market with new products
that compete with our products. Some of these new entrants are located in geographies with lower cost infrastructures than ours. In order to compete effectively in the optical switching market, we must deliver products that:



| |  |  | provide a cost-effective solution to service providers for expanding capacity and bandwidth management;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | lower a service providers cost of building and operating their fiber optic network;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | provide extremely high network reliability;
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| |  |  | interoperate with existing network devices;
| | - |  | -------------------------------------------



| |  |  | simplify the network architecture by replacing multiple traditional networking devices into a single compact optical switch; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide effective network management.
| | - |  | -------------------------------------



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 to 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. We license software to our customers pursuant to signed or shrink-wrapped license agreements, which impose certain restrictions on the
licensees ability to utilize the software. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencing employment or consulting with us. 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. We enforce our intellectual property rights vigorously against infringement or misappropriation.



We license third party software, including certain
technologies that are (i) embedded into our hardware platforms and into our SILVX network management system; (ii) used internally by us as hardware design tools and (iii) used internally by us as software development tools. We also
utilize publicly available technology. The majority of these licenses have perpetual terms but will generally terminate after an uncured breach of the agreement by us. We believe, based upon past experience and standard industry practice, that such
licenses generally could be obtained on commercially reasonable terms in the future. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all.



As of July 31, 2005, we had received 36 United States patents and had
pending 21 United States patent applications. Of the United States patents that have been issued, the earliest any will expire is February 2019. As of July 31, 2005, we had 8 allowed or registered United States trademarks and 17 allowed or
registered foreign trademarks. All of the registered United States trademarks have a duration of ten years from the date of application, the earliest of which will expire in February 2011.



Manufacturing



We outsource almost all of the manufacturing of our products. We utilize contract manufacturers, who provide manufacturing
services, including material procurement and handling, printed circuit board assembly and mechanical board assembly. We design, specify, and monitor all of the tests that are required to meet our internal and external quality standards. We work
closely with our contract manufacturers to manage costs and delivery times. Our contract manufacturing agreements generally have indefinite terms and are cancelable by either party with advance notice. We believe that outsourced manufacturing
enables us to deliver products more quickly and allows us to focus on our core competencies, including research and development, sales and customer service.



We have limited internal manufacturing operations. Our internal manufacturing operations primarily consist of quality assurance for materials and
components, and final testing, assembly and shipment of our existing products. We also use a limited number of other manufacturers to supply certain non-significant product sub-assemblies and components.



Our optical networking products utilize hundreds of individual component
parts, some of which are customized for our products. Component suppliers in the specialized, high technology end of the optical



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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, central processing units, field programmable gate arrays,
switch fabric, and optical transceivers, 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.



Throughout the downturn in the telecommunications industry and the continued spending constraints in the optical networking market, the optical
component industry has been downsizing manufacturing capacity while consolidating product lines from earlier acquisitions. Several suppliers have exited the optical components market, and others 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.



Employees



As of July 31, 2005, we employed approximately 276
persons of which 162 were primarily engaged in research and development, 26 in sales and marketing, 24 in customer service and support, 26 in manufacturing, and 38 in general and administration. None of our employees are currently represented by a
collective bargaining unit. We believe our relations with our employees are good.



Executive Officers of the Registrant



Set
forth below is information concerning our current executive officers and their ages as of August 15, 2005.



|                  |  |     |  |                                                                                             
|----------------- |  | --- |  | --------------------------------------------------------------------------------------------
|Name              |  | Age |  | Position                                                                                    
|Daniel E. Smith   |  | 55  |  | President, Chief Executive Officer and Director                                             
|Richard J. Gaynor |  | 45  |  | Chief Financial Officer, Vice President, Finance and Administration, Treasurer and Secretary
|John E. Dowling   |  | 52  |  | Vice President, Operations                                                                  
|Araldo Menegon    |  | 46  |  | Vice President, Worldwide Sales and Support                                                 
|Kevin J. Oye      |  | 47  |  | Vice President, Systems and Technology                                                      



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.



Richard J. Gaynor has served as our Chief Financial Officer, Vice President of Finance and Administration, Treasurer and Secretary since October
2004. From January 2001 to September 2004, Mr. Gaynor was Vice President, Corporate Controller and Principal Accounting Officer of Manufacturers Services Ltd., a global provider of sub-contract electronic manufacturing services. From January
2000 to January 2001, Mr. Gaynor was Chief Financial Officer of Evans and Sutherland Computer Corporation, a developer and manufacturer of flight simulation hardware and software. From March 1994 to December 1999, Mr. Gaynor was Vice
President of Finance and Operations Controller at Cabletron Systems, Inc., a global provider of enterprise networking products.



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John E. Dowlinghas 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 of 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 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. Oyehas served as our Vice President of Systems and
Technology since November 2001. From October 1999 through October 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.



|ITEM 2. | PROPERTIES
|------- | ----------



We currently lease two facilities in Chelmsford, Massachusetts, containing approximately 225,000 square feet in the aggregate. In Wallingford,
Connecticut, we currently lease one facility containing a total of approximately 30,000 square feet. These facilities consist of offices and engineering laboratories used for research and development, administration, sales and customer support,
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 and suitable for our
needs, and we do not expect to require additional space during fiscal 2006. We own a parcel of undeveloped land, containing approximately 102 acres, in Tyngsborough, Massachusetts. This parcel of land is currently for sale.



|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, which is the operative 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 claims against the Company, several of the Individual Defendants and the underwriters
for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the Securities Act), primarily based on the assertion that the Companys lead underwriters, the Company and several of the Individual Defendants made
material false and misleading statements in the Companys Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or 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. It also alleges claims against the Company, the Individual Defendants and the underwriters under Sections 10(b) and 20(a) of the Securities



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Exchange Act of 1934, as amended (the Exchange Act), primarily based on the assertion that the Companys lead underwriters, the Company and
the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question. The amended complaint seeks damages in an
unspecified amount.



The action against the Company is being
coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the Court has ordered the parties to select up to twenty test cases. To date,
along with sixteen other cases, the Companys case has been selected as one such test case. As a result, among other things, the Company will be subject to broader discovery obligations and expenses in the litigation than non-test case issuer
defendants.



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. This dismissal disposed of the Section 15 and Section 20(a) claims without prejudice, because
these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against the Company with respect to the Section 11 claims alleging that the defendants made
material false and misleading statements in the Companys Registration Statement and Prospectuses. The certification was denied because no class representative purchased shares between the date of the IPO and January 19, 2000 (the date
unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against the Company with respect to the Section 10(b) claims alleging that the Company and the
Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact during the period in question.



The Company, the Individual Defendants, the plaintiff class and the vast
majority of the other approximately three hundred issuer defendants and the individual defendants currently or formerly associated with those companies approved a settlement and related agreements (the Settlement Agreement) which set
forth the terms of a settlement between these parties. Among other provisions, the Settlement Agreement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful and for the Company to
undertake certain responsibilities, including agreeing to assign away, not assert, or release, certain potential claims the Company may have against its underwriters. In addition, no payments will be required by the issuer defendants under the
Settlement Agreement to the extent plaintiffs recover at least $1 billion from the underwriter defendants, who are not parties to the Settlement Agreement and have filed a memorandum of law in opposition to the approval of the Settlement Agreement.
To the extent that plaintiffs recover less than $1 billion from the underwriter defendants, the approximately three-hundred issuer defendants are required to make up the difference. It is anticipated that any potential financial obligation of the
Company to plaintiffs pursuant to the terms of the Settlement Agreement will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any potential financial obligation to the
plaintiffs from the Companys insurance carriers. The Companys insurance carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by the
plaintiffs. Therefore, we do not expect that the Settlement Agreement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from the Companys insurance
carriers should arise, the Companys maximum financial obligation to plaintiffs pursuant to the Settlement Agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement,
subject to certain modifications consistent with its opinion. Those modifications have been made. There is no assurance that the court will grant final approval to the settlement. If the Settlement Agreement is not approved and the Company is found
liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Companys insurance coverage, and whether such damages would have a material impact on our results of
operations or financial condition in any future period.



On
April 1, 2003, a complaint was filed against the Company in the United States Bankruptcy Court for the Southern District of New York by the creditors committee (the Committee) of 360networks (USA), inc. and



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360networks services inc. (the Debtors). The Debtors are the subject of a Chapter 11 bankruptcy proceeding but are not plaintiffs in the
complaint filed by the Committee. The complaint seeks recovery of alleged preferential payments in the amount of approximately $16.1 million, plus interest. The Committee alleges that the Debtors made the preferential payments under
Section 547(b) of the Bankruptcy Code to the Company during the 90-day period prior to the Debtors bankruptcy filing. The Company believes that the claims against it are mostly without merit and has been defending against the complaint
vigorously.



The Company is subject to legal proceedings,
claims, and litigation arising in the ordinary course of business. On a quarterly basis, the Company reviews its commitments and contingencies to reflect the effect of ongoing negotiations, settlements, rulings, advice of counsel, and other
information and events pertaining to a particular case. We are also subject to potential tax liabilities associated with ongoing tax audits by various tax authorities. As a result, during the third quarter of fiscal 2005, the Company accrued $10.3
million associated with contingencies related to claims, litigation and other disputes and tax matters. While we believe the total amounts accrued are adequate, any subsequent change in our estimates will be recorded at such time the change is
probable and estimable.



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



None.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



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.



|                                      |  |      |      |     |   |     
|------------------------------------- |  | ---- | ---- | --- | - | ----
|                                      |  | High |      | Low
|Fiscal year 2005:                     |  |      |      |     |   |     
|Fourth Quarter ended July 31, 2005    |  | $    | 3.62 |     | $ | 3.22
|Third Quarter ended April 30, 2005    |  |      | 3.62 |     |   | 3.35
|Second Quarter January 29, 2005       |  |      | 4.10 |     |   | 3.46
|First Quarter ended October 30, 2004  |  |      | 3.92 |     |   | 3.38
|                                      |  |     
|                                      |  | High |      | Low
|Fiscal year 2004:                     |  |      |      |     |   |     
|Fourth Quarter ended July 31, 2004    |  | $    | 4.41 |     | $ | 3.49
|Third Quarter ended April 24, 2004    |  |      | 5.81 |     |   | 3.91
|Second Quarter ended January 24, 2004 |  |      | 6.29 |     |   | 4.36
|First Quarter ended October 25, 2003  |  |      | 5.36 |     |   | 3.75



As of July 31,
2005, there were approximately 1,020 stockholders of record.



Dividend
Policy



We have never paid or declared any cash dividends
on our common stock or other securities. 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, results of strategic and financial review and such other factors as the board of directors may deem relevant.



Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



In the three months ended July 31, 2005, the Company purchased the following shares of common stock (in thousands,
except per share data):



|                              |  |                         |  |                             |     
|----------------------------- |  | ----------------------- |  | --------------------------- | ----
|                              |  | Total sharespurchased * |  | Average pricepaid per share
|May 1, 2005  May 28, 2005    |  | 0                       |  | $                           | 0.00
|                              |  |                        
|May 29, 2005  June 25, 2005  |  | 2                       |  |                             | 0.00
|                              |  |                        
|June 26, 2005  July 31, 2005 |  | 0                       |  |                             | 0.00
|                              |  |                         |  |                             |     
|Total                         |  | 2                       |  | $                           | 0.00
|                              |  |                         |  |                             |     

---

|* | Purchased from departing employees pursuant to preexisting contractual rights.
|- | ------------------------------------------------------------------------------



The Company has not publicly announced programs to repurchase shares of common stock.



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##### Table of Contents

|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.



|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                    |  | For the years ended July 31,          |        
|                                                    |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                    |  | (in thousands, except per share data) |        
|Consolidated Statement of Operations Data:          |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenue                                             |  | $                                     | 65,434  |   |      | $ | 44,547  |      |  | $ | 38,276    |   |  | $    | 65,174    |   |  | $ | 374,746   |  
|Cost of revenue                                     |  |                                       | 33,937  |   |      |   | 29,233  |      |  |   | 35,236    |   |  |      | 152,854   |   |  |   | 319,812   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Gross profit (loss)                                 |  |                                       | 31,497  |   |      |   | 15,314  |      |  |   | 3,040     |   |  |      | (87,680   | ) |  |   | 54,934    |  
|Operating expenses:                                 |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Research and development                            |  |                                       | 42,659  |   |      |   | 45,692  |      |  |   | 52,438    |   |  |      | 109,654   |   |  |   | 159,607   |  
|Sales and marketing                                 |  |                                       | 11,825  |   |      |   | 18,108  |      |  |   | 19,763    |   |  |      | 39,687    |   |  |   | 83,478    |  
|General and administrative                          |  |                                       | 9,160   |   |      |   | 7,366   |      |  |   | 7,239     |   |  |      | 10,166    |   |  |   | 16,820    |  
|Stock-based compensation                            |  |                                       | 1,266   |   |      |   | 4,880   |      |  |   | 7,320     |   |  |      | 24,251    |   |  |   | 89,958    |  
|Restructuring charges and related asset impairments |  |                                       | 679     |   |      |   |        |      |  |   | (4,447    | ) |  |      | 124,990   |   |  |   | 81,926    |  
|Reserve for contingencies                           |  |                                       | 10,282  |   |      |   |        |      |  |   |          |   |  |      |          |   |  |   |          |  
|Acquisition costs                                   |  |                                       |        |   |      |   |        |      |  |   |          |   |  |      |          |   |  |   | 4,948     |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total operating expenses                            |  |                                       | 75,871  |   |      |   | 76,046  |      |  |   | 82,313    |   |  |      | 308,748   |   |  |   | 436,737   |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loss from operations                                |  |                                       | (44,374 | ) |      |   | (60,732 | )    |  |   | (79,273   | ) |  |      | (396,428  | ) |  |   | (381,803  | )
|Losses on investments                               |  |                                       |        |   |      |   |        |      |  |   |          |   |  |      | (24,845   | ) |  |   |          |  
|Interest and other income, net                      |  |                                       | 20,648  |   |      |   | 15,890  |      |  |   | 23,342    |   |  |      | 40,027    |   |  |   | 85,299    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Loss before income taxes                            |  |                                       | (23,726 | ) |      |   | (44,842 | )    |  |   | (55,931   | ) |  |      | (381,246  | ) |  |   | (296,504  | )
|Income tax expense                                  |  |                                       | 63      |   |      |   |        |      |  |   |          |   |  |      |          |   |  |   | 13,132    |  
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net loss                                            |  | $                                     | (23,789 | ) |      | $ | (44,842 | )    |  | $ | (55,931   | ) |  | $    | (381,246  | ) |  | $ | (309,636  | )
|                                                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic net loss per share                            |  | $                                     | (0.09   | ) |      | $ | (0.17   | )    |  | $ | (0.21     | ) |  | $    | (1.50     | ) |  | $ | (1.30     | )
|Diluted net loss per share                          |  | $                                     | (0.09   | ) |      | $ | (0.17   | )    |  | $ | (0.21     | ) |  | $    | (1.50     | ) |  | $ | (1.30     | )
|Shares used in per-share calculationbasic          |  |                                       | 275,023 |   |      |   | 272,123 |      |  |   | 265,702   |   |  |      | 254,663   |   |  |   | 237,753   |  
|Shares used in per-share calculationdiluted        |  |                                       | 275,023 |   |      |   | 272,123 |      |  |   | 265,702   |   |  |      | 254,663   |   |  |   | 237,753   |  
|                                                    | 
|                                                    |  | As of July 31,                        |        
|                                                    |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                    |  | (in thousands)                        |        
|Consolidated Balance Sheet Data:                    |  |                                       |         |   |      |   |         |      |  |   |           |   |  |      |           |   |  |   |           |  
|Cash, cash equivalents and investments              |  | $                                     | 955,035 |   |      | $ | 961,325 |      |  | $ | 995,583   |   |  | $    | 1,043,545 |   |  | $ | 1,248,549 |  
|Working capital                                     |  |                                       | 931,246 |   |      |   | 511,662 |      |  |   | 583,877   |   |  |      | 588,582   |   |  |   | 731,114   |  
|Total assets                                        |  |                                       | 982,063 |   |      |   | 990,918 |      |  |   | 1,032,628 |   |  |      | 1,118,575 |   |  |   | 1,551,321 |  
|Total stockholders equity                          |  | $                                     | 939,545 |   |      | $ | 955,440 |      |  | $ | 992,515   |   |  | $    | 1,038,523 |   |  | $ | 1,387,860 |  



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|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 wish to caution you that certain matters discussed in this report constitute
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including, without limitation, those risks and
uncertainties discussed under the heading Factors That May Affect Future Results contained in this Form 10-K and any 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.



Executive Summary



Sycamore develops and markets optical networking products for
telecommunications service providers worldwide. Sycamore also offers services such as installation, maintenance, technical assistance, and customer training. Our current and prospective customers include domestic and international wireline and
wireless network service providers and government entities with private fiber networks (collectively referred to as service providers). Our optical networking product portfolio includes fully integrated edge-to-core optical switching
products, network management products and design and planning tools. We believe that our products enable network operators to efficiently and cost-effectively provision and manage optical network capacity to support a wide range of voice, video and
data services.



Our business has been significantly impacted by
the decline in the telecommunications industry which began in 2001 and continued for several years. As a result of this decline, service providers decreased their capital spending, resulting in a reduction in demand for our products. In response to
these adverse market conditions and to reposition the Company to changing market requirements, we enacted four separate restructuring programs to reduce our cost structure and focus our business on the optical switching market. We incurred net
restructuring charges of $403.6 million, comprised as follows: $175.4 million of net charges related to excess inventory, $203.4 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments, as
described in detail in Note 10 to our consolidated financial statements.



Total revenue for fiscal 2005 was $65.4 million, an increase of 46.9% compared to fiscal 2004. Total revenue for fiscal 2004 was $44.5 million, an increase of 16.4% compared to fiscal 2003. Our net losses for fiscal
2005 and 2004 were $23.8 million and $44.8 million, respectively, and we incurred a cumulative net loss of $838.5 million as of July 31, 2005. We continue to maintain a significant cost structure, relative to our revenue, particularly within
the research and development organization. We believe that these investments have enabled us to advance our technology and secure new business. While our fiscal 2005 operating results improved over fiscal 2004, we expect that market conditions will
remain challenging. We anticipate that we will continue to generate operating losses and consume cash for at least the next fiscal year.



Despite the challenges we face as a vendor focused exclusively on optical switching, we have made progress in improving our operating performance and
securing new business in a difficult market environment. As we remain focused on improvements in the performance of our stand-alone optical switching business, our management and Board will continue to consider other strategic options that may serve
to maximize shareholder value. These options include, but are not limited to (i) acquisitions of, or mergers or other combinations with, companies with either complementary technologies or in adjacent market segments, (ii) alliances with
or a sale to another entity, and (iii) recapitalization alternatives, including stock buybacks, cash distributions or cash dividends.



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Our total cash, cash equivalents and investments were $955.0 million at July 31, 2005. Included in
this amount were cash and cash equivalents of $508.3 million. We intend to fund our operations, including fixed commitments under operating leases, and any required capital expenditures over the next few years using our existing cash, cash
equivalents and investments. We believe that, based on our business plans and current conditions, our existing cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for the next twelve months. We also
believe that our current cash, cash equivalents and investments will enable us to pursue the strategic and financial alternatives discussed above.



As of July 31, 2005, Sycamore and its subsidiaries employed approximately 276 persons, which was a net reduction of 77 persons from the approximately
353 persons employed on July 31, 2004.



CRITICAL ACCOUNTING POLICIES
AND ESTIMATES



Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated financial statements. The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States of America requires us to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these
estimates, including those relating to the allowance for doubtful accounts, inventory allowance, 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 we consider 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 affect the most
significant judgments, assumptions and estimates we use in preparing our consolidated financial statements. Changes in these estimates can affect materially the amount of our reported net income or loss.



Revenue Recognition



Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. The most significant revenue recognition judgments typically involve customer acceptance, whether collection is reasonably assured and multiple element
arrangements. In instances where customer acceptance is specified, revenue is deferred until all acceptance criteria have been met. We determine collectibility based on creditworthiness of customer and customers payment history. Service
revenue is recognized as the services are performed or ratably over the service period. Some of our transactions involve the sale of products and services under multiple element arrangements. 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, which generally is the price charged for each component when sold separately and recognized when revenue recognition criteria for each element is met.



Allowance for Doubtful Accounts



The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts. In the event that we become aware of deterioration in a particular customers financial condition, a review is performed to determine if additional provisions for doubtful accounts are required.



Warranty Obligations



We accrue for warranty costs at the time revenue is recognized based on
contractual rights and on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims



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above historical experience or our costs to provide warranty services increase, we may be required to increase our warranty accrual. An increase in the
warranty accrual will have an adverse impact on our gross margins.



Inventory Allowance



We continuously monitor
inventory balances and record inventory allowances for any excess of the cost of the inventory over its estimated market value, based on assumptions about future demand and market conditions. While such assumptions may change from period to period,
we measure the net realizable value of inventories using the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or we experience a higher incidence of inventory obsolescence
because of rapidly changing technology and customer requirements, additional inventory allowances may be required. Once we have written down inventory to its estimated net realizable value, we cannot increase its carrying value 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.



Restructuring Liabilities and Asset Impairments



We enacted several restructuring programs during the last four years to
respond to the decline in the telecommunications industry which began in 2001 and to reposition the Company to changing market requirements. These restructuring programs required us to make numerous assumptions and estimates such as 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 programs.



We continuously monitor the judgments, assumptions and estimates relating to the restructuring programs and, if these judgments, assumptions and estimates change, we may be required to record additional charges or
credits against the reserves previously recorded for these restructuring programs. As of July 31, 2005, we had $8.5 million in accrued restructuring costs, consisting primarily of $8.0 million of accrued liabilities for facility consolidations,
based on our best estimate of the available sublease rates and terms at the present time.



Reserve for Contingencies



We are subject to various claims, litigation and other disputes, as well as potential liabilities associated with various tax matters. Periodically, we review the status of each significant matter and assess our potential financial
exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals, if any, are based
only on the most current and dependable information available at any given time. As additional information becomes available, we may reassess the potential liability from pending claims and litigation and the probability of claims being successfully
asserted against us. As a result, we may revise our estimates related to these pending claims, litigation and other disputes and potential liabilities associated with various tax matters. Such revisions in the estimates of the potential liabilities
could have a material impact on our consolidated results of operations, financial position and cash flows in the future. For further detail, see Note 11 of Notes to Consolidated Financial Statements for a description of legal proceedings.



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Results of Operations



Fiscal Years ended July 31, 2005 and 2004



Revenue



The following table presents product and service revenue (in thousands, except percentages):



|              |  |                     |        |                    |   |                    |  |   |        |  |      |  
|------------- |  | ------------------- | ------ | ------------------ | - | ------------------ |  | - | ------ |  | ---- | -
|              |  | Year Ended July 31, |        | Variancein Dollars |   | Variancein Percent | 
|              |  | 2005                |        | 2004               |   |                   
|Revenue       |  |                     |        |                    |   |                    |  |   |        |  |      |  
|Product       |  | $                   | 49,922 |                    | $ | 32,729             |  | $ | 17,193 |  | 52.5 | %
|Service       |  |                     | 15,512 |                    |   | 11,818             |  |   | 3,694  |  | 31.3 | %
|              |  |                     |        |                    |   |                    |  |   |        |  |      |  
|Total revenue |  | $                   | 65,434 |                    | $ | 44,547             |  | $ | 20,887 |  | 46.9 | %
|              |  |                     |        |                    |   |                    |  |   |        |  |      |  



Total revenue
increased in fiscal 2005 compared to fiscal 2004. The increase was due to an increase in both product revenue and service revenue. Product revenue consists primarily of sales of our optical networking products including the SN 3000 and SN 16000
optical switching platforms. Product revenue increased in fiscal 2005 compared to fiscal 2004. The increase was primarily due to existing customers increasing the capacity of their networks and product sales to new customers. Service revenue
consists primarily of fees for services relating to the maintenance of our products, installation services and training. Service revenue increased in fiscal 2005 compared to fiscal 2004. The increase was primarily due to a higher level of
maintenance contracts and a higher level of installation services associated with product deployments.



For fiscal 2005, four customers accounted for 36%, 24%, 12% and 11% of revenue or 83% of our total revenue. Four customers accounted for 41%, 27%, 13% and
13% of revenue in fiscal 2004 or 94% of our total revenue. International revenue represented 63% of revenue in fiscal 2005, compared to 59% of revenue in fiscal 2004. We expect future revenue to continue to be highly concentrated in a relatively
small number of customers and that international revenue may continue to represent a significant percentage of future revenue. Customer deployments in any given quarter may cause significant shifts in the percentage mix of domestic and international
revenue. The loss of any one of these customers or any substantial reduction in orders by any one of these customers could materially adversely affect our business, financial condition and results of operations.



Gross profit



The following table presents gross profit (loss) for product and services, including non-cash stock-based compensation
expense (in thousands, except percentages):



|              |  |                     |        |   |      |   |        |  
|------------- |  | ------------------- | ------ | - | ---- | - | ------ | -
|              |  | Year Ended July 31, |       
|              |  | 2005                |        |   | 2004 |  
|Gross profit: |  |                     |        |   |      |   |        |  
|Product       |  | $                   | 24,198 |   |      | $ | 12,130 |  
|Service       |  |                     | 7,299  |   |      |   | 3,184  |  
|              |  |                     |        |   |      |   |        |  
|Total         |  | $                   | 31,497 |   |      | $ | 15,314 |  
|              |  |                     |        |   |      |   |        |  
|Gross profit: |  |                     |        |   |      |   |        |  
|Product       |  |                     | 48.5   | % |      |   | 37.1   | %
|Service       |  |                     | 47.0   | % |      |   | 26.9   | %
|Total         |  |                     | 48.1   | % |      |   | 34.4   | %



Product gross
profit



Cost of product revenue consists primarily of
amounts paid to third-party contract manufacturers for purchased materials and services and other fixed manufacturing costs. Product gross profit increased in fiscal



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2005 compared to fiscal 2004. The increase was primarily the result of a favorable product and customer mix and cost efficiencies associated with increased
product revenue. In the future, we believe that product gross profit may fluctuate due to pricing pressures resulting from intense competition for limited optical switching opportunities worldwide. In addition, product gross profit may be affected
by changes in the mix of products sold, channels of distribution used, shipment volume, overhead absorption, sales discounts, increases in material or labor costs, excess inventory and obsolescence charges or credits, increases in component pricing,
product redesigns, the introduction of new products or product features or entering new markets with different pricing and cost structures.



Service gross profit



Cost of service revenue consists primarily of costs of providing services under customer service contracts which include salaries and related expenses and
other fixed costs. Service gross profit increased in fiscal 2005 compared to fiscal 2004. The increase was primarily due to reduced fixed support costs and lower personnel-related expenses and higher revenue levels. Service gross profit may be
affected in future periods by various factors such as the change in mix between technical support services and advanced services, as well as the timing of technical support service contract initiations and renewals.



Operating Expenses



The following table presents operating expenses (in thousands, except percentages):



|                                                    |  |                     |        |                    |   |        |                    |   |        |   |  |       |   
|--------------------------------------------------- |  | ------------------- | ------ | ------------------ | - | ------ | ------------------ | - | ------ | - |  | ----- | --
|                                                    |  | Year Ended July 31, |        | Variancein Dollars |   |        | Variancein Percent |  
|                                                    |  | 2005                |        | 2004               |   |       
|Research and development                            |  | $                   | 42,659 |                    | $ | 45,692 |                    | $ | (3,033 | ) |  | (6.6  | )%
|Sales and marketing                                 |  |                     | 11,825 |                    |   | 18,108 |                    |   | (6,283 | ) |  | (34.7 | )%
|General and administrative                          |  |                     | 9,160  |                    |   | 7,366  |                    |   | 1,794  |   |  | 24.4  | % 
|Stock-based compensation                            |  |                     | 1,266  |                    |   | 4,880  |                    |   | (3,614 | ) |  | (74.1 | )%
|Reserve for contingencies                           |  |                     | 10,282 |                    |   |       |                    |   | 10,282 |   |  |      |   
|Restructuring charges and related asset impairments |  |                     | 679    |                    |   |       |                    |   | 679    |   |  |      |   
|                                                    |  |                     |        |                    |   |        |                    |   |        |   |  |       |   
|Total operating expenses                            |  | $                   | 75,871 |                    | $ | 76,046 |                    | $ | (175   | ) |  |      |   
|                                                    |  |                     |        |                    |   |        |                    |   |        |   |  |       |   



Research and Development Expenses



Research and development expenses consist primarily of
salaries and related expenses and prototype costs relating to design, development, testing and enhancements of our products. Research and development expenses decreased in fiscal 2005 compared to fiscal 2004. The decrease was primarily due to
reduced fixed overhead costs and lower project related costs partially offset by higher personnel-related expenses.



Sales and Marketing Expenses



Sales and marketing expenses consist primarily of salaries, commissions and related expenses, customer evaluations inventory and other sales and marketing
support expenses. Sales and marketing expenses decreased in fiscal 2005 compared to fiscal 2004. The decrease was primarily due to lower personnel-related expenses, a reduction in the cost of evaluation equipment and reduced fixed overhead costs.



General and Administrative Expenses



General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel, professional fees and other general corporate expenses. General and administrative expenses increased in fiscal 2005 compared to fiscal 2004. The increase was primarily due to
costs associated



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with the independent investigation, as previously disclosed in our Form 10-Q for the period ended April 30, 2005, and increased expenses resulting from
activities required to meet the requirements of the Sarbanes-Oxley Act, partially offset by lower personnel-related expenses.



Stock-Based Compensation Expense



Stock-based compensation expense primarily resulted from the granting of stock options and restricted shares with exercise or sale prices that were
deemed to be below fair market value. Total stock-based compensation expense decreased in fiscal 2005 compared to fiscal 2004. The decrease was primarily due to lower deferred compensation balances resulting from the ongoing vesting of stock options
and restricted shares with exercise or sales prices that were deemed below fair market value.



Reserve for Contingencies



During the third quarter of fiscal 2005, the Company accrued $10.3 million associated with contingencies related to claims, litigation and other disputes, as well as potential liabilities associated with various tax matters. In accordance
with SFAS No. 5, a liability is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such provision on a quarterly basis and records
any necessary adjustments to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. We are subject to tax audits by
various tax authorities. Management has recorded its best estimate of the probable liability resulting from these audits as of July 31, 2005. While we believe that the amounts accrued are adequate, any subsequent change in our estimates will be
recorded at such time the change is probable and estimable.



Restructuring
Charges and Related Asset Impairments



During the third
quarter of fiscal 2005, the Company reduced its workforce by approximately 20 employees as a result of the rationalization of certain R&D initiatives. The Company recorded a restructuring charge of $0.7 million that was comprised of expenses
related to the workforce reduction and contract termination costs. As a result of the third quarter fiscal 2005 restructuring, the Company wrote down $0.2 million of certain development assets to their fair value based on the expected discounted
cash flows they would generate over their remaining economic life. As of July 31, 2005, we had $8.5 million in accrued restructuring costs, consisting primarily of $8.0 million of accrued liabilities for facility consolidations that will be
paid over the respective lease terms through 2007.



Interest and Other
Income, Net



The following table presents interest and
other income, net (in thousands, except percentages):



|                               |  |                     |        |                    |   |                    |  |   |       |  |      |  
|------------------------------ |  | ------------------- | ------ | ------------------ | - | ------------------ |  | - | ----- |  | ---- | -
|                               |  | Year Ended July 31, |        | Variancein Dollars |   | Variancein Percent | 
|                               |  | 2005                |        | 2004               |   |                   
|Interest and other income, net |  | $                   | 20,648 |                    | $ | 15,890             |  | $ | 4,758 |  | 29.9 | %
|                               |  |                     |        |                    |   |                    |  |   |       |  |      |  



Interest and other
income, net increased for fiscal 2005 compared to fiscal 2004. The increase was due to higher interest rates.



Provision for Income Taxes



The provision for income taxes of $0.1 million for fiscal 2005 was recorded for taxes due on income generated in foreign tax jurisdictions and certain states. We did not record any net tax benefits relating to our net losses due to the
uncertainty surrounding the realization of these future tax benefits.



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Fiscal Years ended July 31, 2004 and 2003



Revenue



The following table presents product and service revenue (in thousands, except percentages):



|              |  |                     |        |                    |   |        |                    |   |       |   |  |      |   
|------------- |  | ------------------- | ------ | ------------------ | - | ------ | ------------------ | - | ----- | - |  | ---- | --
|              |  | Year Ended July 31, |        | Variancein Dollars |   |        | Variancein Percent |  
|              |  | 2004                |        | 2003               |   |       
|Revenue       |  |                     |        |                    |   |        |                    |   |       |   |  |      |   
|Product       |  | $                   | 32,729 |                    | $ | 26,166 |                    | $ | 6,563 |   |  | 25.1 | % 
|Service       |  |                     | 11,818 |                    |   | 12,110 |                    |   | (292  | ) |  | (2.4 | )%
|              |  |                     |        |                    |   |        |                    |   |       |   |  |      |   
|Total revenue |  | $                   | 44,547 |                    | $ | 38,276 |                    | $ | 6,271 |   |  | 16.4 | % 
|              |  |                     |        |                    |   |        |                    |   |       |   |  |      |   



Total revenue
increased in fiscal 2004 compared to fiscal 2003. The increase was primarily due to a 25% increase in product revenue partially offset by a 2% decrease in service revenue.



During fiscal 2004, the Defense Information Systems Agency (DISA) selected our products to serve as the optical digital
cross connect platform for the Global Information Grid Bandwidth Expansion (GIG-BE) project. During the third and fourth quarters of fiscal 2004, through our distribution partner, Sprint Government Systems Division, DISA purchased certain evaluation
equipment and began accepting GIG-BE product shipments.



Product revenue increased in fiscal 2004 compared to fiscal 2003. The increase was primarily due to revenue generated from the GIG-BE project. Service revenue decreased slightly in fiscal 2004 compared to fiscal 2003. The decrease was
primarily due to the expiration and non-renewal of certain maintenance contracts partially offset by a higher level of installation services associated with product deployments.



For fiscal 2004, GIG-BE accounted for 41% of revenue and three other customers accounted for 27%, 13% and 13% of revenue.
Three customers accounted for 43%, 22% and 14% of revenue in fiscal 2003. International revenue represented 59% of revenue in fiscal 2004, compared to 91% of revenue in fiscal 2003. We expect future revenue to continue to be highly concentrated in a
relatively small number of customers and that international revenue may continue to represent a significant percentage of future revenue. GIG-BE deployments in any given quarter may cause shifts in the percentage mix of domestic and international
revenue. The loss of any one of these customers or any substantial reduction in orders by any one of these customers could materially adversely affect our business, financial condition and results of operations.



Gross profit (loss)



The following table presents gross profit (loss) for product and services, including non-cash stock-based compensation
expense (in thousands, except percentages):



|                     |  |                     |        |   |      |   |        |   
|-------------------- |  | ------------------- | ------ | - | ---- | - | ------ | --
|                     |  | Year Ended July 31, |       
|                     |  | 2004                |        |   | 2003 |  
|Gross profit (loss): |  |                     |        |   |      |   |        |   
|Product              |  | $                   | 12,130 |   |      | $ | 4,203  |   
|Service              |  |                     | 3,184  |   |      |   | (1,163 | ) 
|                     |  |                     |        |   |      |   |        |   
|Total                |  | $                   | 15,314 |   |      | $ | 3,040  |   
|                     |  |                     |        |   |      |   |        |   
|Gross profit (loss): |  |                     |        |   |      |   |        |   
|Product              |  |                     | 37.1   | % |      |   | 16.1   | % 
|Service              |  |                     | 26.9   | % |      |   | (9.6   | )%
|Total                |  |                     | 34.4   | % |      |   | 7.9    | % 



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Product gross profit



Product gross profit increased in fiscal 2004 compared to fiscal 2003. The increase was primarily the result of the
following factors: (i) decreased manufacturing costs, (ii) the expiration of preexisting warranty obligations of approximately $2.1 million and (iii) the sale of evaluation equipment of $1.2 million which had a favorable impact on
gross profit due to its lower carrying value. These favorable factors were partially offset by a sales concession of approximately $0.8 million which decreased gross margins. The fiscal 2003 product gross profit included a credit of $0.5 million
relating to a change in estimate relating to the excess inventory charge recorded in fiscal 2002.



Service gross profit (loss)



Service gross profit increased in fiscal 2004 compared to fiscal 2003. The increase was primarily due to reduced fixed support costs and lower
personnel-related expenses. The service gross loss for fiscal 2003 includes costs associated with a further realignment within the customer support organization, including employee severance and related costs.



Operating Expenses



The following table presents operating expenses (in thousands, except percentages):



|                                                    |  |                     |        |      |                    |        |   |                    |   |        |   |  |       |   
|--------------------------------------------------- |  | ------------------- | ------ | ---- | ------------------ | ------ | - | ------------------ | - | ------ | - |  | ----- | --
|                                                    |  | Year Ended July 31, |        |      | Variancein Dollars |        |   | Variancein Percent |  
|                                                    |  | 2004                |        | 2003 |                    |        |  
|Research and development                            |  | $                   | 45,692 |      | $                  | 52,438 |   |                    | $ | (6,746 | ) |  | (12.9 | )%
|Sales and marketing                                 |  |                     | 18,108 |      |                    | 19,763 |   |                    |   | (1,655 | ) |  | (8.4  | )%
|General and administrative                          |  |                     | 7,366  |      |                    | 7,239  |   |                    |   | 127    |   |  | 1.8   | % 
|Stock-based compensation                            |  |                     | 4,880  |      |                    | 7,320  |   |                    |   | (2,440 | ) |  | (33.3 | )%
|Restructuring charges and related asset impairments |  |                     |       |      |                    | (4,447 | ) |                    |   | 4,447  |   |  |      |   
|                                                    |  |                     |        |      |                    |        |   |                    |   |        |   |  |       |   
|Total operating expenses                            |  | $                   | 76,046 |      | $                  | 82,313 |   |                    | $ | (6,267 | ) |  | (7.6  | )%
|                                                    |  |                     |        |      |                    |        |   |                    |   |        |   |  |       |   



Research and Development Expenses



Research and development expenses decreased in fiscal
2004 compared to fiscal 2003. The decrease was primarily due to reduced fixed overhead costs and lower personnel-related expenses.



Sales and Marketing Expenses



Sales and marketing expenses decreased in fiscal 2004 compared to fiscal 2003. The decrease was primarily due to lower personnel-related expenses and
reduced fixed overhead costs, partially offset by an increase in commissions and sales related programs.



General and Administrative Expenses



General and administrative expenses increased slightly in fiscal 2004 compared to fiscal 2003. The increase was primarily due to increased expenses relating to new regulatory requirements including certain provisions
of the Sarbanes-Oxley Act, partially offset by lower personnel-related expenses.



Stock-Based Compensation Expense



Stock-based
compensation expense primarily resulted from the granting of stock options and restricted shares with exercise or sale prices that were deemed to be below fair market value. Total stock-based



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compensation expense decreased in fiscal 2004 compared to fiscal 2003. The decrease was primarily due to lower headcount levels. We currently expect to
continue to incur stock-based compensation expense through the fourth quarter of fiscal 2005.



Restructuring Charges and Related Asset Impairments



In response to the telecommunications industry downturn, we enacted three separate restructuring programs through the fourth quarter of fiscal 2002 to reduce our costs. As a result of our restructuring programs we
have incurred net charges totaling $402.7 million, comprised as follows: $175.1 million of net charges related to excess inventory, $202.8 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on
investments.



The net charges of $402.7 million include a net
$0.3 million charge to operating expenses in the fourth quarter of fiscal 2004 resulting from less favorable sublease assumptions and a net $4.4 million credit to operating expenses recorded in the third and fourth quarters of fiscal 2003, due to
various changes in estimates relating to its restructuring programs. The changes in estimates consisted primarily of an $8.6 million reduction in the estimated legal matters associated with the restructuring programs, a $0.9 million credit relating
to proceeds received from the disposal of certain equipment and a $0.8 million reduction in the costs associated with a workforce reduction, partially offset by $4.9 million of additional facility consolidation charges and a $1.0 million charge for
the write-down of certain land. In addition, the Company recorded a $0.5 million credit to cost of revenue relating to a favorable settlement with a supplier.



As of July 31, 2004, we had $12.0 million in accrued restructuring costs, consisting primarily of accrued liabilities for facility consolidations.



Interest and Other Income, Net



The following table presents interest and other income, net (in thousands,
except percentages):



|                               |  |                     |        |                    |   |        |                    |   |        |   |  |       |   
|------------------------------ |  | ------------------- | ------ | ------------------ | - | ------ | ------------------ | - | ------ | - |  | ----- | --
|                               |  | Year Ended July 31, |        | Variancein Dollars |   |        | Variancein Percent |  
|                               |  | 2004                |        | 2003               |   |       
|Interest and other income, net |  | $                   | 15,890 |                    | $ | 23,342 |                    | $ | (7,452 | ) |  | (31.9 | )%
|                               |  |                     |        |                    |   |        |                    |   |        |   |  |       |   



Interest and other
income, net decreased for fiscal 2004 compared to fiscal 2003. The decrease was primarily due to a combination of lower interest rates and a lower invested cash balance during fiscal 2004.



Provision for Income Taxes



We did not provide for income taxes for fiscal 2004 or fiscal 2003 due to
our cumulative taxable losses in recent years and the net losses incurred during each period. We did not record any tax benefits relating to these losses due to the uncertainty surrounding the realization of these future tax benefits.



Liquidity and Capital Resources



Total cash, cash equivalents and investments were $955.0 million at
July 31, 2005. Included in this amount were cash and cash equivalents of $508.3 million, compared to $45.4 million at July 31, 2004. The increase in cash and cash equivalents of $462.9 million was attributable to cash provided by investing
activities of $466.6 million and cash provided by financing activities of $5.1 million, partially offset by cash used in operating activities of $8.9 million.



Cash provided by investing activities of $466.6 million consisted primarily of net proceeds of investments of $469.5 million. Cash provided by
financing activities of $5.1 million consisted of the proceeds received from



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employee stock plan activity. Cash used in operating activities of $8.9 million consisted of the net loss for the period of $23.8 million, adjusted for net
non-cash charges totaling $6.2 million and changes in working capital totaling $8.7 million. The most significant changes in working capital were an increase in accrued expenses and other current liabilities of $11.9 million which resulted primarily
from our $10.3 million reserve for contingencies, a decrease in accrued restructuring costs of $3.6 million resulting from payments on restructured facilities and a decrease in accounts payable of $3.5 million primarily due to timing of payments.
Net non-cash charges included depreciation and amortization, provision for doubtful accounts and stock-based compensation.



Our primary source of liquidity comes from our cash and cash equivalents and investments, which totaled $955.0 million at July 31, 2005. 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 at the date of acquisition
ranging from 90 days to two years. At July 31, 2005, $446.3 million of investments with maturities of less than one year were classified as short-term investments, and $0.5 million of investments with maturities of greater than one year were
classified as long-term investments. Our portfolio is primarily invested in short maturity investments to minimize interest rate risk and to ensure cash is available to meet requirements as needed. 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, 2005, more than 99% of our accounts receivable balance was attributable to four customers.



As of July 31, 2005, 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. As of July 31, 2005, we had $8.5 million in accrued restructuring costs, consisting primarily of $8.0 million of accrued liabilities for
facility consolidations that will be paid over the respective lease terms through 2007.



Our fixed commitments for cash expenditures consist primarily of payments under operating leases and inventory purchase commitments. We do not currently have any material commitments for capital expenditures, or any
other material commitments aside from operating leases for our facilities and inventory purchase commitments. We expect to continue to fund our operations, including our fixed commitments under operating leases, and any required capital expenditures
over the next few years, using our existing cash, cash equivalents and investments as our primary source of liquidity.



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. We will continue to consider appropriate action with respect to our cash position in light of the present and anticipated business needs as well as providing a means by which our
shareholders may realize value in connection with their investment.



Recent
Accounting Pronouncements



In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS 151 will have a material impact on our financial statements.



In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense
in the consolidated financial statements based on their fair values. This standard is effective for public companies at the beginning of the first annual period beginning after June 15, 2005 and companies may elect to use either the
modified-prospective or



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modified-retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of
adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123, except that amounts must be
recognized in the income statement. Under the modified retrospective approach, the previously reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS 123 amounts in the income
statement. In March 2005, the SEC issued Staff Accounting Bulletin 107 (SAB 107) to assist preparers by simplifying some of the implementation challenges of SFAS 123R. In particular, SAB 107 provides supplemental implementation guidance
on SFAS 123R, including guidance on valuation methods, classification of compensation expense, inventory capitalization of share-based compensation cost, income tax effects, disclosures in Managements Discussion of and Analysis and several
other issues. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123R. Effective August 1, 2005, the Company adopted SFAS 123R utilizing the modified prospective method. The Company expects the
adoption of SFAS 123R to have a material impact on net income and net income per share and is currently in the process of evaluating the extent of such impact. However, the pro forma disclosures in Note 2 to the Consolidated Financial Statements
included in Item 8 approximate what would have been the impact of applying SFAS 123R to the historical periods presented.



In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (FAS 154). FAS 154 provides guidance on the accounting for, and reporting of, a change in accounting principle, in the absence of explicit transition requirements specific to a newly adopted accounting
principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. FAS 154 requires retrospective application to prior
periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FAS 154 is effective for accounting changes made in fiscal years beginning after December 15,
2005. We do not believe that the adoption of FAS 154 will have a material effect on our financial position on our results of operations.



Commitments, Contractual Obligations and Off-Balance Sheet Arrangements



At July 31, 2005, our off-balance sheet arrangements, which consist entirely of contractual commitments for operating leases and inventory
purchase commitments, were as follows (in thousands):



|                               |  |       |        |                  |   |           |  |           |       |  |  
|------------------------------ |  | ----- | ------ | ---------------- | - | --------- |  | --------- | ----- |  | -
|                               |  | Total |        | Less than 1 Year |   | 1-3 Years |  | 3-5 Years
|Operating leases               |  | $     | 10,064 |                  | $ | 6,910     |  | $         | 3,154 |  | 
|Inventory purchase commitments |  |       | 10,478 |                  |   | 10,478    |  |           |      |  | 
|                               |  |       |        |                  |   |           |  |           |       |  |  
|Total                          |  | $     | 20,542 |                  | $ | 17,388    |  | $         | 3,154 |  | 
|                               |  |       |        |                  |   |           |  |           |       |  |  



Payments made under
operating leases will be treated as rent expense for the facilities currently being utilized, or as a reduction of the restructuring liability for payments relating to excess facilities. Payments made for inventory purchase commitments will
initially be capitalized as inventory, and will then be recorded as cost of revenue as the inventory is sold or otherwise disposed of.



Related Party Transactions



In July 2000, we made an investment of $2.2 million in Tejas Networks India Private Limited (Tejas). The Chairman of the Board of Sycamore
also serves as the Chairman of the Board of Tejas. An executive officer of our Company also attends meetings of the board of directors of Tejas for the sole purpose of representing the Companys business interests, if any. We have no obligation
to provide any additional funding to Tejas. During the years ended July 31, 2005 and 2003, we recognized revenue of $0.1 million and $0.2 million, respectively, relating to transactions with Tejas. During the year ended July 31, 2004, we
did not engage in any material transactions with Tejas.



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FACTORS THAT MAY AFFECT FUTURE RESULTS



OUR BUSINESS HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, ADVERSELY AFFECTED BY UNFAVORABLE CONDITIONS IN THE TELECOMMUNICATIONS INDUSTRY
AND THE ECONOMY IN GENERAL.



In early 2001, the
telecommunications industry began a severe decline which has had a significant impact on our business. The industry decline and the resulting spending constraints in the optical networking market, which continued for several years, caused a decrease
in the demand for our products which has had an adverse impact on our revenue and profitability.



We cannot anticipate that our current and prospective customers will continue or increase their optical switching capital spending with us in the near
future. As a result, we anticipate that our revenue, cost of revenue, gross profit and operating results will continue to be affected by these market conditions.



We expect the trends described above to continue to affect our business in many ways, including the following:



| |  |  | our current and prospective customers will continue to make limited capital expenditures;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | consolidation of our customers may cause delays, disruptions or reductions in their optical switching capital spending plans as well as increase their relative purchasing power in
any negotiation;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we will continue to have limited ability to forecast the volume and product mix of our sales;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | we will experience increased competition as a result of limited demand and we may experience downward pressure on the pricing of our products which reduces gross margins and
constrains revenue growth;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | intense competition may enable customers to demand more favorable terms and conditions of sales including extended payment terms; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any bankruptcies or weakening financial condition of any of our customers may require us to write off amounts due from prior sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



These factors could lead to further reduced revenues and gross margins and
increased operating losses.



CONSOLIDATION IN THE INDUSTRY MAY LEAD TO
INCREASED COMPETITION AND HARM OUR BUSINESS.



The
telecommunications industry has experienced consolidation and we expect this trend to continue. Consolidation among our customers may cause delays or reductions in their capital expenditure plans and may cause increased competitive pricing pressures
as the number of available customers declines and their relative purchasing power increases in relation to suppliers. Consolidation may also result in a combined entity choosing to standardize on a certain vendors optical networking platform.
Any of these factors could adversely affect our business



OUR STRATEGY TO
PURSUE STRATEGIC AND FINANCIAL ALTERNATIVES MAY NOT BE SUCCESSFUL.



We face numerous challenges as a vendor focused exclusively on the optical switching market segment of the overall optical networking market. As we remain focused on improvements in the performance of our stand-alone optical switching
business, our management and Board will continue to consider other strategic options that may serve to maximize shareholder value. These options include, but are not limited to (i) acquisitions of, or mergers or other combinations with,
companies with either complementary technologies or in adjacent market segments, and (ii) alliances with or a sale to another entity. Any decision regarding strategic alternatives would



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be subject to inherent risk, and we cannot guarantee that we will be able to identify appropriate opportunities, successfully negotiate economically
beneficial terms, successfully integrate any acquired business, retain key employees or achieve the anticipated synergies or benefits of any strategic alternative which may be selected. Additionally, in connection with a strategic transaction, we
may issue additional shares that could dilute the holdings of existing common stockholders, or we may utilize cash. In implementing a strategy, we may enter markets in which we have little or no prior experience and there can be no assurance that we
will be successful.



Further, we may consider appropriate
action with respect to our cash position in light of present and anticipated business needs including, but not limited to, stock buybacks, cash distributions or cash dividends. As reported previously, we have engaged Morgan Stanley to assist us in
the review of strategic and financial alternatives for our Company. There can be no assurances that any transaction or other corporate action will result from our review of strategic and financial alternatives. Further, there can be no assurance
concerning the success, type, form, structure, nature, results, timing or terms and conditions of any such potential action, even if such an action does result from this review.



WHETHER OR NOT WE PURSUE ANY SPECIFIC STRATEGIC ALTERNATIVE, THE VALUE OF YOUR SHARES MAY DECREASE.



The Company continues to consider various strategic options, including, but
not limited to: (i) acquisitions of, or mergers or other combinations with, companies with either complementary technologies or in adjacent market segments, (ii) alliances with or a sale to another entity, and (iii) recapitalization
alternatives, including stock buybacks, cash distributions or cash dividends. We cannot predict whether, or when, such review may result in the Company entering into any transaction or transactions with respect to any specific strategic option, and
we cannot assure you that we would be able to consummate any transaction or transactions or that any transaction or transactions would provide you with a positive return on your investment. Accordingly, notwithstanding such review or any outcome
thereof, and whether or not we pursue any specific strategic option, the value of your shares may decrease.



WE CURRENTLY DEPEND ENTIRELY ON OUR LINE OF OPTICAL NETWORKING PRODUCTS AND OUR REVENUE DEPENDS UPON THEIR COMMERCIAL SUCCESS.



Our revenue depends on the commercial success of our line of optical networking products. Our research and development
efforts focus exclusively on optical switching products. In order to remain competitive, we believe that continued investment in research and development is necessary in order to provide innovative solutions to our current and prospective customers.
We cannot assure you that we will be successful in:



| |  |  | anticipating evolving customer requirements;
| | - |  | --------------------------------------------



| |  |  | completing the development, introduction or production manufacturing of new products; or
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | enhancing our existing products.
| | - |  | --------------------------------



If our current and prospective customers do not adopt our optical networking products and do not purchase and successfully deploy our current and future
products, our business, financial condition and results of operations could be materially adversely affected.



CURRENT ECONOMIC AND MARKET CONDITIONS MAKE FORECASTING DIFFICULT.



Current economic and market conditions have limited our ability to forecast the volume and product mix of our sales, making it difficult to provide
estimates of revenue and operating results. We continue to have limited visibility into the capital spending plans of our current and prospective customers. Fluctuations in our revenue can lead to even greater fluctuations in our operating results.
Our planned expense levels depend in part on our expectations of future revenue. Our planned expenses include significant investments, particularly within the research and development organization, which we believe is necessary to continue to
provide innovative optical



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networking solutions to meet our current and prospective customers needs. As a result, it is difficult to forecast revenue and operating results. If
our revenue and operating results are below the expectations of our investors and market analysts, it could cause a decline in the price of our common stock.



OUR CURRENT STRATEGY REQUIRES US TO MAINTAIN A SIGNIFICANT COST STRUCTURE AND OUR FAILURE TO INCREASE OUR REVENUES WOULD PREVENT US FROM ACHIEVING AND MAINTAINING
PROFITABILITY.



In early 2001, the telecommunications
industry began a severe decline which had a significant impact on our business. This decline and the resulting spending constraints in the optical networking market, which continued for several years, caused a decrease in the demand for our products
which had an adverse impact on our revenue and profitability. In response to these adverse market conditions and to reposition the Company to changing market requirements, we enacted four separate restructuring programs through the third quarter of
fiscal 2005, which reduced our cost structure and focused our business on our optical switching product portfolio. As a result of these restructuring programs we incurred net charges totaling $403.6 million, comprised as follows: $175.4 million of
net charges related to excess inventory, $203.4 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments. In order to remain competitive, we continue to maintain a significant cost structure
relative to the size of our business, particularly within the research and development organization which we believe is necessary to continue to provide innovative optical networking solutions to meet our current and prospective customers
needs. Due to our decreased revenues, our restructuring programs and our decision to maintain a significant cost structure, we have incurred a net loss for fiscal 2005 of $23.8 million and a cumulative net loss of $838.5 million at July 31,
2005. We expect that our decision to maintain a significant cost structure will require us to generate significantly higher revenue above current levels in order to achieve and maintain profitability. As a result, we expect to continue to incur net
losses. We cannot assure you that our revenue will increase or that we will generate sufficient revenue to achieve or sustain such profitability.



WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR SALES AND PROFITABILITY.



Service providers continue to limit their capital spending. Competition for limited optical switching opportunities is
intense and continues to be dominated by large, incumbent equipment suppliers. Competition is based upon a combination of price, established customer relationships, broad product portfolios, large service and support teams, functionality and
scalability. Large companies, such as Alcatel, Ciena, Cisco, Lucent, Nortel and Tellabs have historically dominated this market. Many of our competitors have longer operating histories and greater financial, technical, sales, marketing and
manufacturing resources than we do and are able to devote greater resources to the research and development of new products. These competitors also have long standing existing relationships with our current and prospective customers. New incumbent
competitors, such as Huawei and ZTE, have entered the optical networking market using the latest available technology in order to compete with our products. Our competitors may forecast market developments more accurately and could develop new
technologies that compete with our products or even render our products obsolete. Moreover, these competitors have more diverse product lines which allow them the flexibility to price their products more aggressively.



The decline in the telecommunications industry beginning in early 2001 has
reduced demand for our products and resulted in intensified competitive pressures. We expect to encounter aggressive tactics such as the following:



| |  |  | price discounting;
| | - |  | ------------------



| |  |  | early announcements of competing products and other marketing efforts;
| | - |  | ----------------------------------------------------------------------



| |  |  | customer financing assistance;
| | - |  | ------------------------------



| |  |  | complete solution sales from one single source;
| | - |  | -----------------------------------------------



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| |  |  | marketing and advertising assistance; and
| | - |  | -----------------------------------------



| |  |  | intellectual property disputes.
| | - |  | -------------------------------



These tactics may be effective in a highly concentrated customer base like ours. Our customers are under increasing pressure to deliver their services at
the lowest possible cost. As a result, the price of an optical networking system may become an important factor in customer decisions. In certain cases, our larger competitors have more diverse product lines that allow them the flexibility to price
their products more aggressively and absorb the significant cost structure associated with optical switching research and development across their entire business. If we are unable to offset any reductions in the average selling price of our
products by a reduction in the cost of our products, our gross margins will be adversely affected.



If we are unable to compete successfully against our current and future competitors, we could experience revenue reductions, order cancellations and
reduced gross margins, any one of which could have a material adverse effect on our business, results of operations and financial condition.



SUBSTANTIALLY ALL OF OUR REVENUE IS GENERATED FROM A LIMITED NUMBER OF CUSTOMERS, AND OUR SUCCESS DEPENDS ON INCREASING BOTH DIRECT SALES AND INDIRECT SALES THROUGH
DISTRIBUTION CHANNELS TO A LIMITED NUMBER OF INCUMBENT SERVICE PROVIDERS AND THE FEDERAL GOVERNMENT.



There are limited optical switching opportunities. Competition for these opportunities is intense. Our revenue is concentrated among a limited number of
customers. None of our customers are contractually committed to purchase any minimum quantities of products from us and orders are generally cancelable prior to shipment. We expect that our revenue will continue to depend on sales of our products to
a limited number of customers. While expanding our customer base is a key objective, at the present time, the number of prospective customer opportunities for our products is limited. In addition, we believe that the telecommunications industry will
continue in a consolidation phase which may further reduce the number of prospective customers, slow purchases and delay optical switching deployment decisions.



Our direct sales efforts primarily target incumbent service providers, many of which have already made significant investments in traditional optical
networking infrastructures. In addition we are utilizing established channel relationships with distribution partners including resellers, distributors and systems integrators for the sale of our products to the federal government and some
commercial customers. We have entered into agreements with several distribution partners, some of who also sell products that compete with our products. We cannot be certain that we will be able to retain or attract distribution partners on a timely
basis or at all, or that the distribution partners will devote adequate resources to selling our products. Since we have only limited experience in developing and managing such channels, the extent to which we will be successful is uncertain. If we
are unable to develop and manage new channels of distribution to sell our products to incumbent service providers and the federal government, or if our distribution partners are unable to convince incumbent service providers or the federal
government to deploy our optical networking solutions, our business, financial condition and results of operations will be materially adversely affected.



WE MAY NOT BE SUCCESSFUL IN SELLING OUR PRODUCTS THROUGH ESTABLISHED CHANNELS TO THE FEDERAL GOVERNMENT.



We have a reseller agreement for the sale of our products to the federal
government and our products were selected to serve as the Optical Digital Cross Connect platform for DISAs GIG-BE project. Since we have only limited experience in developing and managing such channels, the extent to which we will be
successful is uncertain. Sales to the federal government require compliance with ongoing complex procurement rules and regulations with which we have limited experience. We will not be able to succeed in the federal government market and sell our
products to federal government contractors if we cannot comply with these rules and



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regulations. The federal government is not contractually committed to purchase our products for the GIG-BE project, and there can be no assurance that it
will purchase our products in the future. Our failure to sell products to the federal government, including for use in the GIG-BE project, could adversely affect our ability to achieve our planned levels of revenue, which would affect our
profitability and results of operations.



WE DEPEND ON A GOVERNMENT AGENCY,
THROUGH OUR RESELLER, FOR A SIGNIFICANT AMOUNT OF OUR REVENUE AND THE LOSS OR DECLINE OF EXISTING OR FUTURE GOVERNMENT AGENCY FUNDING COULD ADVERSELY AFFECT OUR REVENUE AND CASH FLOWS.



For the year ended July 31, 2005, approximately 24% of our revenue was
derived from a United States government agency through our reseller. This government agency (DISA) may be subject to budget cuts, budgetary constraints, a reduction or discontinuation of funding or changes in the political or regulatory environment
that may cause the agency to terminate the projects, divert funds or delay implementation or expansion. As with most government contracts, the agency may terminate the contract at any time without cause. A significant reduction in funds
available for the agency to purchase equipment would significantly reduce our revenue and cash flows. The significant reduction or delay in orders by the agency would also significantly reduce our revenue and cash flows. Additionally,
government contracts are generally subject to audits and investigations by government agencies. If the results of these audits or investigations are negative, our reputation could be damaged, contracts could be terminated or significant
penalties could be assessed. If a contract is terminated for any reason, our ability to fully recover certain amounts may be impaired resulting in a material adverse impact on our financial condition and results of operations.



CERTAIN LARGER CUSTOMERS MAY HAVE SUBSTANTIAL NEGOTIATING LEVERAGE, WHICH MAY REQUIRE THAT
WE AGREE TO TERMS AND CONDITIONS THAT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.



Large telecommunications providers, key resellers and the federal government make up a large part of our target market, have substantial purchasing power and potential leverage in negotiating contractual arrangements
with us. These customers and prospects may require us to develop additional features and require penalties for failure to deliver such features. As we seek to increase sales into our target markets, we may be required to agree to such terms and
conditions, which may affect the timing of revenue recognition and amount of deferred revenues and may have other unfavorable effects on our business and financial condition.



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



As part of our business strategy, we consider acquisitions, strategic
investments and business combinations including those in complementary companies, products or technologies, or in adjacent market segments and otherwise. We may consider such acquisitions to broaden our product portfolio, gain access to a particular
customer base or market, or to take immediate advantage of a strategic opportunity. In the event of an acquisition, we may:



| |  |  | issue stock that would dilute our current stockholders holdings;
| | - |  | -----------------------------------------------------------------



| |  |  | consume cash, which would reduce the amount of cash available for other purposes;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | incur debt or assume liabilities;
| | - |  | ---------------------------------



| |  |  | increase our ongoing operating expenses and level of fixed costs;
| | - |  | -----------------------------------------------------------------



| |  |  | record goodwill and non-amortizable intangible assets subject to impairment testing and potential periodic impairment charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | incur amortization expenses related to certain intangible assets;
| | - |  | -----------------------------------------------------------------



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| |  |  | 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 or liabilities;
| | - |  | -----------------------------------



| |  |  | diversion of managements attention from other business issues and opportunities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | problems entering markets in which we have no or limited prior experience;
| | - |  | --------------------------------------------------------------------------



| |  |  | problems with integrating employees and potential loss of key employees; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | additional regulatory compliance issues.
| | - |  | ----------------------------------------



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.



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



In general, our revenue and operating results in any reporting period may fluctuate significantly due to a variety of factors including, but not limited
to:



| |  |  | fluctuation in demand for our products;
| | - |  | ---------------------------------------



| |  |  | the timing and amount of sales of our products;
| | - |  | -----------------------------------------------



| |  |  | changes in customer requirements, including delays or order cancellations;
| | - |  | --------------------------------------------------------------------------



| |  |  | the introduction of new products by us or our competitors;
| | - |  | ----------------------------------------------------------



| |  |  | changes in the price or availability of components for our products;
| | - |  | --------------------------------------------------------------------



| |  |  | the timing of revenue recognition and deferred revenue;
| | - |  | -------------------------------------------------------



| |  |  | readiness of customer sites for installation;
| | - |  | ---------------------------------------------



| |  |  | changes in our pricing policies or the pricing policies of our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | satisfaction of contractual customer acceptance criteria and related revenue recognition issues;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | manufacturing and shipment delays;
| | - |  | ----------------------------------



| |  |  | the timing and amount of employer payroll tax to be paid on employee gains on stock options exercised;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting rules, such as the requirement to record stock-based compensation expense for employee stock option grants made at fair market value; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions as well as those specific to the telecommunications, optical networking and related industries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



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. The factors discussed above are extremely difficult to predict and impact our revenue and operating



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results. In addition, our ability to forecast our future business has been significantly impaired by the ongoing difficult economic and market conditions. As
a result, we believe that our revenue and operating results are likely to continue to vary significantly from quarter to quarter and may cause our stock price to fluctuate.



Customer purchase decisions can take a long period of time. We believe that customers who make a decision to deploy our
products will expand their networks slowly and deliberately. In addition, we could receive purchase orders on an irregular and unpredictable basis. Because of the nature of our business, we cannot predict these sales and deployment cycles. The long
sales cycles, as well as our expectation that customers may tend to issue large purchase orders sporadically with short lead times, may cause our revenue and results of operations to vary significantly and unexpectedly from quarter to quarter. As a
result, our future operating results may be below our expectations or those of public market analysts and investors, and our revenue may 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.



WE UTILIZE CONTRACT MANUFACTURERS AND
ANY DISRUPTION IN THESE RELATIONSHIPS MAY CAUSE US TO FAIL TO MEET OUR CUSTOMERS DEMANDS AND MAY DAMAGE OUR CUSTOMER RELATIONSHIPS.



We have limited internal manufacturing capabilities. We outsource the manufacturing of our products to contract manufacturers who manufacture our products
in accordance with our specifications and fill orders on a timely basis. We may not be able to manage our relationships with our contract manufacturers effectively, and our contract manufacturers may not meet our future requirements for timely
delivery. Our contract manufacturers also build products for other companies, and we cannot be assured that they will have sufficient quantities of inventory available to fill our customer orders or that they will allocate their internal resources
or capacity to fill our orders on a timely basis. Unforecasted customer demand may increase the cost to build our products due to fees charged to expedite production and other related charges.



The contract manufacturing industry is a highly competitive,
capital-intensive business with relatively low profit margins, and in which acquisition activity is relatively common. 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, our revenue, gross margins and customer relationships could be adversely affected.



WE AND OUR CONTRACT MANUFACTURERS RELY ON SINGLE OR LIMITED SOURCES FOR SUPPLY OF CERTAIN
COMPONENTS AND OUR BUSINESS MAY BE SERIOUSLY HARMED IF OUR SUPPLY OF ANY OF THESE COMPONENTS IS DISRUPTED.



We and our contract manufacturers purchase several key components from single or limited sources. These key components include commercial digital signal
processors, central processing units, field programmable gate arrays, switch fabric, and optical transceivers. We generally purchase our key components on a purchase order basis and have no long-term contracts for these components. In the event of a
disruption in supply of key components including, but not limited to, production disruptions, low yield or discontinuance of manufacture, we may not be able to develop an alternate source in a timely manner or on acceptable terms. Any such failure
could impair our ability to deliver products to customers, which would adversely affect our revenue and operating results.



In addition, our reliance on key component suppliers exposes us to potential supplier production difficulties or quality variations. The loss of a source
of supply for key components or a disruption in the supply chain could require us to incur additional costs to redesign our products that use those components.



During the past year, component suppliers have planned their production capacity to better match demand. If the demand for certain components increases
beyond the component suppliers planned production capacity,



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there may be component shortages which may increase procurement costs. In addition, consolidation in the optical component industry could result in reduced
competition for supply of key components and higher component prices. If any of these events occurred, our revenue and operating results could be adversely affected.



OUR INABILITY TO ANTICIPATE INVENTORY REQUIREMENTS MAY RESULT IN INVENTORY CHARGES OR DELAYS IN PRODUCT SHIPMENTS.



During the normal course of business, we may provide purchase orders to our
contract manufacturers for up to six months prior to scheduled delivery of products to our customers. If we overestimate our product requirements, the contract manufacturers may assess cancellation penalties or we may have excess inventory which
could negatively impact our gross margins. If we underestimate our product requirements, the contract manufacturers may have inadequate inventory that could interrupt manufacturing of our products and result in delays in shipment to our customers.
We also could incur additional charges to manufacture our products to meet our customer deployment schedules. If we over or underestimate our product requirements, our revenue and gross profit may be impacted.



PRODUCT PERFORMANCE PROBLEMS COULD LIMIT OUR SALES TO CURRENT AND PROSPECTIVE CUSTOMERS.



If our products do not meet our customers
performance requirements, our relationships with current and prospective customers may be adversely affected. The design, development and deployment of our products often involve problems with software, components, manufacturing processes and
interoperability with other network elements. If we are unable to identify and fix errors or other problems, or if our customers experience interruptions or delays that cannot be promptly resolved, we could experience:



| |  |  | loss of revenue or delay in revenue recognition or accounts receivable collection;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | loss of customers and market share;
| | - |  | -----------------------------------



| |  |  | inability to attract new customers or achieve market acceptance;
| | - |  | ----------------------------------------------------------------



| |  |  | diversion of development and other resources;
| | - |  | ---------------------------------------------



| |  |  | increased service, warranty and insurance costs; and
| | - |  | ----------------------------------------------------



| |  |  | legal actions by our customers.
| | - |  | -------------------------------



These factors may adversely impact our revenue, operating results and financial condition. In addition, our products are often critical to the performance
of our customers network. Generally, we seek to limit liability in our customer agreements. If we are not successful in limiting our liability, or these contractual limitations are not enforceable or if we are exposed to product liability
claims that are not covered by insurance, a successful claim could harm our business.



ENVIRONMENTAL COSTS COULD HARM OUR OPERATING RESULTS.



We may be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making producers of those products
financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union member countries. For
example, the European Union has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS). RoHS prohibits the use of certain substances, including lead, in certain
products, including hard disk drives, put on the market after July 1, 2006. Similar legislation may be enacted in other locations where we sell our products. We will need to ensure that we comply with such laws and regulations as they are
enacted, and that our component



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suppliers also comply on a timely basis with such laws and regulations. If we are not in compliance with such legislation, our customers may refuse to
purchase our products, which would have a materially adverse effect on our business, financial condition and results of operations.



We could incur substantial costs in connection with our compliance with such environmental laws and regulations, and we could also be subject to
governmental fines and liability to our customers if we were found to be in violation of these laws. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant capital expenses in
connection with a violation of these laws, our financial condition or operating results could suffer.



OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS.



International sales represented 63% of total revenue for the year ended July 31, 2005 and we have a substantial international customer base. We are
subject to foreign exchange translation risk to the extent that our revenue is denominated in currencies other than the U.S. dollar. 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. We may not be able to maintain or expand international market demand for our products.



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 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 may impact the timing of revenue recognition;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | necessity to maintain staffing, or to work with third parties, to provide service and support in international locations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of slowdowns or 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.
| | - |  | ---------------------------------------------------------------------



These factors may adversely impact our revenue, operating results and financial condition.



IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, OUR BUSINESS MAY 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



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business strategy, many of whom would be difficult to replace. 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 that 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 our products, and negatively impact our ability to sell and support our products.



WE FACE CERTAIN LITIGATION RISKS.



We are the defendant in a class action securities lawsuit and a party to
other litigation and claims in the normal course of our business. Litigation is by its nature uncertain and there can be no assurance that the ultimate resolution of such claims will not exceed the amounts accrued for such claims, if any. Litigation
can be expensive, lengthy, and disruptive to normal business operations. An unfavorable resolution of a legal matter could have a material adverse affect on our business, operating results, or financial condition. For additional information
regarding certain lawsuits and other disputes in which we are involved, see Part I, Item 3Legal Proceedings.



THE FINDINGS OF THE INDEPENDENT INVESTIGATION AND THE RESULTING RESTATEMENTS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS MAY RESULT IN SHAREHOLDER LITIGATION AND FORMAL
INQUIRIES OR OTHER ACTIONS BY GOVERNMENT AGENCIES.



The
independent investigation conducted under the direction of the Audit Committee of our Board of Directors has been completed and the necessary adjustments have been made in our restatements. Possible issues could arise in connection with the
restatements including shareholder litigation or formal inquiries or other actions by government agencies. Such litigation or inquiries may result in considerable legal expenses, may require the utilization of significant time and resources and may
adversely affect our business and the results of operations and financial condition, including the price of our common stock. The Securities and Exchange Commission has requested, and the Company has agreed, to voluntarily provide documentation
gathered or created during the independent investigation. There can be no assurances as to what, if any, further action may be taken with respect to this matter by the Securities and Exchange Commission or other government agencies or what effect
such actions may have on the Company.



IF WE DO NOT MAINTAIN OUR COMPLIANCE
WITH THE REQUIREMENTS OF THE NASDAQ NATIONAL MARKET, OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET AND TRANSFERRED TO THE NATIONAL QUOTATION SERVICE BUREAU, OR PINK SHEETS, WHICH MAY, AMONG OTHER THINGS, REDUCE THE
PRICE OF OUR COMMON STOCK AND THE LEVELS OF LIQUIDITY AVAILABLE TO OUR STOCKHOLDERS.



On June 7, 2005 the Company announced an independent investigation being conducted under the direction of the Audit Committee of its Board of Directors. The investigation findings related to certain stock options
granted during the calendar years 1999 to 2001 that were erroneously accounted for under GAAP. On June 10, 2005, we filed a Form 12b-25 stating that we would not be able to file our Form 10-Q on a timely basis for the quarter ended
April 30, 2005. On June 16, 2005, we received notice from Nasdaq stating that we were not in compliance with Nasdaqs Marketplace Rule 4310(c)(14), and thus our securities were subject to delisting because we had not yet filed our
Report on Form 10-Q for the quarter ended April 30, 2005. We appealed this determination, and requested a hearing with a Nasdaq Listings Qualifications Panel (Panel). On August 12,



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2005, the Company was notified that the Panel had granted the Companys request for continued listing of the Companys securities on The Nasdaq
National Market subject to the Company filing its Form 10-Q for the period ended April 30, 2005 with the Securities and Exchange Commission on or before September 23, 2005. On September 19, 2005 we filed our Report of Form 10-Q for
the period ended April 30, 2005. On September 21, 2005, the Nasdaq notified us that we were in compliance with all Nasdaqs Marketplace Rules.



If we do not maintain compliance with all requirements for continued listing on Nasdaq, then our securities may be delisted from Nasdaq. If our securities
are delisted from Nasdaq, they would subsequently trade on the Pink Sheets. The trading of our common stock on the Pink Sheets may reduce the price of the Companys common stock and the levels of liquidity available to its stockholders. In
addition, the trading of the Companys common stock on the Pink Sheets will materially adversely affect its access to the capital markets, and the limited liquidity and potentially reduced price of its common stock could materially adversely
affect its ability to raise capital through alternative financing sources on terms acceptable to the Company or at all. Stocks that trade on the Pink Sheets are no longer eligible for margin loans, and a company trading on the Pink Sheets cannot
avail itself of federal preemption of state securities or blue sky laws, which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings
of securities. If the Company is delisted in the future from the Nasdaq National Market and transferred to the Pink Sheets, there may also be other negative implications, including the potential loss of confidence by suppliers, customers and
employees and the loss of institutional investor interest in our company.



IF WE ARE NOT CURRENT IN OUR SEC FILINGS, WE WILL FACE SEVERAL ADVERSE CONSEQUENCES.



If the Company is unable to remain current in its financial filings, investors in its securities will not have information regarding the Companys
business and financial condition with which to make decisions regarding investment in its securities. In addition, the Company will not be able to have a registration statement under the Securities Act of 1933, covering a public offering of
securities, declared effective by the SEC, and will not be able to make offerings pursuant to existing registration statements pursuant to certain private placement rules of the SEC under Regulation D to any purchasers not qualifying as
accredited investors. The Company also will not be eligible to use a short form registration statement on Form S-3 for a period of 12 months after the time we become current in its filings. These restrictions could adversely
affect our financial condition or our ability to pursue specific strategic alternatives.



RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND REGULATIONS WILL INCREASE OUR COSTS.



The Sarbanes-Oxley Act, which became law in July 2002, and rules subsequently implemented by the SEC and the Nasdaq National Market have imposed various
new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these compliance initiatives. Moreover, these
rules and regulations have increased our annual legal and financial compliance costs, have made some activities more time-consuming and costly, and could expose us to additional liability. In our fiscal year ended July 31, 2005, we incurred
approximately $0.7 million in Sarbanes-Oxley related expenses. In addition, these rules and regulations may make retention and recruitment of qualified persons to serve on our board of directors or executive management more difficult. We continue to
evaluate and monitor regulatory and legislative developments and cannot reliably estimate the timing or magnitude of all costs we may incur as a result of the Sarbanes-Oxley Act or other related legislation or regulation.



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OUR ABILITY TO COMPETE AND PURSUE STRATEGIC ALTERNATIVES COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS OR INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS.



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 products, 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 and pursue strategic alternatives effectively could be harmed. Litigation may be
necessary to enforce our intellectual property rights. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse affect on our business, operating results and financial condition.



Our industry 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 require 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. Such claims would likely be time consuming and expensive to resolve, would divert management time and attention and would put us at risk to:



| |  |  | stop selling, incorporating or using our products that incorporate 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.



In addition, we license public domain software and proprietary technology from third parties for use in our existing
products, as well as new product development and enhancements. We cannot be assured that such licenses will be available to us on commercially reasonable terms in the future, if at all. The inability to maintain or obtain any such license required
for our current or future products and enhancements could require us to substitute technology of lower quality or performance standards or at greater cost, either of which could adversely impact the competitiveness of our products.



OUR EARNINGS MAY BE IMPACTED BY THE NEW ACCOUNTING PRONOUNCEMENTS REQUIRING THE EXPENSING
OF EQUITY INSTRUMENTS ISSUED TO EMPLOYEES.



We currently
account for the issuance of stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees. The FASB has issued SFAS 123R, Share-Based Payment that changes the accounting treatment for grants of
options, sale of shares under our employee stock purchase plan and other equity instruments issued to employees. The provisions of SFAS 123R will require companies to record a charge to



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earnings for employee stock option grants and other equity incentives at the beginning of the first annual period beginning after June 15, 2005. SFAS
123R will be effective for our first quarter of fiscal 2006 and thereafter. Management has determined that this revised standard, is likely to materially impact the Companys results of operations in the first quarter of fiscal 2006 and
thereafter.



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 occurrence of any one or more of the factors noted above could cause the market price of our common stock to fluctuate significantly. In addition,
the following factors could cause the market price of our common stock to fluctuate significantly:



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------



| |  |  | regulatory changes in telecommunications;
| | - |  | -----------------------------------------



| |  |  | variations between our actual results and the published expectations of securities 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;
| | - |  | ----------------------------------------------------------------------------



| |  |  | fluctuations in stock market prices and volumes and;
| | - |  | ----------------------------------------------------



| |  |  | announcements or implementation of a stock buyback or cash distribution.
| | - |  | ------------------------------------------------------------------------



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.



YOUR ABILITY TO INFLUENCE KEY TRANSACTIONS, INCLUDING CHANGES OF CONTROL, MAY BE LIMITED
BY SIGNIFICANT INSIDER OWNERSHIP, PROVISIONS OF OUR CHARTER DOCUMENTS AND PROVISIONS OF DELAWARE LAW.



As of July 31, 2005, our officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 35% 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. In addition, 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 certain stockholders.



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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Interest Rate Sensitivity



The primary objective of our current investment activities is to preserve investment principal while maximizing income without significantly increasing
risk. 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 increased immediately and uniformly by 10 percent from levels at July 31, 2005, the fair value of the portfolio
would decline by approximately $0.8 million. Depending on the outcome of our review of strategic and financial alternatives, we may not hold our investments to maturity and as a result, may realize a gain or loss.



Exchange Rate Sensitivity



While the majority of our operations are based in the United States, our
business includes sales globally, with international revenue representing 63% of total revenue in fiscal 2005. To the extent that international sales represent a significant portion of our revenue, fluctuations in foreign currencies may have an
impact on our financial results. 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.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                        |  |   
|----------------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm                                                                 |  | 42
|                                                                                                                        | 
|Consolidated Balance Sheets as of July 31, 2005 and 2004                                                                |  | 44
|                                                                                                                        | 
|Consolidated Statements of Operations for the years ended July 31, 2005, 2004 and 2003                                  |  | 45
|                                                                                                                        | 
|Consolidated Statements of Stockholders Equity and Comprehensive Loss for the years ended July 31, 2005, 2004 and 2003 |  | 46
|                                                                                                                        | 
|Consolidated Statements of Cash Flows for the years ended July 31, 2005, 2004 and 2003                                  |  | 47
|                                                                                                                        | 
|Notes to Consolidated Financial Statements                                                                              |  | 48



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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



We have completed an integrated audit of Sycamore Networks, Inc.s 2005 consolidated financial statements and of its internal control over financial reporting as of July 31, 2005 and audits of its 2004 and
2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated Financial Statements



In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Sycamore Networks, Inc. and its subsidiaries at July 31, 2005 and
2004, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2005 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements
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.



Internal Control over Financial Reporting



Also, in our opinion, managements assessment, included in Managements Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial
reporting as of July 31, 2005 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over
financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made



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only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



PRICEWATERHOUSECOOPERS LLP



Boston, Massachusetts

October 11, 2005



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SYCAMORE NETWORKS, INC.



CONSOLIDATED BALANCE SHEETS



(in thousands,
except par value)



|                                                                                                                                               |  |              |           |   |              |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ------------ | - | --------- | -
|                                                                                                                                               |  | July 31,2005 |           |   | July 31,2004 |  
|A S S E T S                                                                                                                                    |  |              |           |   |              |  
|Current assets:                                                                                                                                |  |              |           |   |              |   |           |  
|Cash and cash equivalents                                                                                                                      |  | $            | 508,281   |   |              | $ | 45,430    |  
|Short-term investments                                                                                                                         |  |              | 446,258   |   |              |   | 482,274   |  
|Accounts receivable, net of allowance for doubtful accounts of $4,132 at July 31, 2005 and July 31, 2004                                       |  |              | 8,384     |   |              |   | 10,605    |  
|Inventories                                                                                                                                    |  |              | 5,445     |   |              |   | 4,294     |  
|Prepaids and other current assets                                                                                                              |  |              | 3,812     |   |              |   | 3,611     |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total current assets                                                                                                                           |  |              | 972,180   |   |              |   | 546,214   |  
|Property and equipment, net                                                                                                                    |  |              | 8,437     |   |              |   | 9,419     |  
|Long-term investments                                                                                                                          |  |              | 496       |   |              |   | 433,621   |  
|Other assets                                                                                                                                   |  |              | 950       |   |              |   | 1,664     |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total assets                                                                                                                                   |  | $            | 982,063   |   |              | $ | 990,918   |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|                                                                                                                                               |  |             
|L I A B I L I T I E S  A N D  S T O C K H O L D E R S  
E Q U I T Y                                                                           |  |              |           |   |              |  
|Current liabilities:                                                                                                                           |  |              |           |   |              |   |           |  
|Accounts payable                                                                                                                               |  | $            | 2,144     |   |              | $ | 5,602     |  
|Accrued compensation                                                                                                                           |  |              | 3,640     |   |              |   | 2,071     |  
|Accrued warranty                                                                                                                               |  |              | 1,654     |   |              |   | 2,017     |  
|Accrued expenses                                                                                                                               |  |              | 4,209     |   |              |   | 3,077     |  
|Accrued restructuring costs                                                                                                                    |  |              | 8,455     |   |              |   | 12,005    |  
|Reserve for contingencies                                                                                                                      |  |              | 10,282    |   |              |   |          |  
|Deferred revenue                                                                                                                               |  |              | 8,700     |   |              |   | 7,226     |  
|Other current liabilities                                                                                                                      |  |              | 1,850     |   |              |   | 2,554     |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total current liabilities                                                                                                                      |  |              | 40,934    |   |              |   | 34,552    |  
|Long term deferred revenue                                                                                                                     |  |              | 1,584     |   |              |   | 926       |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total liabilities                                                                                                                              |  |              | 42,518    |   |              |   | 35,478    |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|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, 2005 and July 31,
2004                       |  |              |          |   |              |   |          |  
|Common stock, $.001 par value; 2,500,000 shares authorized, 276,046 and 273,887 shares issued at July 31, 2005 and July 31, 2004,
respectively |  |              | 276       |   |              |   | 274       |  
|Additional paid-in capital                                                                                                                     |  |              | 1,780,243 |   |              |   | 1,774,214 |  
|Accumulated deficit                                                                                                                            |  |              | (838,533  | ) |              |   | (814,744  | )
|Deferred compensation                                                                                                                          |  |              | (35       | ) |              |   | (1,560    | )
|Accumulated other comprehensive income (loss)                                                                                                  |  |              | (2,406    | ) |              |   | (2,744    | )
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total stockholders equity                                                                                                                     |  |              | 939,545   |   |              |   | 955,440   |  
|                                                                                                                                               |  |              |           |   |              |   |           |  
|Total liabilities and stockholders equity                                                                                                     |  | $            | 982,063   |   |              | $ | 990,918   |  
|                                                                                                                                               |  |              |           |   |              |   |           |  



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



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SYCAMORE NETWORKS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(in
thousands, except per share amounts)



|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------ |  | ------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                       |  | Year Ended July 31, |        
|                                                       |  | 2005                |         |   | 2004 |   |         | 2003 | 
|Revenue                                                |  |                     |         |   |      |   |         |      |  |   |         |  
|Product                                                |  | $                   | 49,922  |   |      | $ | 32,729  |      |  | $ | 26,166  |  
|Service                                                |  |                     | 15,512  |   |      |   | 11,818  |      |  |   | 12,110  |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Total revenue                                          |  |                     | 65,434  |   |      |   | 44,547  |      |  |   | 38,276  |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Cost of revenue                                        |  |                     |         |   |      |   |         |      |  |   |         |  
|Product                                                |  |                     | 25,564  |   |      |   | 20,264  |      |  |   | 21,155  |  
|Service                                                |  |                     | 8,041   |   |      |   | 8,144   |      |  |   | 12,537  |  
|Stock-based compensation:                              |  |                     |         |   |      |   |         |      |  |   |         |  
|Product                                                |  |                     | 160     |   |      |   | 335     |      |  |   | 808     |  
|Service                                                |  |                     | 172     |   |      |   | 490     |      |  |   | 736     |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Total cost of revenue                                  |  |                     | 33,937  |   |      |   | 29,233  |      |  |   | 35,236  |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Gross profit                                           |  |                     | 31,497  |   |      |   | 15,314  |      |  |   | 3,040   |  
|Operating expenses:                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Research and development                               |  |                     | 42,659  |   |      |   | 45,692  |      |  |   | 52,438  |  
|Sales and marketing                                    |  |                     | 11,825  |   |      |   | 18,108  |      |  |   | 19,763  |  
|General and administrative                             |  |                     | 9,160   |   |      |   | 7,366   |      |  |   | 7,239   |  
|Stock-based compensation:                              |  |                     |         |   |      |   |         |      |  |   |         |  
|Research and development                               |  |                     | 822     |   |      |   | 2,764   |      |  |   | 2,995   |  
|Sales and marketing                                    |  |                     | 120     |   |      |   | 1,035   |      |  |   | 1,742   |  
|General and administrative                             |  |                     | 324     |   |      |   | 1,081   |      |  |   | 2,583   |  
|Reserve for contingencies                              |  |                     | 10,282  |   |      |   |        |      |  |   |        |  
|Restructuring charges and related asset impairments    |  |                     | 679     |   |      |   |        |      |  |   | (4,447  | )
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                               |  |                     | 75,871  |   |      |   | 76,046  |      |  |   | 82,313  |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Loss from operations                                   |  |                     | (44,374 | ) |      |   | (60,732 | )    |  |   | (79,273 | )
|Interest and other income, net                         |  |                     | 20,648  |   |      |   | 15,890  |      |  |   | 23,342  |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes                               |  |                     | (23,726 | ) |      |   | (44,842 | )    |  |   | (55,931 | )
|Income tax expense                                     |  |                     | 63      |   |      |   |        |      |  |   |        |  
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Net loss                                               |  | $                   | (23,789 | ) |      | $ | (44,842 | )    |  | $ | (55,931 | )
|                                                       |  |                     |         |   |      |   |         |      |  |   |         |  
|Basic and diluted net loss per share                   |  | $                   | (0.09   | ) |      | $ | (0.17   | )    |  | $ | (0.21   | )
|Shares used in per-share calculationbasic and diluted |  |                     | 275,023 |   |      |   | 272,123 |      |  |   | 265,702 |  



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



45



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SYCAMORE NETWORKS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS



(in thousands)



|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|---------------------------------------------------------------- |  | ------------ | - |  | ------------------------ | --- | - | ------------------ | - | --------- | -------------------- |  | - | -------------- | - |  | ------------------------------------------ | ------- | - | ------------------------ | ------ | - |  | - | ---- | - |  | - | ------ | - |  | - | --------- | -
|                                                                 |  | Common Stock |   |  | AdditionalPaid-inCapital |     |   | AccumulatedDeficit |   |           | DeferredCompensation |  |   | Treasury Stock |   |  | AccumulatedOtherComprehensiveIncome (Loss) |         |   | TotalStockholdersEquity |       
|                                                                 |  | Shares       |   |  | Amount                   |     |   |                    |   |           | Shares               |  |   | Amount         |   |  |                                           
|Balance, July 31, 2002                                           |  | 273,681      |   |  | $                        | 274 |   |                    | $ | 1,767,231 |                      |  | $ | (713,971       | ) |  | $                                          | (19,410 | ) |                          | 1,933  |   |  | $ | (158 | ) |  | $ | 4,557  |   |  | $ | 1,038,523 |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Net loss                                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   | (55,931        | ) |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | (55,931   | )
|Unrealized loss on investments                                   |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   | (2,765 | ) |  |   | (2,765    | )
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Total comprehensive loss                                         |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   | (58,696   | )
|Treasury stock purchases                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          | 1,861  |   |  |   | (163 | ) |  |   |       |   |  |   | (163      | )
|Treasury stock retirements                                       |  | (2,861       | ) |  |                          | (3  | ) |                    |   | (243      | )                    |  |   |               |   |  |                                            |        |   |                          | (2,861 | ) |  |   | 246  |   |  |   |       |   |  |   |          |  
|Issuance of common stock under employee and director stock plans |  | 1,279        |   |  |                          | 1   |   |                    |   | 3,460     |                      |  |   |               |   |  |                                            |        |   |                          | (786   | ) |  |   | 64   |   |  |   |       |   |  |   | 3,525     |  
|Stock-based compensation expense                                 |  |             |   |  |                          |    |   |                    |   | 525       |                      |  |   |               |   |  |                                            | 8,339   |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 8,864     |  
|Adjustments to deferred compensation for terminated employees    |  |             |   |  |                          |    |   |                    |   | (3,919    | )                    |  |   |               |   |  |                                            | 3,919   |   |                          |       |   |  |   |     |   |  |   |       |   |  |   |          |  
|Compensation expense relating to stock option acceleration       |  |             |   |  |                          |    |   |                    |   | 462       |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 462       |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Balance, July 31, 2003                                           |  | 272,099      |   |  |                          | 272 |   |                    |   | 1,767,516 |                      |  |   | (769,902       | ) |  |                                            | (7,152  | ) |                          | 147    |   |  |   | (11  | ) |  |   | 1,792  |   |  |   | 992,515   |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Net loss                                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   | (44,842        | ) |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | (44,842   | )
|Unrealized loss on investments                                   |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   | (4,536 | ) |  |   | (4,536    | )
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Total comprehensive loss                                         |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   | (49,378   | )
|Treasury stock purchases                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          | 289    |   |  |   | (25  | ) |  |   |       |   |  |   | (25       | )
|Treasury stock retirements                                       |  | (436         | ) |  |                          |    |   |                    |   | (36       | )                    |  |   |               |   |  |                                            |        |   |                          | (436   | ) |  |   | 36   |   |  |   |       |   |  |   |          |  
|Issuance of common stock under employee and director stock plans |  | 2,224        |   |  |                          | 2   |   |                    |   | 6,621     |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 6,623     |  
|Stock-based compensation expense                                 |  |             |   |  |                          |    |   |                    |   | 514       |                      |  |   |               |   |  |                                            | 5,191   |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 5,705     |  
|Adjustments to deferred compensation for terminated employees    |  |             |   |  |                          |    |   |                    |   | (401      | )                    |  |   |               |   |  |                                            | 401     |   |                          |       |   |  |   |     |   |  |   |       |   |  |   |          |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Balance, July 31, 2004                                           |  | 273,887      |   |  |                          | 274 |   |                    |   | 1,774,214 |                      |  |   | (814,744       | ) |  |                                            | (1,560  | ) |                          |       |   |  |   |     |   |  |   | (2,744 | ) |  |   | 955,440   |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Net loss                                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   | (23,789        | ) |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | (23,789   | )
|Unrealized gain on investments                                   |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   | 338    |   |  |   | 338       |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Total comprehensive loss                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | (23,451   | )
|Treasury stock purchases                                         |  |             |   |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          | 14     |   |  |   |     |   |  |   |       |   |  |   |          |  
|Treasury stock retirements                                       |  | (14          | ) |  |                          |    |   |                    |   |          |                      |  |   |               |   |  |                                            |        |   |                          | (14    | ) |  |   |     |   |  |   |       |   |  |   |          |  
|Issuance of common stock under employee and director stock plans |  | 2,173        |   |  |                          | 2   |   |                    |   | 5,956     |                      |  |   |               |   |  |                                            |        |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 5,958     |  
|Stock-based compensation expense                                 |  |             |   |  |                          |    |   |                    |   | 146       |                      |  |   |               |   |  |                                            | 1,452   |   |                          |       |   |  |   |     |   |  |   |       |   |  |   | 1,598     |  
|Adjustments to deferred compensation for terminated employees    |  |             |   |  |                          |    |   |                    |   | (73       | )                    |  |   |               |   |  |                                            | 73      |   |                          |       |   |  |   |     |   |  |   |       |   |  |   |          |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  
|Balance, July 31, 2005                                           |  | 276,046      |   |  | $                        | 276 |   |                    | $ | 1,780,243 |                      |  | $ | (838,533       | ) |  | $                                          | (35     | ) |                          |       |   |  | $ |     |   |  | $ | (2,406 | ) |  | $ | 939,545   |  
|                                                                 |  |              |   |  |                          |     |   |                    |   |           |                      |  |   |                |   |  |                                            |         |   |                          |        |   |  |   |      |   |  |   |        |   |  |   |           |  



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



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SYCAMORE NETWORKS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(in
thousands)



|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                            |  | Year Ended July 31, |         
|                                                                            |  | 2005                |          |   | 2004 |   |          | 2003 | 
|Cash flows from operating activities:                                       |  |                     |          |   |      |   |          |      |  |   |          |  
|Net loss                                                                    |  | $                   | (23,789  | ) |      | $ | (44,842  | )    |  | $ | (55,931  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                     |          |   |      |   |          |      |  |   |          |  
|Depreciation                                                                |  |                     | 4,408    |   |      |   | 9,618    |      |  |   | 21,114   |  
|Restructuring charges and related asset impairments                         |  |                     | 169      |   |      |   |         |      |  |   | 1,000    |  
|Stock-based compensation                                                    |  |                     | 1,598    |   |      |   | 5,705    |      |  |   | 8,864    |  
|Provision for doubtful accounts                                             |  |                     |         |   |      |   | (52      | )    |  |   | (500     | )
|Changes in operating assets and liabilities:                                |  |                     |          |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                         |  |                     | 2,221    |   |      |   | 216      |      |  |   | 7,918    |  
|Inventories                                                                 |  |                     | (1,151   | ) |      |   | 823      |      |  |   | 7,823    |  
|Prepaids and other current assets                                           |  |                     | 611      |   |      |   | 69       |      |  |   | (233     | )
|Deferred revenue                                                            |  |                     | 2,132    |   |      |   | 5,475    |      |  |   | (2,301   | )
|Accounts payable                                                            |  |                     | (3,458   | ) |      |   | 2,127    |      |  |   | (2,629   | )
|Accrued expenses and other liabilities                                      |  |                     | 11,916   |   |      |   | (5,156   | )    |  |   | (5,928   | )
|Accrued restructuring costs                                                 |  |                     | (3,550   | ) |      |   | (7,081   | )    |  |   | (28,619  | )
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Net cash used in operating activities                                       |  |                     | (8,893   | ) |      |   | (33,098  | )    |  |   | (49,422  | )
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                       |  |                     |          |   |      |   |          |      |  |   |          |  
|Purchases of property and equipment                                         |  |                     | (3,587   | ) |      |   | (4,448   | )    |  |   | (4,007   | )
|Purchases of investments                                                    |  |                     | (215,361 | ) |      |   | (896,609 | )    |  |   | (566,671 | )
|Maturities of investments                                                   |  |                     | 684,840  |   |      |   | 774,040  |      |  |   | 679,875  |  
|Decrease in other assets                                                    |  |                     | 714      |   |      |   | 1,226    |      |  |   | 4,870    |  
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                         |  |                     | 466,606  |   |      |   | (125,791 | )    |  |   | 114,067  |  
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                       |  |                     |          |   |      |   |          |      |  |   |          |  
|Proceeds from issuance of common stock, net                                 |  |                     | 5,138    |   |      |   | 6,623    |      |  |   | 3,525    |  
|Purchase of treasury stock                                                  |  |                     |         |   |      |   | (25      | )    |  |   | (163     | )
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                   |  |                     | 5,138    |   |      |   | 6,598    |      |  |   | 3,362    |  
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                        |  |                     | 462,851  |   |      |   | (152,291 | )    |  |   | 68,007   |  
|Cash and cash equivalents, beginning of period                              |  |                     | 45,430   |   |      |   | 197,721  |      |  |   | 129,714  |  
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents, end of period                                    |  | $                   | 508,281  |   |      | $ | 45,430   |      |  | $ | 197,721  |  
|                                                                            |  |                     |          |   |      |   |          |      |  |   |          |  
|Supplemental cash flow information:                                         |  |                     |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                      |  |                     |         |   |      |   |         |      |  |   |         |  
|Cash paid for income taxes                                                  |  |                     |         |   |      |   |         |      |  |   |         |  



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



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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 optical networking products that are designed to enable telecommunications service providers to cost-effectively and easily transition their existing fiber optic
network into a network infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers.



2. Summary of 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, allowance for doubtful accounts, warranty obligations, inventory allowance, restructuring liabilities and asset impairments and reserve for
contingencies. 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.



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 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 is determined based on quoted market prices at the reporting date for those instruments. As of July 31, 2005 and 2004, investments consisted of (in thousands):



|                        |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|----------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | - | ---------------- | - |  | - | -------
|                        |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair MarketValue
|July 31, 2005:          |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|Government securities   |  | $             | 428,339 |                      | $ |                      |  | $ | (2,374           | ) |  | $ | 425,965
|Commercial paper        |  |               | 20,821  |                      |   |                      |  |   | (32              | ) |  |   | 20,789 
|                        |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|Total                   |  | $             | 449,160 |                      | $ |                      |  | $ | (2,406           | ) |  | $ | 446,754
|                        |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|                        |  |               |         |                     
|                        |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair MarketValue
|July 31, 2004:          |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|Certificates of deposit |  | $             | 30,331  |                      | $ | 3                     |  | $ | (23              | ) |  | $ | 30,311 
|Commercial paper        |  |               | 330,773 |                      |   | 71                    |  |   | (212             | ) |  |   | 330,632
|Government securities   |  |               | 557,535 |                      |   | 28                    |  |   | (2,611           | ) |  |   | 554,952
|                        |  |               |         |                      |   |                       |  |   |                  |   |  |   |        
|Total                   |  | $             | 918,639 |                      | $ | 102                   |  | $ | (2,846           | ) |  | $ | 915,895
|                        |  |               |         |                      |   |                       |  |   |                  |   |  |   |        



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At July 31, 2005, contractual maturities of the Companys investment securities were as follows
(in thousands):



|                          |  |               |         |                  |   |        
|------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                          |  | AmortizedCost |         | Fair MarketValue
|Less than one year        |  | $             | 448,663 |                  | $ | 446,258
|Due in one to three years |  |               | 497     |                  |   | 496    
|                          |  |               |         |                  |   |        
|Total                     |  | $             | 449,160 |                  | $ | 446,754
|                          |  |               |         |                  |   |        



At July 31, 2004,
substantially all of the gross unrealized losses on investments had been in a continuous unrealized loss position for less than 12 months. The following tables provide the breakdown of the investments with unrealized losses at July 31, 2005 (in
thousands):



|                      |  |                     |         |                       |                      |      |            |       |                       |         |  |            |        |                       |  |   |         |  |   |        |  
|--------------------- |  | ------------------- | ------- | --------------------- | -------------------- | ---- | ---------- | ----- | --------------------- | ------- |  | ---------- | ------ | --------------------- |  | - | ------- |  | - | ------ | -
|                      |  | Less than 12 Months |         |                       | 12 Months or Greater |      |            | Total |                      
|                      |  | Fair Value          |         | GrossUnrealizedLosses |                      |      | Fair Value |       | GrossUnrealizedLosses |         |  | Fair Value |        | GrossUnrealizedLosses | 
|Government securities |  | $                   | 170,379 |                       | $                    | (275 | )          |       | $                     | 255,585 |  | $          | (2,099 | )                     |  | $ | 425,964 |  | $ | (2,374 | )
|Commercial paper      |  |                     | 13,650  |                       |                      | (1   | )          |       |                       | 7,140   |  |            | (31    | )                     |  |   | 20,790  |  |   | (32    | )
|                      |  |                     |         |                       |                      |      |            |       |                       |         |  |            |        |                       |  |   |         |  |   |        |  
|Total                 |  | $                   | 184,029 |                       | $                    | (276 | )          |       | $                     | 262,725 |  | $          | (2,130 | )                     |  | $ | 446,754 |  | $ | (2,406 | )
|                      |  |                     |         |                       |                      |      |            |       |                       |         |  |            |        |                       |  |   |         |  |   |        |  



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 less
appropriate reductions or impairments charges. As of July 31, 2005 and 2004, $0.4 million and $0.4 million of these investments are included in other long-term assets, respectively.



Inventories



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



Revenue Recognition



Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. The most significant revenue recognition judgments typically involve customer acceptance, whether collection is reasonably assured and multiple element
arrangements. In instances where customer acceptance is specified, revenue is deferred until all acceptance criteria have been met. Collectibility is determined based on creditworthiness of customer, analysis and customers payment history.
Service revenue is recognized as the services are performed or ratably over the service period.



Some of the Companys transactions involve the sale of products and services under multiple element arrangements. 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, which generally is the price charged for each component when sold separately and recognized when revenue recognition criteria for each element is met.



Stock-Based Compensation



The Company accounts for stock-based employee compensation arrangements in
accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to



49



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Employees (APB 25) and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure.



Under the intrinsic value method, when the exercise price of the
Companys employee stock awards equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Companys Consolidated Statements of Operations. The Company currently recognizes
compensation expense under APB 25 relating to certain stock options with exercise prices below fair market value on the date of grant and restricted stock.



The Company is required under SFAS 123 to disclose pro forma information regarding the stock awards made to its employees based on specified valuation
techniques that produce estimated compensation charges. The pro forma information is as follows (in thousands, except per share data):



|                                                                                                                                                            |  |                     |         |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                                                            |  | Year Ended July 31, |        
|                                                                                                                                                            |  | 2005                |         |   | 2004 |   |          | 2003 | 
|Net loss:                                                                                                                                                   |  |                     |         |   |      |   |          |      |  |   |          |  
|As reported                                                                                                                                                 |  | $                   | (23,789 | ) |      | $ | (44,842  | )    |  | $ | (55,931  | )
|Stock-based compensation expense included in reported net loss under APB 25                                                                                 |  |                     | 1,598   |   |      |   | 5,705    |      |  |   | 8,864    |  
|Stock-based compensation expense that would have been included in reported net loss if the fair value provisions of SFAS 123 had been applied
to all awards |  |                     | (56,140 | ) |      |   | (132,977 | )    |  |   | (159,863 | )
|                                                                                                                                                            |  |                     |         |   |      |   |          |      |  |   |          |  
|Pro forma                                                                                                                                                   |  | $                   | (78,331 | ) |      | $ | (172,114 | )    |  | $ | (206,930 | )
|                                                                                                                                                            |  |                     |         |   |      |   |          |      |  |   |          |  
|Basic and diluted net loss per share:                                                                                                                       |  |                     |         |   |      |   |          |      |  |   |          |  
|As reported                                                                                                                                                 |  | $                   | (0.09   | ) |      | $ | (0.17    | )    |  | $ | (0.21    | )
|Pro forma                                                                                                                                                   |  | $                   | (0.28   | ) |      | $ | (0.63    | )    |  | $ | (0.78    | )



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



|                        |  |                     |   |  |           |   |  |           |  
|----------------------- |  | ------------------- | - |  | --------- | - |  | --------- | -
|                        |  | Year Ended July 31, |  
|                        |  | 2005                |   |  | 2004      |   |  | 2003      |  
|Risk free interest rate |  | 3.8                 | % |  | 3.0       | % |  | 2.2       | %
|Dividend yield          |  | 0                   | % |  | 0         | % |  | 0         | %
|Expected volatility     |  | 78                  | % |  | 93        | % |  | 96        | %
|Expected life           |  | 5.0 years           |   |  | 3.2 years |   |  | 3.9 years |  



The assumptions used
for awards under the Companys Employee Stock Purchase Plan were the same as those listed above, except that an expected life of 0.5 years was used for each period. The weighted average grant date fair value of stock awards granted during the
years ended July 31, 2005, 2004 and 2003 was $2.99, $2.92 and $2.19 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
$3.77, $3.80 and $3.37 for fiscal 2005, 2004 and 2003, respectively. The weighted average fair values for options granted at fair value were $2.67, $2.34 and $2.19 for fiscal 2005, 2004 and 2003, respectively. No options were granted below fair
value in fiscal 2005 and 2004. The weighted average fair value of options granted below fair value in fiscal 2003 was $2.21.



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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:



|                                          |  |                                              
|----------------------------------------- |  | ---------------------------------------------
|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



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.



Currently, the Companys long-lived assets consist entirely of property and equipment. Long-lived assets to be held and used are evaluated for impairment whenever events or changes in circumstances indicate that
the carrying value of the asset may not be recoverable. Determination of recoverability is based on a comparison of the carrying value of the asset to an estimate of the undiscounted future cash flows resulting from the use and eventual disposition
of the asset. An impairment loss is recognized when the fair value of the asset, or the present value of the discounted cash flows expected to result from the use of the asset, is less than the carrying value. Long-lived assets to be disposed of are
reported at the lower of carrying value or fair value less costs to sell.



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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported



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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, 2005, four customers accounted for 36%, 24%, 12% and 11% of the Companys revenue. For the year ended July 31, 2004,
GIG-BE revenue accounted for 41% and three international customers accounted for 27%, 13% and 13% of the Companys revenue. For the year ended July 31, 2003, three international customers accounted for 43%, 22% and 14% 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, 2005 more than 99% of the Companys accounts receivable balance was attributable to four customers. At July 31, 2004, more than 80% of the Companys accounts receivable balance was attributable to two 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 has directed 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
quality control and enhance working relationships with suppliers. These purchases are made under 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 (in thousands):



|                                        |  |                     |       |      |   |       |      |  |   |       |  
|--------------------------------------- |  | ------------------- | ----- | ---- | - | ----- | ---- |  | - | ----- | -
|                                        |  | Year Ended July 31, |      
|                                        |  | 2005                |       | 2004 |   |       | 2003 | 
|Beginning balance                       |  | $                   | 4,132 |      | $ | 4,184 |      |  | $ | 4,684 |  
|Additions (credits) charged to expenses |  |                     |      |      |   | (52   | )    |  |   | (500  | )
|                                        |  |                     |       |      |   |       |      |  |   |       |  
|Ending balance                          |  | $                   | 4,132 |      | $ | 4,132 |      |  | $ | 4,184 |  
|                                        |  |                     |       |      |   |       |      |  |   |       |  



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



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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. For all
periods presented, due to the net loss sustained in each period, there was no difference between the shares used to calculate basic and diluted net loss per share, since the impact of the common equivalent shares would have been anti-dilutive.



The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per share data):



|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | ------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | Year Ended July 31, |        
|                                                    |  | 2005                |         |   | 2004 |   |         | 2003 | 
|Numerator:                                          |  |                     |         |   |      |   |         |      |  |   |         |  
|Net loss                                            |  | $                   | (23,789 | ) |      | $ | (44,842 | )    |  | $ | (55,931 | )
|Denominator:                                        |  |                     |         |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding |  |                     | 275,081 |   |      |   | 272,881 |      |  |   | 271,602 |  
|Weighted-average shares subject to repurchase       |  |                     | (58     | ) |      |   | (758    | )    |  |   | (5,900  | )
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Shares used in per-share calculationbasic          |  |                     | 275,023 |   |      |   | 272,123 |      |  |   | 265,702 |  
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding |  |                     | 275,023 |   |      |   | 272,123 |      |  |   | 265,702 |  
|Weighted common stock equivalents                   |  |                     |        |   |      |   |        |      |  |   |        |  
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Shares used in per-share calculationdiluted        |  |                     | 275,023 |   |      |   | 272,123 |      |  |   | 265,702 |  
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Net loss per share:                                 |  |                     |         |   |      |   |         |      |  |   |         |  
|Basic                                               |  | $                   | (0.09   | ) |      | $ | (0.17   | )    |  | $ | (0.21   | )
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  
|Diluted                                             |  | $                   | (0.09   | ) |      | $ | (0.17   | )    |  | $ | (0.21   | )
|                                                    |  |                     |         |   |      |   |         |      |  |   |         |  



Options to purchase
26.7 million, 30.8 million and 30.2 million shares of common stock at average exercise prices of $6.98, $6.95 and $7.44 have not been included in the computation of diluted net income (loss) per share for the years ended July 31,
2005, 2004 and 2003, 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 year
ended July 31, 2003, as their effect would have been anti-dilutive. These warrants expired unexercised during the year ended July 31, 2003.



Segment Information



The Company has determined that it conducts its operations in one business segment. For the year ended July 31, 2005, the geographical distribution
of revenue was as follows: United States40%, England33%, Japan9% and all other countries18%. For the year ended July 31, 2004, the geographical distribution of revenue was as follows: United States41%,
England21%, France13%, Japan13% and all other countries12%. For the year ended July 31, 2003, the geographical distribution of revenue was as follows: United States9%, England44%, France22%,
Japan15% and all other countries10%. 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 November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 151 (SFAS 151), Inventory Costs, which clarifies the accounting for abnormal



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amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not believe the adoption of SFAS 151 will have a material impact on our financial statements.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. This standard is
effective for public companies at the beginning of the first annual period beginning after June 15, 2005 and companies may elect to use either the modified-prospective or modified-retrospective transition method. Under the modified
prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should
continue to be accounted for in accordance with SFAS 123, except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously reported amounts are restated (either to the beginning of the year of
adoption or for all periods presented) to reflect the SFAS 123 amounts in the income statement. In March 2005, the SEC issued Staff Accounting Bulletin 107 (SAB 107) to assist preparers by simplifying some of the implementation
challenges of SFAS 123R. In particular, SAB 107 provides supplemental implementation guidance on SFAS 123R, including guidance on valuation methods, classification of compensation expense, inventory capitalization of share-based compensation cost,
income tax effects, disclosures in Managements Discussion of and Analysis and several other issues. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123R. Effective August 1, 2005, the Company
adopted SFAS 123R utilizing the modified prospective method. The Company expects the adoption of SFAS 123R to have a material impact on net income and net income per share and is currently in the process of evaluating the extent of such
impact. However, the pro forma disclosures above approximate what would have been the impact of applying SFAS 123R to the historical periods presented.



In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3 (FAS 154). FAS 154 provides guidance on the accounting for, and reporting of, a change in accounting principle, in the absence of explicit transition requirements specific to a newly adopted accounting
principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. FAS 154 requires retrospective application to prior
periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FAS 154 is effective for accounting changes made in fiscal years beginning after December 15,
2005. We do not believe that the adoption of FAS 154 will have a material effect on our financial position or our results of operations.



3. Inventories



Inventories consisted of the following at July 31, 2005 and 2004 (in thousands):



|                |  |      |       |      |   |      
|--------------- |  | ---- | ----- | ---- | - | -----
|                |  | 2005 |       | 2004
|Raw materials   |  | $    | 889   |      | $ | 702  
|Work in process |  |      | 1,221 |      |   | 1,405
|Finished goods  |  |      | 3,335 |      |   | 2,187
|                |  |      |       |      |   |      
|Total           |  | $    | 5,445 |      | $ | 4,294
|                |  |      |       |      |   |      



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4. Property and Equipment



Property and equipment consisted of the following at July 31, 2005 and 2004 (in thousands):



|                                |  |      |         |   |      |   |         |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                |  | 2005 |         |   | 2004 |  
|Computer software and equipment |  | $    | 65,994  |   |      | $ | 63,300  |  
|Land                            |  |      | 3,000   |   |      |   | 3,000   |  
|Furniture and office equipment  |  |      | 1,443   |   |      |   | 1,443   |  
|Leasehold improvements          |  |      | 2,866   |   |      |   | 2,834   |  
|                                |  |      |         |   |      |   |         |  
|                                |  |      | 73,303  |   |      |   | 70,577  |  
|Less accumulated depreciation   |  |      | (64,866 | ) |      |   | (61,158 | )
|                                |  |      |         |   |      |   |         |  
|Total                           |  | $    | 8,437   |   |      | $ | 9,419   |  
|                                |  |      |         |   |      |   |         |  



Depreciation expense
was $4.4 million, $9.6 million and $21.1 million for the years ended July 31, 2005, 2004 and 2003, respectively.



The Company owns approximately 102 acres of land in Tyngsborough, Massachusetts, which is currently for sale.



5. Lease Commitments



Operating Leases



Rent expense under operating leases was $2.5 million, $2.5 million and $2.3 million for the years ended July 31, 2005, 2004 and 2003, respectively.
At July 31, 2005, future minimum lease payments under all non-cancelable operating leases are as follows (in thousands):



|                                    |  |   |       
|----------------------------------- |  | - | ------
|2006                                |  | $ | 6,910 
|2007                                |  |   | 3,154 
|2008                                |  |   |      
|                                    |  |   |       
|Total future minimum lease payments |  | $ | 10,064
|                                    |  |   |       



The amounts shown
above include future lease payments 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 programs (Note 10). At July 31, 2005,
$7.6 million is included as part of the restructuring liability relating to these facilities.



6. Income Taxes



Substantially all of the loss before income taxes as shown in the Consolidated Statement of Operations for the years ended July 31, 2005, 2004 and 2003 is derived in the United States.



During the years ended July 31, 2005, 2004 and 2003, due to the
Companys cumulative taxable losses, the net losses incurred during each period and the inability to carryback these losses, the Company has not recorded a current tax benefit for the net operating losses.



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



|                                       |  |          |        |   |      |   |         |      |  |   |         |  
|-------------------------------------- |  | -------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                       |  | July 31, |       
|                                       |  | 2005     |        |   | 2004 |   |         | 2003 | 
|Statutory federal income tax (benefit) |  | $        | (8,305 | ) |      | $ | (15,695 | )    |  | $ | (19,576 | )
|State taxes, net of federal benefit    |  |          | (712   | ) |      |   | (1,283  | )    |  |   | (1,630  | )
|Non-deductible stock compensation      |  |          | 560    |   |      |   | 1,796   |      |  |   | 1,963   |  
|Valuation allowance                    |  |          | 9,726  |   |      |   | 18,419  |      |  |   | 19,871  |  
|Other                                  |  |          | (1,206 | ) |      |   | (3,237  | )    |  |   | (628    | )
|                                       |  |          |        |   |      |   |         |      |  |   |         |  
|Tax expense                            |  | $        | 63     |   |      | $ |        |      |  | $ |        |  
|                                       |  |          |        |   |      |   |         |      |  |   |         |  



The significant
components of the Companys net deferred tax assets as of July 31, 2005 and 2004 are as follows (in thousands):



|                                            |  |      |          |   |      |   |          |  
|------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                            |  | 2005 |          |   | 2004 |  
|Deferred tax assets:                        |  |      |          |   |      |   |          |  
|Net operating loss and credit carryforwards |  | $    | 294,460  |   |      | $ | 285,059  |  
|Restructuring and related accruals          |  |      | 10,224   |   |      |   | 11,050   |  
|Capital loss                                |  |      | 6,917    |   |      |   | 6,917    |  
|Accruals                                    |  |      | 6,942    |   |      |   | 3,346    |  
|Depreciation                                |  |      | 4,685    |   |      |   | 7,530    |  
|Other, net                                  |  |      | 3,097    |   |      |   | 2,698    |  
|                                            |  |      |          |   |      |   |          |  
|Total net deferred tax assets               |  |      | 326,325  |   |      |   | 316,600  |  
|Valuation allowance                         |  |      | (326,325 | ) |      |   | (316,600 | )
|                                            |  |      |          |   |      |   |          |  
|Net deferred tax assets                     |  | $    |         |   |      | $ |         |  
|                                            |  |      |          |   |      |   |          |  



The Company recorded
increases to the valuation allowance of $9.7 million and $18.4 million for the years ended July 31, 2005 and 2004, respectively, 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.



The Company
had federal and state tax net operating loss carryforwards at July 31, 2005 of approximately $783.2 million and $161.9 million, respectively. The federal and state tax loss carryforwards will begin to expire in 2018 and 2005, respectively.
Included in the net operating loss carryforwards are stock option deductions of approximately $49.6 million. The benefits of these stock option deductions approximate $17.3 million and will be credited to additional paid-in capital when realized or
recognized. The Company also has federal and state research tax credit carryforwards of approximately $9.5 million and $4.9 million respectively, which will begin to expire in 2019 and 2014, respectively. Under provisions of the Internal Revenue
Code, certain substantial changes in the Companys ownership over a three year period may significantly limit the amount of the net operating loss carryforwards and research and development credit carryforwards, which can be utilized each year
in future periods to offset taxable income.



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, 2005 or July 31, 2004.



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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, if any.
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 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 133,934,980 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, 2005, there were no shares related to immediate option exercises subject to repurchase by the Company through fiscal 2006.



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 years ended July 31, 2005, 2004 and 2003.



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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 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, 2005, 2004 and 2003, 578,333, 641,520 and 869,370 shares of common stock were issued
under the plan, respectively. Effective May 1, 2005, the Company terminated the Employee Stock Purchase Plan.



Non-Employee Director Option Plan



The Company has a Non-Employee Director Option Plan (the Director Plan) under which a total of 1,980,000 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 120,000, 120,000 and 210,000 options under the Director Plan during the years ended July 31,
2005, 2004 and 2003, respectively. At July 31, 2005, 1,380,000 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 through the year ended July 31, 2001, the Company recorded
deferred stock compensation equal to 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, 2005, 2004 and 2003, the Company recorded stock-based compensation expense
relating to these options and restricted shares totaling $1.6 million, $5.7 million and $8.8 million, respectively. During the years ended July 31, 2005, 2004 and 2003, the Company reversed deferred stock compensation of $0.1 million, $0.4
million and $3.9 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, 2004 and 2003, the Company granted 6,000 and 18,000 shares of fully vested non-forfeitable common stock awards to
non-employees, respectively, and recognized compensation expense of $22,500 and $40,000, 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, 2004 and 2003, respectively: weighted-average risk free interest rates of 3.2% and 3.0%, weighted-average expected option life of 5.0 and 3.8 years, no dividend yield and 98% and 100% volatility.



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Stock Option Activity



Stock option activity under all of the Companys stock plans during the three years ended July 31, 2005 is
summarized as follows:



|                             |  |                 |   |  |                                |      
|---------------------------- |  | --------------- | - |  | ------------------------------ | -----
|                             |  | Number ofShares |   |  | Weighted AverageExercise Price
|Outstanding at July 31, 2003 |  | 30,188,328      |   |  | $                              | 7.44 
|                             |  |                 |   |  |                                |      
|Options granted              |  | 4,191,700       |   |  |                                | 3.80 
|Options exercised            |  | (1,582,635      | ) |  |                                | 3.00 
|Options canceled             |  | (1,950,921      | ) |  |                                | 11.04
|                             |  |                 |   |  |                                |      
|Outstanding at July 31, 2004 |  | 30,846,472      |   |  | $                              | 6.95 
|                             |  |                 |   |  |                                |      
|Options granted              |  | 1,626,500       |   |  |                                | 3.77 
|Options exercised            |  | (1,595,084      | ) |  |                                | 2.65 
|Options canceled             |  | (4,192,193      | ) |  |                                | 7.15 
|                             |  |                 |   |  |                                |      
|Outstanding at July 31, 2005 |  | 26,685,695      |   |  | $                              | 6.98 
|                             |  |                 |   |  |                                |      



The following table
summarizes information about stock options outstanding at July 31, 2005:



|                            |  |                            |  |                                      |  |                              |       |                   |            |                              |   |      
|--------------------------- |  | -------------------------- |  | ------------------------------------ |  | ---------------------------- | ----- | ----------------- | ---------- | ---------------------------- | - | -----
|                            |  | Options Outstanding        |  | Vested Options Exercisable          
|Range of    Exercise Prices |  | Number ofSharesOutstanding |  | WeightedAverageRemainingContractLife |  | WeightedAverageExercisePrice |       | NumberExercisable |            | WeightedAverageExercisePrice
|$  0.11$    3.34           |  | 8,616,085                  |  | 6.3                                  |  | $                            | 2.94  |                   | 7,764,005  |                              | $ | 2.95 
|$  3.37$    4.59           |  | 7,755,567                  |  | 8.2                                  |  | $                            | 3.80  |                   | 3,685,107  |                              | $ | 3.86 
|$  4.60$    4.89           |  | 5,343,495                  |  | 6.4                                  |  | $                            | 4.88  |                   | 5,323,991  |                              | $ | 4.88 
|$  4.91$  12.67            |  | 3,975,323                  |  | 5.0                                  |  | $                            | 9.44  |                   | 3,900,023  |                              | $ | 9.50 
|$15.63$154.00              |  | 995,225                    |  | 5.0                                  |  | $                            | 68.08 |                   | 956,412    |                              | $ | 69.39
|                            |  |                            |  |                                      |  |                              |       |                   |            |                              |   |      
|$  0.11$154.00             |  | 26,685,695                 |  | 6.6                                  |  | $                            | 6.98  |                   | 21,629,538 |                              | $ | 7.70 
|                            |  |                            |  |                                      |  |                              |       |                   |            |                              |   |      



At July 31, 2004
and 2003, approximately 20.6 million and 14.6 million outstanding options were vested and exercisable, respectively. The weighted average exercise prices for vested and exercisable outstanding options were $7.96 and $9.08 at July 31,
2004 and 2003, respectively.



Treasury Stock



At July 31, 2003, the Company held 147,000 shares of treasury stock,
recorded at the acquisition cost of $11,000. 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 either retired or
reissued upon the exercise of options or the issuance of other stock-based equity awards. During the years ended July 31, 2005 and 2004, the Company retired 14,000 shares and 436,000 shares of treasury stock at its acquisition cost of
approximately $0 and $36,000.



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 $0.4 million, $0.5 million and $0.5 million to the plan during fiscal 2005, 2004 and 2003, respectively.



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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. An executive officer of the Company also attends meetings of the Board of Directors of Tejas for the sole purpose of representing the Companys business interests, if
any. 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 years ended July 31, 2005 and 2003, the Company recognized revenue relating to transactions with Tejas of $0.1 million and $0.2 million, respectively.
During the year ended July 31, 2004, the Company did not engage in any material transactions with Tejas.



10. Restructuring Charges and Related Asset Impairments



In early 2001, the telecommunications industry began a severe decline which had a significant impact on our business. In response to the
telecommunications industry downturn and to reposition the Company to changing market requirements, we enacted four separate 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), the third in the fourth quarter of fiscal 2002 (the fourth quarter fiscal 2002 restructuring), and the fourth in the third quarter of
fiscal 2005 (the third quarter fiscal 2005 restructuring). During fiscal 2002, as a result of the combined activity under all of the restructuring programs, 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 expenses$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). During fiscal 2003, due to various changes in estimates relating to the prior restructuring programs, the Company recorded a credit of $0.5 million
classified as cost of revenue, and a net credit of $4.4 million classified as operating expenses. During the fourth quarter of fiscal 2004, the Company recorded a net charge of $0.3 million to operating expense resulting from changes in estimates
relating to its restructuring programs. During fiscal 2005, due to changes in estimates relating to its restructuring programs, the Company recorded a net charge of $0.4 million to operating expense. In the event that other contingencies associated
with the restructuring programs occur, or the estimates associated with the restructuring programs are revised, the Company may be required to record additional charges or credits against the reserves previously recorded for its restructuring
programs.



As of July 31, 2005, the future restructuring
cash payments of $8.5 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2007, potential legal matters and contractual commitments associated with the restructuring programs.



Details regarding each of the restructuring programs are
described below.



Fiscal 2001 Restructuring:



The fiscal 2001 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. The Company 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 discontinued product lines, which was classified as cost of revenue. The restructuring charges included amounts accrued
for potential legal matters, administrative expenses and professional fees associated with the restructuring programs, including employment termination related claims. The Company substantially completed the fiscal 2001 restructuring program during
the first half of fiscal 2002.



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First Quarter Fiscal 2002 Restructuring:



The first quarter fiscal 2002 restructuring program included a workforce
reduction of 239 employees, consolidation of excess facilities and charges related to excess inventory and other asset impairments. As a result, 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 restructuring charges included $7.1 million of costs relating to the workforce reduction, $11.2 million related to the write-down of certain land, lease terminations
and non-cancelable lease costs and $6.0 million for potential legal matters, administrative expenses and professional fees associated with the restructuring programs, including employment termination related claims. The restructuring charges also
included $102.4 million for inventory write-downs and non-cancelable purchase commitments for inventories due to a severe decline in the forecasted demand for the Companys products and $53.1 million for asset impairments related to the
Companys vendor financing agreements and fixed assets that the Company abandoned. 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 net $3.8 million credit to operating expenses relating to various changes in estimates. The changes in estimates consisted of a $8.4 million reduction in potential legal matters associated with the
restructuring programs and the reversal of an accrued liability of $0.8 million for workforce reductions, partially offset by $5.6 million of additional facility consolidation charges. During the third and fourth quarters of fiscal 2003, the Company
recorded a net $0.1 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted of a $4.5 million reduction in potential legal matters associated with the restructuring programs, partially offset by
$4.4 million of additional facility consolidation charges due to less favorable sublease assumptions. In addition, the Company recorded a $1.0 million non-cash charge to operating expenses for the write-down of certain land and a $0.5 million credit
to cost of revenue relating to a favorable settlement with a supplier. During the fourth quarter of fiscal 2004, the Company recorded a net $0.3 million charge to operating expenses for additional facility consolidation charges due to less favorable
sublease assumptions. During the second quarter of fiscal 2005, due to less favorable sublease assumptions, the Company recorded a net $0.9 million charge to operating expenses.



Fourth Quarter Fiscal 2002 Restructuring:



The fourth quarter fiscal 2002 restructuring program included a workforce reduction of 225 employees, 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 stand-alone transport products, including the SN 8000 Intelligent Optical
Transport Node and the SN 10000 Intelligent Optical Transport System. As a result, 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 restructuring charges included $8.7 million of costs relating to the
workforce reduction, $5.6 million for lease terminations and non-cancelable lease costs and $14.5 million relating to potential legal matters, contractual commitments, administrative expenses and professional fees related to the restructuring
programs, including employment termination related claims. The restructuring charges also included $22.6 million of costs relating to asset impairments, which primarily included fixed assets that were disposed of, or abandoned, due to the
rationalization of the Companys product offerings and the consolidation of excess facilities. The fourth quarter fiscal 2002 restructuring program was substantially completed during the first half of fiscal 2003.



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During the third and fourth quarters of fiscal 2003, the Company recorded a net $4.4 million credit to
operating expenses due to various changes in estimates. The changes in estimates consisted of a $4.1 million reduction in potential legal matters associated with the restructuring programs and a $0.8 million reduction in the costs associated with
the workforce reduction, partially offset by $0.5 million of additional facility consolidation charges. In addition, the Company recorded a $0.9 million credit to operating expenses relating to proceeds received from the disposal of certain
equipment. During the second quarter of fiscal 2005, due to an early lease termination, the Company recorded a net credit of $0.6 million to operating expenses.



As of July 31, 2005, the future restructuring cash payments for the fiscal 2001, the first quarter fiscal 2002 and the fourth quarter fiscal 2002
restructuring programs of $8.4 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2007 and certain other costs.



The restructuring charges and related asset impairments recorded in the fiscal 2001, the first quarter fiscal 2002 and the
fourth quarter fiscal 2002 restructuring programs, and the reserve activity since that time, are summarized as follows (in thousands):



|                                                |  |                              |         |                  |   |          |  |             |         |                                 |   |          |  |             |        |  |                                 |       |  |   |      |   |  |   |      
|----------------------------------------------- |  | ---------------------------- | ------- | ---------------- | - | -------- |  | ----------- | ------- | ------------------------------- | - | -------- |  | ----------- | ------ |  | ------------------------------- | ----- |  | - | ---- | - |  | - | -----
|                                                |  | Original RestructuringCharge |         | Non-cash Charges |   | Payments |  | Adjustments |         | Accrual Balance atJuly 31, 2004 |   | Payments |  | Adjustments |        |  | Accrual Balance at July 31,2005
|Workforce reduction                             |  | $                            | 19,993  |                  | $ | 1,816    |  | $           | 16,438  |                                 | $ | 1,739    |  | $           |       |  | $                               |      |  | $ |     |   |  | $ |     
|Facility consolidations and certain other costs |  |                              | 61,750  |                  |   | 9,786    |  |             | 33,637  |                                 |   | 6,322    |  |             | 12,005 |  |                                 | 3,976 |  |   | (353 | ) |  |   | 8,382
|Inventory and asset write-downs                 |  |                              | 315,373 |                  |   | 210,149  |  |             | 94,420  |                                 |   | 10,804   |  |             |       |  |                                 |      |  |   |     |   |  |   |     
|Losses on investments                           |  |                              | 24,845  |                  |   | 24,845   |  |             |        |                                 |   |         |  |             |       |  |                                 |      |  |   |     |   |  |   |     
|                                                |  |                              |         |                  |   |          |  |             |         |                                 |   |          |  |             |        |  |                                 |       |  |   |      |   |  |   |      
|Total                                           |  | $                            | 421,961 |                  | $ | 246,596  |  | $           | 144,495 |                                 | $ | 18,865   |  | $           | 12,005 |  | $                               | 3,976 |  | $ | (353 | ) |  | $ | 8,382
|                                                |  |                              |         |                  |   |          |  |             |         |                                 |   |          |  |             |        |  |                                 |       |  |   |      |   |  |   |      



Third Quarter
Fiscal 2005 Restructuring:



During the third quarter
of fiscal 2005, the Company enacted a fourth restructuring plan and reduced its workforce by approximately 20 employees due to a rationalization of certain R&D initiatives. The Company recorded a restructuring charge of $0.7 million that was
comprised of expenses related to the workforce reduction and contract termination costs. As a result of the third quarter fiscal 2005 restructuring, the Company wrote down $0.2 million of certain development assets to their fair value based on the
expected discounted cash flows they would generate over their remaining economic life. Due to the short remaining economic life and current market conditions for such assets, the fair value of these assets was estimated to be zero.



As of July 31, 2005, the future restructuring cash payments of $0.1
million consist primarily of expenses related to the workforce reduction and contract termination costs which will be paid in the first quarter of fiscal 2006.



The restructuring charges for the third quarter fiscal 2005 restructuring plan and the reserve activity as of July 31, 2005 are summarized as
follows (in thousands):



|                           |  |                             |     |                  |   |          |  |                                  |     |  |   |   
|-------------------------- |  | --------------------------- | --- | ---------------- | - | -------- |  | -------------------------------- | --- |  | - | --
|                           |  | OriginalRestructuringCharge |     | Non-cash Charges |   | Payments |  | Accrual Balance at July 31, 2005
|Workforce reduction        |  | $                           | 445 |                  | $ |         |  | $                                | 412 |  | $ | 33
|Contract termination costs |  |                             | 278 |                  |   | 9        |  |                                  | 229 |  |   | 40
|                           |  |                             |     |                  |   |          |  |                                  |     |  |   |   
|Total                      |  | $                           | 723 |                  | $ | 9        |  | $                                | 641 |  | $ | 73
|                           |  |                             |     |                  |   |          |  |                                  |     |  |   |   



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11. Commitments and Contingencies



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, which is the operative 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 claims against the Company, several of the Individual Defendants and the underwriters
for violations under Sections 11 and 15 of the Securities Act of 1933, as amended (the Securities Act), primarily based on the assertion that the Companys lead underwriters, the Company and several of the Individual Defendants made
material false and misleading statements in the Companys Registration Statements and Prospectuses filed with the Securities and Exchange Commission, or 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. 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 of 1934, as amended (the Exchange Act), primarily based on
the assertion that the Companys lead underwriters, the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of material fact
during the period in question. The amended complaint seeks damages in an unspecified amount.



The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. Due to the large number of nearly identical actions, the Court has
ordered the parties to select up to twenty test cases. To date, along with sixteen other cases, the Companys case has been selected as one such test case. As a result, among other things, the Company will be subject to broader
discovery obligations and expenses in the litigation than non-test case issuer defendants.



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. This dismissal
disposed of the Section 15 and Section 20(a) claims without prejudice, because these claims were asserted only against the Individual Defendants. On October 13, 2004, the court denied the certification of a class in the action against
the Company with respect to the Section 11 claims alleging that the defendants made material false and misleading statements in the Companys Registration Statement and Prospectuses. The certification was denied because no class
representative purchased shares between the date of the IPO and January 19, 2000 (the date unregistered shares entered the market), and thereafter suffered a loss on the sale of those shares. The court certified a class in the action against
the Company with respect to the Section 10(b) claims alleging that the Company and the Individual Defendants defrauded investors by participating in a fraudulent scheme and by making materially false and misleading statements and omissions of
material fact during the period in question.



The Company, the
Individual Defendants, the plaintiff class and the vast majority of the other approximately three hundred issuer defendants and the individual defendants currently or formerly associated with those companies approved a settlement and related
agreements (the Settlement Agreement) which set forth the terms of a settlement between these parties. Among other provisions, the Settlement Agreement provides for a release of the Company and the Individual Defendants for the conduct
alleged in the action to be wrongful and for the Company to undertake certain responsibilities, including agreeing to assign away, not assert, or release, certain potential claims the Company may have against its underwriters. In addition, no
payments will be required by the issuer defendants under the Settlement Agreement to the extent plaintiffs



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recover at least $1 billion from the underwriter defendants, who are not parties to the Settlement Agreement and have filed a memorandum of law in opposition
to the approval of the Settlement Agreement. To the extent that plaintiffs recover less than $1 billion from the underwriter defendants, the approximately three-hundred issuer defendants are required to make up the difference. It is anticipated that
any potential financial obligation of the Company to plaintiffs pursuant to the terms of the Settlement Agreement will be covered by existing insurance. The Company currently is not aware of any material limitations on the expected recovery of any
potential financial obligation to the plaintiffs from the Companys insurance carriers. The Companys insurance carriers are solvent, and the Company is not aware of any uncertainties as to the legal sufficiency of an insurance claim with
respect to any recovery by the plaintiffs. Therefore, we do not expect that the Settlement Agreement will involve any payment by the Company. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs
from the Companys insurance carriers should arise, the Companys maximum financial obligation to plaintiffs pursuant to the Settlement Agreement would be less than $3.4 million. On February 15, 2005, the Court granted preliminary
approval of the settlement agreement, subject to certain modifications consistent with its opinion. Those modifications have been made. There is no assurance that the court will grant final approval to the settlement. If the Settlement Agreement is
not approved and the Company is found liable, we are unable to estimate or predict the potential damages that might be awarded, whether such damages would be greater than the Companys insurance coverage, and whether such damages would have a
material impact on our results of operations or financial condition in any future period.



On April 1, 2003, a complaint was filed against the Company in the United States Bankruptcy Court for the Southern District of New York by the creditors committee (the Committee) of 360networks
(USA), inc. and 360networks services inc. (the Debtors). The Debtors are the subject of a Chapter 11 bankruptcy proceeding but are not plaintiffs in the complaint filed by the Committee. The complaint seeks recovery of alleged
preferential payments in the amount of approximately $16.1 million, plus interest. The Committee alleges that the Debtors made the preferential payments under Section 547(b) of the Bankruptcy Code to the Company during the 90-day period prior
to the Debtors bankruptcy filing. The Company believes that the claims against it are mostly without merit and has been defending against the complaint vigorously.



The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. On a
quarterly basis, the Company reviews its commitments and contingencies to reflect the effect of ongoing negotiations, settlements, rulings, advice of counsel, and other information and events pertaining to a particular case. We are also subject to
potential tax liabilities associated with ongoing tax audits by various tax authorities. As a result, during the third quarter of fiscal 2005, the Company accrued $10.3 million associated with contingencies related to claims, litigation and other
disputes and tax matters. While we believe the amounts accrued are adequate, any subsequent change in our estimates will be recorded at such time the change is probable and estimable.



Guarantees



FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation assumed under that guarantee. The initial recognition and
measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002 for those items that only require disclosure. As of July 31, 2005, the Companys guarantees requiring disclosure consist of its
accrued warranty obligations and indemnifications for intellectual property infringement claims.



In the normal course of business, the Company may also agree to indemnify other parties, including customers, lessors and parties to other transactions
with the Company, with respect to certain matters. The Company has also agreed to indemnify certain officers and directors. The Company has agreed to hold these other parties harmless against losses arising from a breach of representations or
covenants, or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made



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and the amount of the claim. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history
of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company, if any, under these agreements have not had a material impact on the Companys operating
results or financial position. Accordingly, the Company has not recorded a liability for these agreements as the Company believes the fair value is not material.



Warranty liability



The Company records a warranty liability for parts and labor on its products at the time revenue is recognized. Warranty periods are generally three years
from installation date. The estimate of the warranty liability is based primarily on the Companys historical experience in product failure rates and the expected material and labor costs to provide warranty services.



The following table summarizes the activity related to the product warranty
liability (in thousands):



|                                               |  |                     |       |   |      |   |        |  
|---------------------------------------------- |  | ------------------- | ----- | - | ---- | - | ------ | -
|                                               |  | Year Ended July 31, |      
|                                               |  | 2005                |       |   | 2004 |  
|Beginning Balance                              |  | $                   | 2,017 |   |      | $ | 4,651  |  
|Adjustments relating to preexisting warranties |  |                     | (430  | ) |      |   | (2,100 | )
|Accruals for warranties during the period      |  |                     | 959   |   |      |   | 654    |  
|Settlements                                    |  |                     | (892  | ) |      |   | (1,188 | )
|                                               |  |                     |       |   |      |   |        |  
|Ending Balance                                 |  | $                   | 1,654 |   |      | $ | 2,017  |  
|                                               |  |                     |       |   |      |   |        |  



65



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12. Selected Quarterly Financial Data (Unaudited)



|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|-------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------- | - | ------- | -------------------- |  | - | ---------------- | - |  | -------------- | ------- | - | ------------- | - | ------- | - |  | - | ------ | -
|                                                   |  | October 30, 2004                         |         |   | October 30, 2004 |   |         | January 29, 2005     |  |   | January 29, 2005 |   |  | April 30, 2005 |         |   | July 31, 2005 |  
|                                                   |  | Aspreviouslyreported                     |         |   | Asrestated       |   |         | Aspreviouslyreported |  |   | Asrestated       |   |  |                |         |   |               |  
|                                                   |  | (in thousands, except per share amounts) |        
|Consolidated Statement of Operations Data:         |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Revenue                                            |  | $                                        | 14,215  |   |                  | $ | 14,215  |                      |  | $ | 14,892           |   |  | $              | 14,892  |   |               | $ | 17,848  |   |  | $ | 18,479 |  
|Cost of revenue                                    |  |                                          | 8,633   |   |                  |   | 8,664   |                      |  |   | 8,449            |   |  |                | 8,480   |   |               |   | 8,881   |   |  |   | 7,912  |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Gross profit                                       |  |                                          | 5,582   |   |                  |   | 5,551   |                      |  |   | 6,443            |   |  |                | 6,412   |   |               |   | 8,967   |   |  |   | 10,567 |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Operating expenses:                                |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Research and development                           |  |                                          | 11,672  |   |                  |   | 11,672  |                      |  |   | 11,217           |   |  |                | 11,217  |   |               |   | 10,676  |   |  |   | 9,094  |  
|Sales and marketing                                |  |                                          | 3,144   |   |                  |   | 3,144   |                      |  |   | 3,011            |   |  |                | 3,011   |   |               |   | 2,630   |   |  |   | 3,040  |  
|General and administrative                         |  |                                          | 2,248   |   |                  |   | 2,248   |                      |  |   | 1,932            |   |  |                | 1,932   |   |               |   | 2,013   |   |  |   | 2,967  |  
|Stock-based compensation                           |  |                                          | 508     |   |                  |   | 548     |                      |  |   | 266              |   |  |                | 306     |   |               |   | 262     |   |  |   | 150    |  
|Reserve for contingencies                          |  |                                          |        |   |                  |   |        |                      |  |   |                 |   |  |                |        |   |               |   | 10,282  |   |  |   |       |  
|Restructuring charges related to asset impairments |  |                                          |        |   |                  |   |        |                      |  |   |                 |   |  |                |        |   |               |   | 679     |   |  |   |       |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Total operating expenses                           |  |                                          | 17,572  |   |                  |   | 17,612  |                      |  |   | 16,426           |   |  |                | 16,466  |   |               |   | 26,542  |   |  |   | 15,251 |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Loss from operations                               |  |                                          | (11,990 | ) |                  |   | (12,061 | )                    |  |   | (9,983           | ) |  |                | (10,054 | ) |               |   | (17,575 | ) |  |   | (4,684 | )
|Interest and other income, net                     |  |                                          | 4,198   |   |                  |   | 4,198   |                      |  |   | 4,672            |   |  |                | 4,672   |   |               |   | 5,595   |   |  |   | 6,183  |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Loss before income taxes                           |  |                                          | (7,792  | ) |                  |   | (7,863  | )                    |  |   | (5,311           | ) |  |                | (5,382  | ) |               |   | (11,980 | ) |  |   | 1,499  |  
|Income tax expense                                 |  |                                          |        |   |                  |   |        |                      |  |   |                 |   |  |                |        |   |               |   |        |   |  |   | 63     |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Net loss                                           |  | $                                        | (7,792  | ) |                  | $ | (7,863  | )                    |  | $ | (5,311           | ) |  | $              | (5,382  | ) |               | $ | (11,980 | ) |  | $ | 1,436  |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  
|Basic and diluted net loss per share               |  | $                                        | (0.03   | ) |                  | $ | (0.03   | )                    |  | $ | (0.02            | ) |  | $              | (0.02   | ) |               | $ | (0.04   | ) |  | $ | 0.01   |  
|                                                   |  |                                          |         |   |                  |   |         |                      |  |   |                  |   |  |                |         |   |               |   |         |   |  |   |        |  



|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|------------------------------------------ |  | ---------------------------------------- | ------- | - | ---------------- | - | ------- | -------------- |  | - | ------------- | - |  | - | ------- | -
|                                           |  | October 25, 2003                         |         |   | January 24, 2004 |   |         | April 24, 2004 |  |   | July 31, 2004 |  
|                                           |  | (in thousands, except per share amounts) |        
|Consolidated Statement of Operations Data: |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Revenue                                    |  | $                                        | 8,441   |   |                  | $ | 6,875   |                |  | $ | 14,718        |   |  | $ | 14,513  |  
|Cost of revenue                            |  |                                          | 5,933   |   |                  |   | 4,454   |                |  |   | 9,929         |   |  |   | 8,917   |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Gross profit                               |  |                                          | 2,508   |   |                  |   | 2,421   |                |  |   | 4,789         |   |  |   | 5,596   |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Operating expenses:                        |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Research and development                   |  |                                          | 11,298  |   |                  |   | 11,751  |                |  |   | 11,257        |   |  |   | 11,386  |  
|Sales and marketing                        |  |                                          | 4,411   |   |                  |   | 4,345   |                |  |   | 4,896         |   |  |   | 4,456   |  
|General and administrative                 |  |                                          | 1,968   |   |                  |   | 1,482   |                |  |   | 1,642         |   |  |   | 2,274   |  
|Stock-based compensation                   |  |                                          | 1,250   |   |                  |   | 1,710   |                |  |   | 1,040         |   |  |   | 880     |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Total operating expenses                   |  |                                          | 18,927  |   |                  |   | 19,288  |                |  |   | 18,835        |   |  |   | 18,996  |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Loss from operations                       |  |                                          | (16,419 | ) |                  |   | (16,867 | )              |  |   | (14,046       | ) |  |   | (13,400 | )
|Interest and other income, net             |  |                                          | 4,268   |   |                  |   | 3,895   |                |  |   | 3,485         |   |  |   | 4,242   |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Loss before income taxes                   |  |                                          | (12,151 | ) |                  |   | (12,972 | )              |  |   | (10,561       | ) |  |   | (9,158  | )
|Income tax expense                         |  |                                          |        |   |                  |   |        |                |  |   |              |   |  |   |        |  
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Net loss                                   |  | $                                        | (12,151 | ) |                  | $ | (12,972 | )              |  | $ | (10,561       | ) |  | $ | (9,158  | )
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  
|Basic and diluted net loss per share       |  | $                                        | (0.04   | ) |                  | $ | (0.05   | )              |  | $ | (0.04         | ) |  | $ | (0.03   | )
|                                           |  |                                          |         |   |                  |   |         |                |  |   |               |   |  |   |         |  



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



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosure Controls and Procedures. Our management (with the participation of our Chief Executive Officer and Chief Financial
Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of July 31, 2005. Disclosure
controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such
information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been or will be detected. These inherent limitations include the fact that there are resource constraints, and that the benefits of controls must be considered relative to their costs.



In June 2005, the Company announced that the Audit Committee of its Board
of Directors had initiated an independent investigation into the accounting for stock options. The independent investigation identified certain stock options granted during calendar years 1999 to 2001 that were erroneously accounted for under
generally accepted accounting principles (GAAP). The options identified consisted of: (i) six new employee stock option grants in which employment start date records were deliberately modified and six existing stock option grants
that were deliberately cancelled and reissued, in both cases, to provide a lower exercise price for these stock options, (ii) options granted under the April 14, 2000 broad based stock option grant program, where from a review of
supporting records it appeared that the number of options granted likely was not ultimately determined until April 26, 2000, (iii) three stock option grants that continued to vest following a change in the grantees employment status
without the Company recording an appropriate corresponding stock compensation charge, and (iv) one stock option grant that was improperly accounted for due to an inadvertent recording error. The employees directing the stock option program in
the period from 1999 to 2001 are no longer employed by the Company.



As a result of these findings, the Company determined that it had erroneously accounted for non-cash stock-based compensation charges associated with such stock option grants. Accordingly, on August 25, 2005 and subsequently on
August 31, 2005, the Companys Board of Directors, upon the recommendation of Sycamores management, concluded that the Companys financial statements for the years ended July 31, 2004, 2003 and 2002, and for the first and
second quarters of the year ended July 31, 2005 should be restated to reflect the additional non-cash stock compensation expense amortized over the vesting period of the identified stock options.



In connection with the preparation of the Companys amended Form 10-K/A
for the year ended July 31, 2004, the Company determined that the pro forma disclosures for stock-based compensation expense required under Statement of Financial Accounting Standards No. 123 (SFAS 123) included in Note 2 to
its Original filing of its Form 10-K for the year ended July 31, 2004 were incorrect due to errors related to the calculation of the effect of a stock option exchange program that took place on June 20, 2001 and accordingly such
disclosures should be restated. In addition, the Company determined that the disclosures of its net deferred tax assets included in Note 7 Income Taxes to its Original filing of its Form 10-K for the year ended July 31, 2004 were
incorrect due to a miscalculation of its net operating loss carryforwards and accordingly such disclosures should be restated. These errors do not have any impact on the Companys consolidated statements of operations, consolidated balance
sheets or consolidated statements of cash flows for any period.



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A material weakness is a control deficiency, or combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.



As discussed in our Form 10-Q for the period ended April 30, 2005, the Company determined that a material weakness in its internal control over
financial reporting existed as of April 30, 2005. Specifically, as a result of the independent investigation into the Companys stock option accounting practices, management determined that the Company did not maintain effective controls
over the completeness and accuracy of its accounting for and monitoring of its non-cash stock-based accounting and related financial statement disclosures, including the validity of its recording of various stock option transactions. This control
deficiency resulted in managements failure to detect errors as a result of both deliberate and inadvertent actions by certain former employees with regard to stock option accounting and resulted in the restatement of the Companys
consolidated financial statements for the years ended July 31, 2004, 2003, 2002 and for the first and second quarters of the year ended July 31, 2005. In addition, the restatement will include the selected financial data for the years
ended July 31, 2001 and 2000 and adjustments to the consolidated financial statements for the third quarter for the year ended July 31, 2005 prior to its issuance. Additionally, this control deficiency could result in a misstatement of
non-cash stock-based compensation expense, additional paid-in capital, accumulated deficit and deferred compensation and financial statement disclosures related to stock options that could result in a material misstatement to the interim or annual
consolidated financial statements that would not be prevented or detected. Accordingly, the Company has determined that this control deficiency constituted a material weakness.



Therefore, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of April 30,
2005, our disclosure controls and procedures were not effective for the reasons described in the preceding paragraphs.



Remediation of Material Weakness in Internal Control over Financial Reporting



To address the findings of the independent investigation and the Companys subsequent analysis which led to the
determination of the existence of a material weakness in the Companys internal control over financial reporting related to non-cash stock-based accounting, the Company implemented a series of remedial actions during the fourth quarter of
fiscal year 2005, including a) an improved process to certify employee start dates, b) the stock administration group no longer having system administrator access to the Companys stock option database, and c) a resolution of the Compensation
Committee of the Board of Directors rescinding previously delegated power for executive officers to authorize broad based stock option grants. These actions were in addition to an organizational change that took effect in July 2003, in which the
stock administration function was placed under the direct supervision of the corporate controller. In addition, as a result of the knowledge gained during the independent investigation and the Companys preparation for the adoption of SFAS
123R, the Company implemented a more detailed and thorough review of the calculation of its pro forma stock-based compensation expense and related disclosures required under SFAS 123. Management has determined that these corrective actions, taken as
a whole, have remediated the material weakness described above.



Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter, except
as described above, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Limitations on Effectiveness of Controls. Our management has concluded that our disclosure controls and procedures and internal controls provide
reasonable assurance that the objectives of our control system are met. However, our management (including our chief executive officer and chief financial officer) does not expect that the disclosure controls and procedures or internal controls will
prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there



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are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected.



Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act as a process designed by, or under the supervision of, the Companys principal executive and principal financial
officers and effected by the Companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Our management assessed the effectiveness of our internal control over financial reporting as of July 31, 2005. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework.



Based on our assessment, management concluded that, as of July 31, 2005, our internal control over financial reporting
was effective based on those criteria.



Our managements
assessment of the effectiveness of our internal control over financial reporting as of July 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on
page 41.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



On July 5, 2005, we entered into Amendment No. 3 dated June 16, 2005, to the United States Reseller Agreement between Sycamore Networks,
Inc. and Sprint Communications Company, L.P. Government Systems Division dated January 6, 2004 (the Original Sprint Agreement). This amendment primarily updates certain pricing terms to the Original Sprint Agreement. A copy of this
amendment is attached as Exhibit 10.22 to this Annual Report on Form 10-K.



On June 8, 2005, we entered into Amendment No. 4 dated June 1, 2005, to the Original Sprint Agreement. This amendment primarily updates certain pricing terms to the Original Sprint Agreement. A copy of
this amendment is attached as Exhibit 10.23 to this Annual Report on Form 10-K.



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The following disclosures would otherwise have been filed during the first quarter of fiscal year 2006 on
Form 8-K under the heading Item 1.01. Entry into a Material Definitive Agreement.



On October 7, 2005, the Compensation Committee of the Board of Directors of Sycamore Networks, Inc. approved fiscal year 2006 salaries for the following executive officers: Richard J. Gaynor, Chief Financial Officer,
Vice President, Finance and Administration, Secretary and Treasurer, base salary of $235,000 and bonus of $115,000; Kevin J. Oye, Vice President, Systems and Technology, base salary of $225,000 and bonus of $110,000; John E. Dowling, Vice President,
Operations, base salary of $180,000; Araldo Menegon, Vice President, Worldwide Sales and Support, base salary of $200,000 and bonus of $200,000; Alan R. Cormier, General Counsel, base salary of $200,000. No other terms of the employment arrangements
for the executive officers have been modified. For further information see Item 11. Executive Compensation herein.



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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 captions Election of
Directors and Section 16(a) Beneficial Ownership Reporting Compliance appearing in the Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on December 19, 2005, which will be filed
with the Securities and Exchange Commission not later than 120 days after July 31, 2005, is incorporated herein by reference.



We have adopted a business code of ethics and corporate governance that applies to all executive officers, directors and employees of the Company. This
business code of ethics and corporate governance is available on our website at www.sycamorenet.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the
business code of ethics and corporate governance by posting such information on our website, at the address specified above, unless a Form 8-K is otherwise required by applicable rules of the Nasdaq National Market.



|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 2005 Annual Meeting of Stockholders to be held on December 19, 2005, which will be filed with the Securities and Exchange Commission not
later than 120 days after July 31, 2005, 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 and
Compensation and Other Information Concerning Executive Officers appearing in the Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on December 19, 2005 which will be filed with the
Securities and Exchange Commission not later than 120 days after July 31, 2005, is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The information set forth under the caption Certain Relationships and Related Transactions appearing in the Companys definitive Proxy
Statement for the 2005 Annual Meeting of Stockholders to be held on December 19, 2005, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2005, is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



The information set forth under the caption Principal Accounting Fees and Services appearing in the Companys definitive Proxy Statement
for the 2005 Annual Meeting of Stockholders to be held on December 19, 2005, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2005, is incorporated herein by reference.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



(a) 1. Financial Statements



The financial statements listed in the accompanying Index to Consolidated Financial Statements on page 41 are filed as part of this
report.



2. Financial Statement Schedules



None



3. Exhibits



|        |  |                                                                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Exhibit Description                                                                                                                                                                                                                                         
|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 (6)                                                                                                                                                        
|        | 
|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)(6)                                                                    
|        | 
|*10.1   |  | 1998 Stock Incentive Plan, as amended (1)                                                                                                                                                                                                                   
|        | 
|*10.2   |  | 1999 Non-Employee Directors Option Plan (1)                                                                                                                                                                                                                
|        | 
|*10.3   |  | 1999 Stock Incentive Plan, as amended (7)                                                                                                                                                                                                                   
|        | 
|*10.4   |  | 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)                                                                             
|        | 
|*10.5   |  | Form of Change in Control Agreement between Sycamore Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17, 1999 or August 5, 2002 (2)                                                                                    
|        | 
|10.6    |  | Lease Agreement between Sycamore Networks, Inc. and Farley White Associates, LLC dated March 23, 2000 (4)                                                                                                                                                   
|        | 
|*10.7   |  | Sirocco Systems, Inc. 1998 Stock Plan (5)                                                                                                                                                                                                                   
|        | 
|10.8    |  | Lease dated as of October 27, 2000, between Sycamore Networks, Inc. and BCIA New England Holdings LLC for One Executive Drive, Chelmsford, Massachusetts (6)                                                                                                
|        | 
|+10.9   |  | Manufacturing Services Agreement between Sycamore Networks, Inc. and Jabil Circuit, Inc. (7)                                                                                                                                                                
|        | 
|+10.10  |  | Manufacturing Services Agreement between Sycamore Networks, Inc. and Plexus Services Corp. (8)                                                                                                                                                              
|        | 
|10.11   |  | Lease Agreement between Sycamore Networks, Inc. and New Boston Mill Road Limited Partnership dated March 8, 2000 (3)                                                                                                                                        
|        | 
|++10.12 |  | Reseller Agreement dated January 6, 2004 between Sycamore Networks, Inc. and Sprint (9)                                                                                                                                                                     
|        | 
|++10.13 |  | Exhibit I dated February 25, 2004 to the Reseller Agreement dated January 6, 2004 between Sycamore Networks, Inc. and Sprint (10)                                                                                                                           
|        | 
|++10.14 |  | Master Purchase Agreement for Technical Equipment and Related Services dated April 22, 2004 between Sycamore Networks, Inc. and Sprint/United Management Company, including Amendment No. 1 dated
June 29, 2004 and Amendment No. 2 dated July 19, 2004 (11)



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|        |  |                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Exhibit Description                                                                                                                                                                                                                                             
|++10.15 |  | Amendment No. 1 to Manufacturing Services Agreement between Sycamore Networks, Inc. and Plexus Services Corp. dated July 26, 2004 (11)                                                                                                                          
|        | 
|*10.16  |  | Letter Agreement between Sycamore Networks, Inc. and Richard J. Gaynor (12)                                                                                                                                                                                     
|        | 
|*10.17  |  | Agreement and Release dated November 2, 2004 between Sycamore Networks, Inc. and Frances M. Jewels (12)                                                                                                                                                         
|        | 
|*10.18  |  | Letter Agreement between Sycamore Networks, Inc. and Alan Cormier (13)                                                                                                                                                                                          
|        | 
|++10.19 |  | Lease Term Expiration Agreement between Sycamore Networks, Inc. and Farley White Associates, LLC dated January 21, 2005 (13)                                                                                                                                    
|        | 
|++10.20 |  | Agreement for the Provision of Hardware, Software, Training, Support and Maintenance and Project Management Services to Vodafone Limited between Vodafone Limited and Sycamore Networks, Inc.
dated November 16, 2000, as amended by amendments 1 through 5 (13)
|        | 
|++10.21 |  | Amendment No. 2 dated March 29, 2005 to the Reseller Agreement dated January 6, 2004 between Sycamore Networks, Inc. and Sprint (14)                                                                                                                            
|        | 
|++10.22 |  | Amendment No. 3 dated June 16, 2005 to the United States Reseller Agreement between Sycamore Networks, Inc. and Sprint Communications Company, L.P.
Government Systems Division dated January 6, 2004                                                           
|        | 
|++10.23 |  | Amendment No. 4 dated June 1, 2005 to the United States Reseller Agreement between Sycamore Networks, Inc. and Sprint Communications Company, L.P.
Government Systems Division dated January 6, 2004                                                            
|        | 
|++10.24 |  | Agreement for the Provision of Hardware, Software, Training, Support and Maintenance and Project Management Services to Vodafone Libertel N.V. dated June 12, 2002                                                                                              
|        | 
|++10.25 |  | Amendment No. 1 dated February 2, 2004 to Agreement for the Provision of Hardware, Software, Training, Support and Maintenance and Project Management Services to Vodafone Libertel N.V. dated
June 12, 2002                                                    
|        | 
|21.1    |  | List of subsidiaries                                                                                                                                                                                                                                            
|        | 
|23.1    |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                           
|        | 
|24.1    |  | Power of Attorney (see signature page)                                                                                                                                                                                                                          
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                              
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                              
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 
|        | 
|32.2    |  | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                 

---

|(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 30, 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 Annual Report on Form 10-K for the annual period ended July 31, 2000 filed with the Commission on October 24,
2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



73



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##### Table of Contents

|(6) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Sycamore Networks, Inc.s Annual Report on Form 10-K for the annual period ended July 31, 2003 filed with the Commission on October 21,
2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to Sycamore Networks, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended January 24, 2004 filed with the Commission on
February 12, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Sycamore Networks, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended April 24, 2004 filed with the Commission on
May 13, 2004.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to Sycamore Networks, Inc.s Annual Report on Form 10-K for the annual period ended July 31, 2004, filed with the Commission on August 23, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to Sycamore Networks, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended October 30, 2004 filed with the Commission on
November 18, 2004.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to Sycamore Networks, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended January 29, 2005 filed with the Commission on
February 25, 2005.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to Sycamore Networks, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005 filed with the Commission on
September 12, 2005.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Denotes a management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------

|+ | 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|++ | Confidential treatment requested 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) | Exhibits
| | --- | --------



The Company hereby files as part of this Form 10-K the exhibits listed in the Exhibit Index beginning on page 72.



| | (c) | Financial Statement Schedules:
| | --- | ------------------------------



None



74



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##### Table of Contents

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 11th day of October 2005.



|                        |  |                                      
|----------------------- |  | -------------------------------------
|SYCAMORE NETWORKS, INC.
|                        | 
|By:                     |  | /s/    DANIEL E. SMITH               
|                        |  | 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 Richard J. Gaynor, 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 11th day of October 2005.



|                                            |  |                                                                                                                                         
|------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                                            | 
|/s/    GURURAJ
DESHPANDEGururaj
Deshpande   |  | Chairman of the Board of Directors                                                                                                      
|                                            | 
|/s/    DANIEL E. SMITHDaniel E. Smith       |  | President, Chief Executive Officer and Director                                                                                         
|                                            | 
|/s/    RICHARD J.
GAYNORRichard J. Gaynor   |  | Chief Financial Officer, Vice President, Finance and Administration, Secretary and Treasurer(Principal Financial and Accounting
Officer)
|                                            | 
|/s/    TIMOTHY A.
BARROWSTimothy A.
Barrows |  | Director                                                                                                                                
|                                            | 
|/s/    PAUL W.
CHISHOLMPaul W. Chisholm     |  | Director                                                                                                                                
|                                            | 
|/s/    PAUL J. FERRIPaul J. Ferri           |  | Director                                                                                                                                
|                                            | 
|/s/    JOHN W.
GERDELMANJohn W.
Gerdelman   |  | Director                                                                                                                                



75