10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 24, 2004

OR

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

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-27273

SYCAMORE NETWORKS, INC.

(Exact name of registrant as specified in its charter)

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

220 Mill Road

Chelmsford, Massachusetts 01824

(Address of principal executive offices)

(Zip code)

(978) 250-2900

(Registrant’s telephone number, including area code)

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

The number of shares outstanding of the Registrant’s Common Stock as of January 31, 2004 was 273,038,378.

Sycamore Networks, Inc.

Index		Page No.
Part I.	Financial Information	3
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of January 24, 2004 and July 31, 2003	3
	Consolidated Statements of Operations for the three months and six months ended January 24, 2004 and January 25, 2003	4
	Consolidated Statements of Cash Flows for the six months ended January 24, 2004 and January 25, 2003	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34
Item 4.	Controls and Procedures	34
Part II.	Other Information	35
Item 1.	Legal Proceedings	35
Item 6.	Exhibits and Reports on Form 8-K	37
Signature		38
Exhibit Index		39

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Part I. Financial Information

Item 1. Financial Statements

Sycamore Networks, Inc.

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)

	January 24, 2004			July 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	301,638		$	250,595
Short-term investments		331,408			421,784
Accounts receivable, net of allowance for doubtful accounts of $4,132 and $4,184 at January 24, 2004 and July 31, 2003, respectively		3,994			10,769
Inventories		10,710			5,117
Prepaids and other current assets		4,389			3,680
Total current assets		652,139			691,945
Property and equipment, net		11,309			14,589
Long-term investments		344,900			323,204
Other assets		2,536			2,890
Total assets	$	1,010,884		$	1,032,628
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,346		$	3,475
Accrued compensation		2,759			3,545
Accrued warranty		3,896			4,651
Accrued expenses		4,530			4,203
Accrued restructuring costs		15,621			19,086
Deferred revenue		2,367			2,677
Other current liabilities		2,563			2,476
Total current liabilities		36,082			40,113
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized; none issued or outstanding		—			—
Common stock, $.001 par value; 2,500,000 shares authorized; 273,037 and 272,099 shares issued at January 24, 2004 and July 31, 2003, respectively		273			272
Additional paid-in capital		1,737,887			1,733,476
Accumulated deficit		(761,368	)		(736,192	)
Deferred compensation		(3,726	)		(6,822	)
Treasury stock, at cost, 0 and 147 shares held at January 24, 2004 and July 31, 2003, respectively		—			(11	)
Accumulated other comprehensive income		1,736			1,792
Total stockholders’ equity		974,802			992,515
Total liabilities and stockholders’ equity	$	1,010,884		$	1,032,628

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)

(unaudited)

	Three Months Ended						Six Months Ended
	January 24, 2004			January 25, 2003			January 24, 2004			January 25, 2003
Revenue:
Product	$	3,673		$	7,453		$	9,829		$	10,301
Service		3,202			3,372			5,487			6,462
Total revenue		6,875			10,825			15,316			16,763
Cost of revenue:
Product (exclusive of non-cash stock-based compensation expense of $77, $169, $157 and $338)		2,152			6,414			5,760			10,715
Service (exclusive of non-cash stock-based compensation expense of $100, $188, $200 and $375)		2,094			4,173			4,210			7,015
Stock-based compensation		177			357			357			713
Total cost of revenue		4,423			10,944			10,327			18,443
Gross profit (loss)		2,452			(119	)		4,989			(1,680	)
Operating expenses:
Research and development (exclusive of non-cash stock-based compensation expense of $1,106, $844, $1,790 and $1,718)		11,751			13,432			23,049			27,359
Sales and marketing (exclusive of non-cash stock-based compensation expense of $263, $516, $537 and $1,128)		4,345			5,070			8,756			10,012
General and administrative (exclusive of non-cash stock-based compensation expense of $399, $387, $746 and $918)		1,482			1,751			3,450			3,409
Stock-based compensation		1,768			1,747			3,073			3,764
Total operating expenses		19,346			22,000			38,328			44,544
Loss from operations		(16,894	)		(22,119	)		(33,339	)		(46,224	)
Interest and other income, net		3,895			6,002			8,163			12,745
Loss before income taxes		(12,999	)		(16,117	)		(25,176	)		(33,479	)
Provision for income taxes		—			—			—			—
Net loss	$	(12,999	)	$	(16,117	)	$	(25,176	)	$	(33,479	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.06	)	$	(0.09	)	$	(0.13	)
Weighted-average shares used in computing basic and diluted net loss per share		271,801			264,981			271,138			263,640

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)

(unaudited)

	Six Months Ended
	January 24, 2004			January 25, 2003
Cash flows from operating activities:
Net loss	$	(25,176	)	$	(33,479	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,982			12,388
Stock-based compensation		3,430			4,477
Provision for doubtful accounts		(52	)		—
Changes in operating assets and liabilities:
Accounts receivable		6,827			3,126
Inventories		(5,593	)		3,179
Prepaids and other current assets		(709	)		(2,464	)
Deferred revenue		(310	)		(3,049	)
Accounts payable		871			(1,568	)
Accrued expenses and other current liabilities		(1,127	)		(5,168	)
Accrued restructuring costs		(3,465	)		(17,691	)
Net cash used in operating activities		(19,322	)		(40,249	)
Cash flows from investing activities:
Purchases of property and equipment		(2,702	)		(2,347	)
Purchases of investments		(380,961	)		(300,503	)
Maturities of investments		449,585			514,115
Decrease in other assets		354			3,894
Net cash provided by investing activities		66,276			215,159
Cash flows from financing activities:
Proceeds from issuance of common stock		4,112			2,000
Purchase of treasury stock		(23	)		(143	)
Net cash provided by financing activities		4,089			1,857
Net increase in cash and cash equivalents		51,043			176,767
Cash and cash equivalents, beginning of period		250,595			172,658
Cash and cash equivalents, end of period	$	301,638		$	349,425

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

2. Basis of Presentation

The accompanying financial data as of January 24, 2004 and for the three and six months ended January 24, 2004 and January 25, 2003 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2003.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present a fair statement of financial position as of January 24, 2004 and results of operations and cash flows for the periods ended January 24, 2004 and January 25, 2003 have been made. The results of operations and cash flows for the periods ended January 24, 2004 are not necessarily indicative of the operating results and cash flows for the full fiscal year or any future periods.

3. 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 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 and restricted stock with exercise prices below fair market value on the date of grant.

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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):

	Three Months Ended						Six Months Ended
	January 24, 2004			January 25, 2003			January 24, 2004			January 25, 2003
Net loss:
As reported	$	(12,999	)	$	(16,117	)	$	(25,176	)	$	(33,479	)
Stock-based compensation expense included in reported net loss under APB 25		1,945			2,104			3,430			4,477
Stock-based compensation expense that would have been included in reported net loss if the fair value provisions of FAS 123 had been applied to all awards		(9,875	)		(11,713	)		(19,097	)		(27,993	)
Pro forma	$	(20,929	)	$	(25,726	)	$	(40,843	)	$	(56,995	)
Basic and diluted net loss per share:
As reported	$	(0.05	)	$	(0.06	)	$	(0.09	)	$	(0.13	)
Pro forma	$	(0.08	)	$	(0.10	)	$	(0.15	)	$	(0.22	)

The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future periods. The fair value of the stock options at the date of grant was estimated using the Black-Scholes model.

4. Net Loss Per Share

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

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

	Three Months Ended						Six Months Ended
	January 24, 2004			January 25, 2003			January 24, 2004			January 25, 2003
Numerator:
Net loss	$	(12,999	)	$	(16,117	)	$	(25,176	)	$	(33,479	)
Denominator:
Weighted-average shares of common stock outstanding		272,666			271,703			272,346			271,474
Weighted-average shares subject to repurchase		(865	)		(6,722	)		(1,208	)		(7,834	)
Shares used in per-share calculation – basic and diluted		271,801			264,981			271,138			263,640
Net loss per share:
Basic and diluted	$	(0.05	)	$	(0.06	)	$	(0.09	)	$	(0.13	)

Options to purchase 28.8 million and 29.8 million shares of common stock, at respective average exercise prices of $7.43 and $7.98, have not been included in the computation of diluted net loss per share for the three and six months ended January 24, 2004 and January 25, 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 three and six months ended January 25, 2003, as their effect would have been anti-dilutive. These warrants expired unexercised during the fiscal year ended July 31, 2003.

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5. Inventories

Inventories consisted of the following (in thousands):

	January 24, 2004		July 31, 2003
Raw materials	$	636	$	861
Work in process		1,036		498
Finished goods		9,038		3,758
	$	10,710	$	5,117

6. Comprehensive Loss

The components of comprehensive loss consisted of the following (in thousands):

	Three Months Ended						Six Months Ended
	January 24, 2004			January 25, 2003			January 24, 2004			January 25, 2003
Net loss	$	(12,999	)	$	(16,117	)	$	(25,176	)	$	(33,479	)
Unrealized gain (loss) on investments		849			641			(56	)		79
Comprehensive loss	$	(12,150	)	$	(15,476	)	$	(25,232	)	$	(33,400	)

7. Restructuring Charges and Related Asset Impairments

In fiscal 2001, the telecommunications industry began a severe decline which has impacted equipment suppliers, including the Company. In response to the telecommunications industry downturn, the Company enacted three 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”), and the third in the fourth quarter of fiscal 2002 (the “fourth quarter fiscal 2002 restructuring”). As a part of the Company’s fourth quarter fiscal 2002 restructuring program, the Company discontinued the development of its standalone transport products and focused its business exclusively on optical switching products. 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 as described below.

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 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. While the Company has reduced the accrual for potential legal matters based on its current estimate, given the inherent uncertainties involved in such matters, it is reasonably possible that the Company may incur a loss in addition to the amount accrued. In addition, 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.

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As of January 24, 2004, the Company had $15.6 million in accrued restructuring costs, consisting primarily of $15.1 million of accrued liabilities for facility consolidations. 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. In the fourth quarter of fiscal 2002, the Company recorded a net $2.1 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted primarily of $4.7 million of additional facility consolidation charges due to less favorable sublease assumptions, offset by a $6.7 million reduction in the potential legal matters associated with the restructuring programs. During the third and fourth quarters of fiscal 2003, the Company recorded a net $1.3 million charge to operating expenses due to various changes in estimates. The changes in estimates consisted of $3.6 million of additional facility consolidation charges due to less favorable sublease assumptions, partially offset by a $2.3 million reduction in potential legal matters associated with the restructuring programs. As of January 24, 2004, the projected future cash payments of $11.2 million consist of facility consolidation charges that will be paid over the respective lease terms through fiscal 2007, and potential legal matters associated with the restructuring programs.

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

	Original Restructuring Charge		Non- cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	4,174	$	829	$	3,203	$	142	$	—	$	—	$	—
Facility consolidations and certain other costs		24,437		1,214		9,675		658		12,890		1,643		11,247
Inventory and asset write-downs		137,285		84,972		52,313		—		—		—		—
Total	$	165,896	$	87,015	$	65,191	$	800	$	12,890	$	1,643	$	11,247

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.

9

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 $1.7 million credit to operating expenses relating to various changes in estimates. The changes in estimates consisted of a $1.7 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 $0.9 million of additional facility consolidation charges. During the third and fourth quarters of fiscal 2003, the Company recorded a net $1.4 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted of a $2.2 million reduction in potential legal matters associated with the restructuring programs, partially offset by $0.8 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. As of January 24, 2004, the projected future cash payments of $1.0 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2005 and potential legal matters associated with the restructuring programs.

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

	Original Restructuring Charge		Non-cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	7,106	$	173	$	6,106	$	827	$	—	$	—	$	—
Facility consolidations and certain other costs		17,181		8,572		4,505		2,284		1,820		814		1,006
Inventory and asset write-downs		155,451		102,540		42,107		10,804		—		—		—
Losses on investments		22,737		22,737		—		—		—		—		—
Total	$	202,475	$	134,022	$	52,718	$	13,915	$	1,820	$	814	$	1,006

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 standalone 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.

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. As of January 24, 2004, the projected future cash payments of $3.4 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2006 and potential legal matters and contractual commitments associated with the restructuring programs.

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

	Original Restructuring Charge		Non-cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	8,713	$	814	$	7,129	$	770	$	—	$	—	$	—
Facility consolidations and certain other costs		20,132		—		12,116		3,640		4,376		1,008		3,368
Asset write-downs		22,637		22,637		—		—		—		—		—
Losses on investments		2,108		2,108		—		—		—		—		—
Total	$	53,590	$	25,559	$	19,245	$	4,410	$	4,376	$	1,008	$	3,368

8. Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides guidance on accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 were applied to multiple element revenue arrangements entered into by the Company beginning in the first quarter of fiscal 2004. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position or results of operations.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. The Company does not have any financial interests in variable interest entities created after January 31, 2003. For those arrangements entered into prior to January 31, 2003, FIN 46, as amended by FIN 46R, provisions are required to be adopted by the Company in the third quarter of fiscal 2004. The adoption of FIN 46R is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s financial position or results of operations.

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”), which supercedes SAB 101, Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company’s financial statements.

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9. 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 violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, primarily based on the assertion that the Company’s lead underwriters, the Company and the other named defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the SEC in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. The amended complaint alleges claims against the Company, several of the Company’s officers and directors and the underwriters under Sections 11 and 15 of the Securities Act. It also alleges claims against the Company, the individual defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act. The 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. The actions seek damages in an unspecified amount. On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. The Company has approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a proposed settlement between the Company and the plaintiff class. Among other provisions, the settlement contemplated by the MOU provides for a release of the Company and the individual defendants with respect to claims related to the conduct alleged in the action to be wrongful. Pursuant to the settlement contemplated by the MOU, the Company would agree to undertake certain responsibilities, including agreeing to assign to the plaintiffs, and not otherwise assert or release, certain potential claims the Company may have against its underwriters. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. The Company is unable to determine whether or when a settlement will occur or be finalized. In the event that a settlement is not finalized, the Company is not currently able to estimate the possibility of loss or range of loss, if any, relating to these claims. 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 six 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 discovery obligations and expenses in the litigation, whereas non-test case issuer defendants will not be subject to such obligations.

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 filings. The Company believes that the claims against it are without merit and intends to defend against the complaint vigorously. The Company is not currently able to estimate the possibility of loss or range of loss, if any, relating to these claims.

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

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 only for those items that require disclosure. As of January 24, 2004 , 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 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 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 product warranty liability during the six months ended January 24, 2004 (in thousands):

Balance at July 31, 2003	$	4,651
Accruals for warranties during the period		197
Settlements		(499	)
Adjustments related to preexisting warranties		(453	)
Balance at January 24, 2004	$	3,896

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 Operating Results” contained in this Form 10-Q. The information discussed in this report should be read in conjunction with our Annual Report on Form 10-K and other reports we file from time to time with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise. Forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words.

Overview

Sycamore Networks, Inc. was incorporated in Delaware on February 17, 1998.

Sycamore develops and markets optical networking products for telecommunications service providers worldwide. Our current and prospective customers include domestic and international large, established telecommunications service providers (sometimes referred to as incumbent service providers), Internet service providers, non-traditional telecommunications service providers, newer start-up service providers (sometimes referred to as emerging service providers), systems integrators, governments and enterprise organizations with private fiber networks. We believe that our products enable service providers to cost-effectively and easily transition their existing fiber optic network into an infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers.

For the last several years, the market for our products in the United States was influenced by regulatory changes, in particular, the Telecommunications Act of 1996, and the entry of a substantial number of new companies into the communications service business both domestically and internationally. These new companies, commonly referred to as emerging service providers, raised significant amounts of capital, much of which they invested in capital expenditures to build out their networks. In order to compete with the new emerging service providers, incumbent service providers also increased their capital expenditures above their historical levels. These trends accelerated the growth of the telecommunications equipment industry, including the demand for our products.

Over the last three years, these trends began to reverse and the telecommunications industry began to decline. In addition, there has been a sharp contraction in the availability of capital to our industry. As a result, many emerging service providers were no longer able to finance the build-out of their networks and subsequently have failed or have significantly reduced the scope of their business operations. In addition, many incumbent service providers also had difficulty raising additional capital and have experienced significant financial difficulties. As a result of these developments service providers have reduced capital spending. At the same time, both the United States economy and the economies in substantially all of the countries in which we market our products have slowed significantly. As a result, our existing and prospective customers have become more conservative in their capital expenditures and more uncertain about their future purchases. As a consequence, we are facing a market that is both reduced in size and more difficult to predict and plan for.

These trends have had a number of significant effects on our business, including a decline in revenue of $309.6 million, or 83%, in fiscal 2002 compared to fiscal 2001 and a decline in revenue of $26.9 million, or 41%, in fiscal 2003 compared to fiscal 2002. In response to the telecommunications industry downturn, we enacted three separate restructuring programs through the fourth quarter of fiscal 2002. As a result of our restructuring programs we have incurred net charges totaling $402.4 million, comprised as follows: $175.1 million of net charges related to excess inventory, $202.5 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments.

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Our restructuring programs have reduced our cost structure compared to historical levels, however, we maintain a significant cost structure, particularly within the research and development, sales and customer support organizations. We believe this cost structure is necessary to develop, market and sell our products to our current and prospective customers. We expect that our significant investment in our current cost structure will continue to have an adverse impact on our cost of revenue, gross margins and operating results. At this time, we cannot predict when, or if, the market conditions and the demand for our products will improve.

As a result of the downturn in the telecommunications industry, our restructuring programs and our decision to maintain a significant cost structure, we have incurred a cumulative net loss of $761.4 million at January 24, 2004.

During the second quarter of 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. The project was awarded as an indefinite-delivery and indefinite-quantity subcontract. As such, our visibility into the potential size of the project or the timing of shipments is limited. We did not recognize any revenue from the GIG-BE project in our second quarter.

While we believe that our success in the GIG-BE project validates our technology, we continue to face significant challenges including but not limited to the following: (i) we continue to compete against a number of larger more established incumbent telecom equipment suppliers, many of whom have long-standing relationships with our current and prospective customers; (ii) the incumbent competitors generally have more diverse product lines which allow them the flexibility to price their products more aggressively and absorb the large optical switching overhead expenses across their entire business; and (iii) in order to remain competitive, we continue to devote significant resources to research and development, sales and customer support which may cause us to generate operating losses and consume cash. In order to address these challenges, the Company continues to examine a variety of options to broaden our strategic direction including, but not limited to, alliances with larger networking companies, acquisitions of companies with either complementary technologies or of companies that participate in adjacent market segments or other strategic transactions.

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.

When products are shipped to customers, we evaluate whether all of the fundamental criteria for revenue recognition have been met. The most significant revenue recognition judgments typically involve customer acceptance and whether collection is reasonably assured.

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. For the product portion, we recognize revenue upon shipment if there are no significant uncertainties regarding customer acceptance. If uncertainties regarding customer acceptance exist, we recognize revenue when the uncertainties are resolved.

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For installation services, typically we recognize revenue for services that have been performed upon acceptance in accordance with the contract. For maintenance and training services, we recognize revenue when the services are performed.

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.

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 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.

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, such as the $102.4 million charge we recorded in the first quarter of fiscal 2002.

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.

During the third quarter of fiscal 2001 and the first and fourth quarters of fiscal 2002, we recorded charges for restructuring and related asset impairments totaling $422.0 million, including inventory related charges of $186.4 million. These restructuring 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. For example, during the third and fourth quarters of fiscal 2003, we recorded a net credit totaling $4.4 million to operating expenses, due to various changes in estimates relating to all of our restructuring programs. These credits included decreases in the accruals for potential legal matters associated with the restructuring programs and workforce reduction costs, partially offset by increases in the accrual for additional facility consolidation charges due to less favorable sublease assumptions. While we have reduced the accrual for potential legal matters based on our current estimate, given the inherent uncertainties involved in such matters, it is reasonably possible that we may incur a loss in addition to the amount accrued. In addition, in the event that other contingencies associated with the restructuring programs occur, or the estimates associated with the restructuring programs are revised, we may be required to record additional charges or credits against the reserves previously recorded for the restructuring programs. As of January 24, 2004, we had $15.1 million accrued as part of our restructuring liability relating to facility consolidations, based on our best estimate of the available sublease rates and terms at the present time. In the event that we are unsuccessful in subleasing any of the restructured facilities, we could incur additional restructuring charges and cash outflows in future periods totaling $1.2 million, which represents our current estimate of the assumed sublease recoveries.

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Results of Operations

Revenue

Total revenue was $6.9 million and $10.8 million for the second quarter of fiscal 2004 and the second quarter of fiscal 2003, respectively. Total revenue was $15.3 million and $16.8 million for the first six months of fiscal 2004 and the first six months of fiscal 2003, respectively. The decrease in revenue is primarily due to constrained service provider capital expenditures in optical switching and continued extended trial and evaluation periods by our prospective customers. Product revenue declined by 51% for the three months ended January 24, 2004 compared to the three months ended January 25, 2003. The demand for our products has been relatively flat, down 5%, in the first six months ended January 24, 2004, as compared to the first six months ended January 25, 2003. Service revenue decreased by 5% and 15%, respectively, for the three and six months ended January 24, 2004, compared to the three and six months ended January 25, 2003. The decrease in service revenue was primarily due to a lower level of installation services associated with our product deployments. For the second quarter of fiscal 2004, three international customers accounted for the majority of our revenue and international revenue represented 98% of our total revenue. For the second quarter of fiscal 2003, three international customers accounted for the majority of our revenue and international revenue represented more than 82% of our total revenue. For our current fiscal year ending July 31, 2004, we anticipate that revenue will continue to be highly concentrated in a relatively small number of customers and that international revenue may continue to represent a relatively high percentage of total revenue.

Gross profit (loss)

Gross profit (loss) for product and services, including non-cash stock-based compensation expense, was as follows (in thousands, except percentages):

	Three Months Ended						Six Months Ended
	January 24, 2004			January 25, 2003			January 24, 2004			January 25, 2003
Gross profit (loss):
Product	$	1,444		$	870		$	3,912		$	(752	)
Service		1,008			(989	)		1,077			(928	)
Total	$	2,452		$	(119	)	$	4,989		$	(1,680	)
Gross profit (loss):
Product		39.3	%		11.7	%		39.8	%		( 7.3	)%
Service		31.5	%		(29.3	)%		19.6	%		(14.4	)%
Total		35.7	%		(1.1	)%		32.6	%		(10.0	)%

Product gross profit (loss)

Product gross profit was 39.3% of product revenue for the second quarter of fiscal 2004 compared to 11.7% for the second quarter of fiscal 2003. Product gross profit was 39.8% for the six months ended January 24, 2004 compared to (7.3%) product gross loss for the six months ended January 25, 2003. The improvement in product gross profit was attributable to the expiration of preexisting warranty obligations, decreased manufacturing cost and reduced material cost.

We believe that product gross profit may decrease in the future due to pricing pressures resulting from intense competition as a result of limited optical switching opportunities worldwide. In addition, product gross profit may be affected in future periods by changes in the mix of products sold, channels of distribution, shipment volume, overhead absorption, sales discounts, increases in material or labor costs, excess inventory and obsolescence charges, loss of cost savings due to changes in component pricing, the introduction of new products or entering new markets with different pricing and cost structures.

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Service gross profit (loss)

Service gross profit was 31.5% of service revenue for the second quarter of fiscal 2004 compared to a service gross loss of (29.3%) of revenue for the second quarter of fiscal 2003. Service gross profit was 19.6% for the six months ended January 24, 2004 compared to a service gross loss of (14.4%) for the same period of fiscal 2003. Service gross margins increased in both the three months and six months ended January 24, 2004 as compared to the same periods ended January 25, 2003 due to a reduction in service delivery cost as a result of lower fixed support costs.

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.

Research and Development Expenses

Research and development expenses for the second quarter of fiscal 2004 decreased $1.6 million, or 13%, to $11.8 million from $13.4 million for the second quarter of fiscal 2003. Research and development expenses decreased $4.4 million, or 16%, to $23.0 million for the six months ended January 24, 2004 compared to $27.4 million for the same period in fiscal 2003. The decrease in expenses for the three and six months ended January 24, 2004 was primarily due to reduced costs for project materials, a decrease in personnel-related expenses and reduced fixed overhead costs.

Sales and Marketing Expenses

Sales and marketing expenses for the second quarter of fiscal 2004 decreased $0.8 million, or 14%, to $4.3 million from $5.1 million for the second quarter of fiscal 2003. Sales and marketing expenses decreased $1.2 million, or 13%, to $8.8 million for the six months ended January 24, 2004 compared to $10.0 million for the same period of fiscal 2003. The decrease in expenses was primarily due to lower personnel-related expenses.

General and Administrative Expenses

General and administrative expenses for the second quarter of fiscal 2004 decreased $0.3 million, or 15%, to $1.5 million from $1.8 million for the second quarter of fiscal 2003. General and administrative expenses increased $0.1 million, or 1%, to $3.5 million for the six months ended January 24, 2004 compared to $3.4 million for the same period in fiscal 2003. The decrease in expenses for the three months ended January 24, 2004 was due to lower personnel related expenses. For the six months ended January 24, 2004 lower personnel costs were offset by increased expenses relating to new regulatory requirements including certain provisions of the Sarbanes-Oxley Act.

Stock-Based Compensation Expense

Total stock-based compensation expense for the second quarter of fiscal 2004 decreased $0.2 million, or 8%, to $1.9 million from $2.1 million for the second quarter of fiscal 2003. Total stock compensation decreased $1.1 million, or 23%, to $3.4 million for the six months ended January 24, 2004 compared to $4.5 million for the same period in fiscal 2003. For the three and six months ended January 24, 2004, $0.2 million and $0.4 million of stock compensation expense was classified as cost of revenue, respectively, and $1.7 million and $3.0 million was classified as operating expenses, respectively. 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. The decrease was primarily due to headcount reductions from the second quarter of fiscal 2003 through the second quarter of fiscal 2004. Stock-based compensation expense is expected to impact our reported results of operations through the fourth quarter of fiscal 2005.

Restructuring Charges and Related Asset Impairments

In fiscal 2001, the telecommunications industry began a severe decline which has impacted equipment suppliers, including Sycamore. In response to the telecommunications industry downturn, we enacted three 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”), and the third in the fourth quarter of fiscal 2002 (the “fourth quarter fiscal 2002 restructuring”). As a part of our fourth quarter fiscal 2002 restructuring program, we discontinued the development of our standalone transport products and focused our

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business exclusively on optical switching products. During fiscal 2002, as a result of the combined activity under all of the restructuring programs, we recorded a total net charge of $241.5 million, which was classified in the statement of operations as follows: cost of revenue - $91.7 million, operating expenses - $125.0 million, and non-operating 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, we recorded a credit of $0.5 million classified as cost of revenue, and a net credit of $4.4 million classified as operating expenses as described below.

During the third and fourth quarters of fiscal 2003, we recorded a net $4.4 million credit to operating expenses due to various changes in estimates relating to our restructuring programs. The changes in estimates consisted primarily of a $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, we recorded a $0.5 million credit to cost of revenue relating to a favorable settlement with a supplier. While we have reduced the accrual for potential legal matters based on our current estimate, given the inherent uncertainties involved in such matters, it is reasonably possible that we may incur a loss in addition to the amount accrued. In addition, in the event that other contingencies associated with the restructuring programs occur, or the estimates associated with the restructuring programs are revised, we may be required to record additional charges or credits against the reserves previously recorded for our restructuring programs.

As of January 24, 2004, we had $15.6 million in accrued restructuring costs, consisting primarily of $15.1 million of accrued liabilities for facility consolidations. 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. We recorded restructuring charges and related asset impairments of $81.9 million classified as operating expenses and an excess inventory charge of $84.0 million relating to 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. We substantially completed the fiscal 2001 restructuring program during the first half of fiscal 2002. In the fourth quarter of fiscal 2002, we recorded a net $2.1 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted primarily of $4.7 million of additional facility consolidation charges due to less favorable sublease assumptions, offset by a $6.7 million reduction in the potential legal matters associated with the restructuring programs. During the third and fourth quarters of fiscal 2003, we recorded a net $1.3 million charge to operating expenses due to various changes in estimates. The changes in estimates consisted of $3.6 million of additional facility consolidation charges due to less favorable sublease assumptions, partially offset by a $2.3 million reduction in potential legal matters associated with the restructuring programs. As of January 24, 2004, the projected future cash payments of $11.2 million consist of facility consolidation charges that will be paid over the respective lease terms through fiscal 2007, and potential legal matters associated with the restructuring programs.

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

	Original Restructuring Charge		Non-cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	4,174	$	829	$	3,203	$	142	$	—	$	—	$	—
Facility consolidations and certain other costs		24,437		1,214		9,675		658		12,890		1,643		11,247
Inventory and asset write-downs		137,285		84,972		52,313		—		—		—		—
Total	$	165,896	$	87,015	$	65,191	$	800	$	12,890	$	1,643	$	11,247

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, we recorded restructuring charges and related asset impairments of $77.3 million classified as operating expenses and an excess inventory charge of $102.4 million classified as cost of revenue. In addition, we recorded charges totaling $22.7 million, classified as a non-operating expense, relating to impairments of investments in non-publicly traded companies that were determined to be other than temporary. The 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 our products and $53.1 million for asset impairments related to our vendor financing agreements and fixed assets that we 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, we recorded credits totaling $10.8 million to cost of revenue due to changes in estimates, the majority of which related to favorable settlements with contract manufacturers for non-cancelable inventory purchase commitments. In addition, during the fourth quarter of fiscal 2002, we recorded a net $1.7 million credit to operating expenses relating to various changes in estimates. The changes in estimates consisted of a $1.7 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 $0.9 million of additional facility consolidation charges. During the third and fourth quarters of fiscal 2003, we recorded a net $1.4 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted of a $2.2 million reduction in potential legal matters associated with the restructuring programs, partially offset by $0.8 million of additional facility consolidation charges due to less favorable sublease assumptions. In addition, we 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. As of January 24, 2004, the projected future cash payments of $1.0 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2005 and potential legal matters associated with the restructuring programs.

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

	Original Restructuring Charge		Non-cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	7,106	$	173	$	6,106	$	827	$	—	$	—	$	—
Facility consolidations and certain other costs		17,181		8,572		4,505		2,284		1,820		814		1,006
Inventory and asset write-downs		155,451		102,540		42,107		10,804		—		—		—
Losses on investments		22,737		22,737		—		—		—		—		—
Total	$	202,475	$	134,022	$	52,718	$	13,915	$	1,820	$	814	$	1,006

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 our standalone transport products, including the SN 8000 Intelligent Optical Transport Node and the SN 10000 Intelligent Optical Transport System. As a result, we recorded restructuring charges and related asset impairments of $51.5 million classified as operating expenses. In addition, we recorded a charge of $2.1 million, classified as a non-operating expense, relating to impairments of investments in non-publicly traded companies that were determined to be other than temporary. 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 our 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.

During the third and fourth quarters of fiscal 2003, we 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, we recorded a $0.9 million credit to operating expenses relating to proceeds received from the disposal of certain equipment. As of January 24, 2004, the projected future cash payments of $3.4 million consist primarily of facility consolidation charges that will be paid over the respective lease terms through fiscal 2006 and potential legal matters and contractual commitments associated with the restructuring programs.

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

	Original Restructuring Charge		Non-cash Charges		Payments		Adjustments		Accrual Balance at July 31, 2003		Payments		Accrual Balance at January 24, 2004
Workforce reduction	$	8,713	$	814	$	7,129	$	770	$	—	$	—	$	—
Facility consolidations and certain other costs		20,132		—		12,116		3,640		4,376		1,008		3,368
Asset write-downs		22,637		22,637		—		—		—		—		—
Losses on investments		2,108		2,108		—		—		—		—		—
Total	$	53,590	$	25,559	$	19,245	$	4,410	$	4,376	$	1,008	$	3,368

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Interest and Other Income, Net

Interest and other income, net decreased to $3.9 million for the second quarter of fiscal 2004 compared to $6.0 million for the second quarter of fiscal 2003. Interest and other income, net decreased $4.6 million to $8.1 million for the six months ended January 24, 2004 compared to $12.7 million for the same period in fiscal 2003. The decrease for the three and six months ended January 24, 2004 was due to a combination of lower interest rates and lower invested cash balances during these periods.

Provision for Income Taxes

We did not provide for income taxes for the three and six months ended January 24, 2004, or for the same periods in 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 $977.9 million at January 24, 2004. Included in this amount were cash and cash equivalents of $301.6 million, compared to $250.6 million at July 31, 2003. The increase in cash and cash equivalents for the six months ended January 24, 2004 was due to cash provided by investing activities of $66.3 million and cash provided by financing activities of $4.1 million offset by cash used in operating activities of $19.3 million.

Cash provided by investing activities of $66.3 million consisted primarily of net maturities of investments of $68.6 million. Cash provided by financing activities of $4.1 million consisted primarily of proceeds from employee stock plan activity. Cash used in operating activities of $19.3 million consisted of the net loss for the period of $25.2 million, adjusted for net non-cash charges totaling $9.4 million and changes to working capital totaling $3.5 million. The most significant changes to working capital were a decrease in accrued restructuring costs of $3.5 million, an increase in inventories of $5.6 million and a decrease in accounts receivable of $6.8 million. Non-cash charges include depreciation and amortization, provision for doubtful accounts and stock-based compensation.

Currently, our primary source of liquidity comes from our cash and cash equivalents and investments, which totaled $977.9 million at January 24, 2004. 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 three years. At January 24, 2004, $331.4 million of investments with maturities of less than one year were classified as short-term investments, and $344.9 million of investments with maturities of greater than one year were classified as long-term investments. At current revenue levels, we anticipate that some portion of our existing cash and cash equivalents and investments will continue to be consumed by operations. Our accounts receivable, while not considered a primary source of liquidity, represents a concentration of credit risk because the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. At January 24, 2004, more than 90% of our accounts receivable balance was attributable to three international customers. As of January 24, 2004, we do not have any outstanding debt or credit facilities, and do not anticipate entering into any debt or credit agreements in the foreseeable future. Our fixed commitments for cash expenditures consist primarily of payments under operating leases 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 currently intend 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.

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.

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Off-Balance Sheet Arrangements

At January 24, 2004, our off-balance sheet arrangements, which consist entirely of contractual commitments for operating leases and inventory purchase commitments, were as follows (in thousands):

Fiscal Year:	Operating Leases		Inventory Purchase Commitments
2004 (remainder of year)	$	4,478	$	2,052
2005		5,078		—
2006		6,881		—
2007		2,848		—
Total future contractual commitments	$	19,285	$	2,052

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.

Factors that May Affect Future Operating 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.

Over the last three years, the telecommunications industry began to decline due to a sharp contraction in the available capital to our industry. The telecommunications industry trends have been compounded by the slowing economy in the United States and other countries in which we market our products. As a result, many of our existing and prospective customers have experienced significant financial distress. These customers have reduced their capital expenditures significantly. As a result, there has been a substantial reduction in the demand for our products.

Over the last three years, our revenue has declined and we have incurred significant operating losses. Our net losses for fiscal 2003 and 2002 were $55.1 million and $379.7 million, respectively. For the first six months of fiscal 2004, our net loss was $25.2 million. Throughout the telecommunications industry downturn, we have maintained a significant cost structure, particularly within the research and development, sales and customer service organizations. We believe this cost structure is necessary to develop, market and sell our products to current and prospective customers. As a result of the adverse market conditions and our decision to maintain a significant cost structure, we have incurred a cumulative net loss of $761.4 million at January 24, 2004. We anticipate that our cost of revenue, gross profit and operating results will continue to be adversely affected by adverse market conditions and our decision to maintain our significant cost structure. We will need to generate significantly higher revenue over the current levels in order to achieve and maintain profitability. We cannot assure you that our revenue will increase or that we will generate sufficient revenue to achieve or sustain profitability.

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

• our current and prospective customers will continue to have limited capital expenditures;

• 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 reduced demand and we may experience downward pressures on pricing of our products which reduces gross margins;

• the increased competition may enable customers to demand more favorable terms and conditions of sales including extended payment terms; and

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• the bankruptcies or weakened financial condition of some 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.

We depend entirely on our line of intelligent optical networking products and our future revenue depends on their commercial success.

Our future revenue depends on the commercial success of our line of intelligent optical networking products. Over the past three years, we have narrowed the scope of our product offerings, including discontinuing the development of our standalone transport products. Our research and development efforts focus exclusively on optical switching products and network management systems. 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:

• forecasting evolving customer requirements;

• completing the development, introduction or production manufacturing of new products; or

• enhancing our existing products.

Failure of our current or future products to operate as expected could delay or prevent their adoption. If our current and prospective customers do not adopt, purchase and successfully deploy our current and future products, our business, financial condition and results of operations could be materially adversely affected.

Substantially all of our revenue is generated from a limited number of customers, and our success depends on increasing sales to incumbent service providers and establishing channels.

We currently have a limited number of customers. For the second quarter of fiscal 2004, three international customers accounted for the majority of our revenue. During fiscal 2003, Vodafone, Louis Dreyfus Communications, and NTT Communications accounted for 43%, 22% and 14% of our revenue, respectively. 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 potential customers for our products is limited. In addition, we believe that our industry may enter into a consolidation phase which would further reduce the number of potential customers, slow purchases and delay optical switching deployment decisions.

Our sales efforts are primarily directed toward incumbent service providers, many of which have made significant investments in traditional optical networking infrastructures. We believe that our products enable service providers to easily and cost-effectively transition their existing fiber optic network into a network infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers. We believe that our products provide service providers an infrastructure that offers significant financial, operational and competitive advantages over traditional optical networking equipment. If we are unable to convince incumbent service providers to deploy our intelligent optical networking solutions, our business, financial condition and results of operations will be materially adversely affected.

In addition, in order to increase sales, we are focused on establishing successful relationships with a variety of distribution partners, including systems integrators. We have entered into agreements with several distribution partners, some of which 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. In addition, the prospective customers for our products include systems integrators targeting governments and, to a limited extent, large enterprise customers, all of which we have limited experience in selling our products to. There can be no assurance that we will be successful in increasing our sales to distribution partners. If we are unable to increase sales to distribution partners, our business, financial condition and results of operations could be materially adversely affected.

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We face intense competition that could adversely affect our sales and profitability.

Competition in the optical networking market is intense. Competition is based upon a combination of price, functionality, network management, interoperability, installation, services and scalability. Large companies, such as Nortel Networks, Lucent Technologies, Alcatel and Ciena Corporation, have historically dominated this market. Many of our competitors have longer operating histories and greater financial, sales, marketing and manufacturing resources. These competitors also have longer standing existing relationships with our current and prospective customers. Moreover, our competitors may foresee the course of market developments more accurately and could develop new technologies that compete with our products or even render our products obsolete.

In addition, to a lesser extent, we see new entrants into the optical networking market with new products that compete with our products. They often base their products on the latest available technology. Our inability to compete successfully against these companies would harm our business, financial condition and results of operations.

The recent decline in the telecommunications industry has resulted in even greater 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;

• 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 product lines that allow them the flexibility to price their products aggressively and absorb the optical switching overhead expenses 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 impacted.

Further, we believe that our industry may enter into a consolidation phase. Over the past two to three years, the market valuations of many companies in our industry have declined significantly making them more attractive acquisition candidates. Furthermore, the weakened financial position of many companies in our industry may make them more receptive to being acquired. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. Industry consolidation may have an adverse impact on our business, operating results, and financial condition.

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

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Our strategy to pursue strategic opportunities may not be successful.

We may, as part of our business strategy, pursue strategic alliances with larger networking companies, acquisitions of companies with complementary technologies or of companies that participate in adjacent market segments or other business combinations or transactions. Any such strategic option would be subject to inherent risk and we cannot guarantee that we will be able to identify the appropriate opportunities, successfully negotiate economically beneficial terms, successfully integrate any acquired business, retain key employees or achieve the anticipated synergies of the strategic transaction. Additionally, we may issue additional shares in connection with a strategic transaction that could dilute the holdings of existing common stockholders or we may utilize cash in such a strategic transaction. In implementing our 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 as well as the possibility of providing a means by which shareholders may realize value in connection with their investment in our common stock.

Current economic conditions combined with our limited operating history makes forecasting difficult.

Current economic and market conditions have made it more difficult to make reliable 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 long-term future revenue. Our planned expenses include significant investments in our research and development, sales and customer service organizations that we believe are necessary to support large established service providers, even though we are unsure of the volume, duration, or timing of any purchase orders. As a result, it is difficult to forecast revenue and operating results. If 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.

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:

• fluctuation in demand for intelligent optical networking products;

• the timing and size 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 recognizing revenue 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 and deferrals;

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

• changes in accounting rules, such as any future requirement to record stock-based compensation expense for

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employee stock option grants made at fair market value; and

• general economic conditions as well as those specific to the telecommunications, Internet 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 results. In addition, our ability to forecast our future business has been significantly impaired by the current 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.

Additionally, we believe that customers who make a decision to deploy our products will expand their networks slowly and deliberately. Potential new business opportunities for our products may be smaller than what we have experienced historically. Accordingly, in the event that customer order activity increased, we could receive purchase orders on an irregular and unpredictable basis. Because of our limited operating history and the nature of our business, we cannot predict these sales and deployment cycles. The long sales cycles, as well as our expectation that customers may tend to place large 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 continue to decline or recover at a slower rate than anticipated by us or analysts and investors. In either event, the price of our common stock could decrease.

Our strategy requires significant investments and requires revenue to increase substantially.

In terms of our strategy, we believe that continued investment is necessary in order to continue to provide innovative optical networking solutions that our current and prospective customers require. As a result, we have maintained a significant cost structure, particularly within research and development, sales and customer service. This cost structure will not permit us to return to profitability unless we can increase our revenue substantially. If we fail to do so, we may be required to modify our strategy, which would likely have an adverse effect on our financial condition.

Product performance problems could limit our current and future sales prospects.

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 or delay in revenue and loss of market share;

• loss of customers;

• failure to expand sales to existing and prospective customers;

• failure to attract new customers or achieve market acceptance;

• diversion of development resources;

• increased service and warranty costs;

• delays in collecting accounts receivable;

• legal actions by our customers; and

• increased insurance costs.

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

Our business is subject to risks from international operations.

International sales represented 91% of total revenue in fiscal 2003, and 99% of total revenue in the first six months of fiscal 2004, and we expect that international sales may continue to represent a significant portion of our revenue. We are subject to foreign exchange translation risk to the extent that our revenues are 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. While international sales currently represent a high percentage of total revenue, these sales are concentrated within a relatively small number of customers. We may not be able to maintain or expand international market demand for our products.

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

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

• difficulties and costs of staffing and managing foreign operations in compliance with local laws and customs;

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

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

• the impact of 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.

We rely on single sources for supply of certain components and our business may be seriously harmed if our supply of any of these components or other components is disrupted.

We 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, we may not be able to develop an alternate source in a timely manner or on favorable terms. Such a failure could impair our ability to deliver products to customers, which would adversely affect our revenue and operating results.

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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. If any of these events occurred, our revenue and operating results could be adversely affected.

Throughout the downturn in the telecommunications industry, the optical component industry has been downsizing manufacturing capacity while consolidating product lines from earlier acquisitions. Several suppliers have exited the market for optical components, have been acquired or 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 key components in our products. If any of these events occurred, our revenue and operating results could be adversely affected.

We utilize contract manufacturers and any disruption in these relationships may cause us to fail to meet the demands of our customers and damage our customer relationships.

We have limited internal manufacturing capabilities. We utilize contract manufacturers to manufacture our products in accordance with our specifications and to 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 to fill these orders on a timely basis. In addition, our utilization of contract manufacturers limits our ability to control the manufacturing processes of our products, which exposes us to risks including the unpredictability of manufacturing yields and a reduced ability to control the quality of finished products.

The contract manufacturing industry is a highly competitive, capital-intensive business with relatively low profit margins, in 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, we may (i) lose revenue, (ii) adversely impact gross margins and (iii) damage our customer relationships.

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 demand forecasts to our contract manufacturers up to six months prior to scheduled delivery of products to our customers. If we overestimate our requirements, the contract manufacturers may assess cancellation penalties or we may have excess inventory which could negatively impact our gross margins. During the first quarter of fiscal 2002, we recorded an excess inventory charge of $102.4 million due to a severe decline in our forecasted revenue. A portion of this charge was related to inventory purchase commitments. 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.

If we underestimate our inventory requirements, the contract manufacturers may have inadequate inventory that could interrupt manufacturing of our products and result in delays in shipment to our customers and revenue recognition. We also could incur additional charges to manufacture our products to meet our customer deployment schedules.

We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our key employees, our ability to compete could be harmed.

We depend on the continued services of our executive officers and other key engineering, sales, marketing and support personnel, who have critical industry experience and relationships that we rely on to implement our business strategy. 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

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component of their compensation package. These stock-based awards may not provide the intended incentive to our employees if our stock price declines or experiences significant volatility. The loss of the services of any of our key employees, the inability to attract and retain qualified personnel in the future, or delays in hiring qualified personnel could delay the development and introduction of, and negatively impact our ability to sell, our products.

We face certain litigation risks.

We are a party to lawsuits and claims in the normal course of our business. However, 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. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, operating results, or financial condition. For additional information regarding certain of the lawsuits in which we are involved, see Part II, Item 1 - “Legal Proceedings”.

Our ability to compete 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 software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. 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.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Our industry in particular is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In the course of our business, we may receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products.

Any parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves, and possibly our customers, manufacturers or suppliers against the alleged infringement. Regardless of their merit, these claims could result in costly litigation and subject us to the risk of significant liability for damages. 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.

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In addition, we license technology from third parties and utilize software in the public domain that is used in our existing products, and in new product development and enhancements to existing products. We cannot be assured that third party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain any third party license required to develop new products and enhance existing products 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.

Any acquisitions or strategic investments we make could disrupt our business and seriously harm our financial condition.

As part of our ongoing 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 acquisitions of other companies to broaden our product portfolio and gain access to incumbent service providers or otherwise enhance our business opportunities. In the event of an acquisition, we could:

• issue stock that would dilute our current stockholders’ percentage ownership;

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

• incur debt;

• assume liabilities;

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

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

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs; or

• become subject to litigation.

Our ability to achieve the benefits of any acquisition, will also involve numerous risks, including:

• problems combining the purchased operations, technologies or products;

• unanticipated costs;

• diversion of management’s attention from other business issues and opportunities;

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

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

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

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

As of January 24, 2004, we have made strategic investments in privately held companies totaling approximately $26.0 million, and we may decide to make additional investments in the future. In fiscal 2002, we recorded impairment losses of $24.8 million relating to these investments. These types of investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire investment in certain or all of these companies.

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Any extension of credit to our customers may subject us to credit risks and limit the capital that we have available for other uses.

We continue to receive requests for financing assistance from existing and prospective customers. In the near term, we expect these requests to continue. We believe the ability to offer financing assistance can be a competitive factor in obtaining business. From time to time we have provided extended payment terms on trade receivables to certain key customers to assist them with their network deployment plans. Such financing activities subject us to the credit risk of customers whom we finance. In addition, our ability to recognize revenue from financed sales will depend upon the relative financial condition of the specific customer, among other factors. We could experience losses due to customers failing to meet their financial obligations that could harm our business and materially adversely affect our operating results and financial condition, such as the losses that we incurred during the first quarter of fiscal 2002.

Our stock price may continue to be volatile.

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

• our loss of a major customer;

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

• the addition or departure of key personnel;

• variations in our quarterly operating results;

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

• failure by us to meet product milestones;

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

• 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; and

• fluctuations in stock market prices and volumes.

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

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At January 24, 2004, options to purchase a total of 28.8 million shares of our common stock were outstanding. While these options are subject to vesting schedules, a number of the shares underlying these options are freely tradable. Sales of a substantial number of shares of our common stock could cause our stock price to fall or increase the volatility of our stock price. In addition, sales of shares by our stockholders could impair our ability to raise capital through the sale of additional stock.

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 January 24, 2004, our officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 36% 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 3.

Quantitative and Qualitative Disclosure 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 January 24, 2004, the fair value of the portfolio would decline by approximately $0.9 million. We have the ability to hold our fixed income investments until maturity, and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

Exchange Rate Sensitivity

While the majority of our operations are based in the United States, our business has become increasingly global, with international revenue representing 91% of total revenue in fiscal 2003, and 99% of revenue in the first six months of fiscal 2004. We expect that international sales may continue to represent a significant portion of our revenue. Fluctuations in foreign currencies may have an impact on our financial results, although to date the impact has not been material. We are prepared to hedge against fluctuations in foreign currencies if the exposure is material, although we have not engaged in hedging activities to date.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that 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”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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 second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. 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 violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, primarily based on the assertion that the Company’s lead underwriters, the Company and the other named defendants made material false and misleading statements in the Company’s Registration Statements and Prospectuses filed with the SEC in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. The amended complaint alleges claims against the Company, several of the Company’s officers and directors and the underwriters under Sections 11 and 15 of the Securities Act. It also alleges claims against the Company, the individual defendants and the underwriters under Sections 10(b) and 20(a) of the Securities Exchange Act. The 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. The actions seek damages in an unspecified amount. On October 9, 2002, the court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. The Company has approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a proposed settlement between the Company and the plaintiff class. Among other provisions, the settlement contemplated by the MOU provides for a release of the Company and the individual defendants with respect to claims related to the conduct alleged in the action to be wrongful. Pursuant to the settlement contemplated by the MOU, the Company would agree to undertake certain responsibilities, including agreeing to assign to the plaintiffs, and not otherwise assert or release, certain potential claims the Company may have against its underwriters. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. The Company is unable to determine whether or when a settlement will occur or be finalized. In the event that a settlement is not finalized, the Company is not currently able to estimate the possibility of loss or range of loss, if any, relating to these claims. 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 six 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 discovery obligations and expenses in the litigation, whereas non-test case issuer defendants will not be subject to such obligations.

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 filings. The Company believes that the claims against it are without merit and intends to defend against the complaint vigorously. The Company is not currently able to estimate the possibility of loss or range of loss, if any, relating to these claims.

35

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

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Item 6. Exhibits and Reports on Form 8-K

Exhibits:

(a) List of Exhibits

Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of the Company (2)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)
3.3	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
3.4	Amended and Restated By-Laws of the Company (2)
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 (2)(3)
*10.1	Reseller agreement dated January 6, 2004 between Sprint and Sycamore Networks, Inc.
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 Registration Statement on Form S-1 (Registration Statement No. 333-30630).

(3) 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 Securities and Exchange Commission on March 13, 2001.

 * Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K: On November 12, 2003, the Company furnished a Current Report on Form 8-K under Item 12 containing the press release relating to its first quarter fiscal 2004 results. On December 31, 2003, the Company furnished a Current Report on Form 8-K under Item 5 containing the Defense Information Systems Agency (DISA) issued press release.

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Signature

Pursuant to the requirements 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.

Sycamore Networks, Inc.

/s/ Frances M. Jewels

Frances M. Jewels

Chief Financial Officer

(Duly Authorized Officer and Principal

Financial and Accounting Officer)

Dated: February 12, 2004

38

EXHIBIT INDEX

Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of the Company (2)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (2)
3.3	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
3.4	Amended and Restated By-Laws of the Company (2)
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 (2)(3)
*10.1	Reseller agreement dated January 6, 2004 between Sprint and Sycamore Networks, Inc.
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 Registration Statement on Form S-1 (Registration Statement No. 333-30630).

(3) 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 Securities and Exchange Commission on March 13, 2001.

 * Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Securities Exchange Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

39

EX-10.1

Exhibit 10.1

UNITED STATES RESELLER AGREEMENT

BETWEEN

SYCAMORE NETWORKS, INC.

AND

SPRINT COMMUNICATIONS COMPANY, L.P.

GOVERNMENT SYSTEMS DIVISION

Sycamore Networks, Inc.

Exhibits:
Exhibit A:	Products and Reseller’s Territory
Exhibit B:	Discount Schedule and Price List
Exhibit C:	Sales Plan
Exhibit D:	Reseller Services Agreement
Exhibit E:	Sycamore Software License Agreement
Exhibit F:	Sprint Trading Agreement
Exhibit G:	Sprint Transportation Routing Guide
Exhibit H:	[*]
Exhibit I:	[*]

Tel: (978) 250-2900 Fax: (978) 256-3434

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

SYCAMORE NETWORKS, INC. AND SPRINT COMMUNICATIONS COMPANY, L.P.

1

UNITED STATES RESELLER AGREEMENT

THIS AGREEMENT is made this 6th day of January, 2004, by and between Sycamore Networks, Inc. (“Sycamore”), a Delaware corporation having a principal place of business at 220 Mill Road, Chelmsford, MA, USA, and Sprint Communications Company, L.P., Government Systems Division (“Reseller” or “Sprint”), a Delaware limited partnership having a principal place of business at 13221 Woodland Park Road, Herndon, VA 20171.

Recitals of Fact

1. Sycamore sells and licenses various hardware and software optical networking products (the “Products”) including, but not limited to optical networking software products, including all software patches, error corrections, revisions and updates (the “Software Products”) and hardware products (the “Hardware Products”) including parts listed in Sycamore’s then-current US Price List (the “Price List”).

2. Whereas Sycamore sells engineering, furnishing, installation, and testing services (“EFI&T Services”), hardware and software maintenance, training, and other services in respect of the Products. Such hardware and software maintenance, training, and other services, and EFI&T Services are collectively referred to hereunder as “Services”.

3. Sprint represents itself as having the ability, expertise and resources to market, sell, sublicense and support the Products in connection with sales of Sycamore Products and Services to its customers within its Government Systems Division, and Sycamore is willing to allow Sprint to do so pursuant to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of their mutual promises and obligations contained in this Agreement, the parties agree as follows:

1. Term

This Agreement shall become effective as of the date written below and shall continue in force until July 1, [*], unless terminated sooner as provided under this Agreement. Up until thirty (30) days prior to the expiration date, either party shall have the right to propose a termination or renewal of this Agreement upon such terms as such party deems appropriate and all terms of such renewal are subject to negotiation and mutual agreement. In the event that neither party elects to propose a termination or to re-negotiate the terms and conditions hereof at the end of any term, this Agreement shall automatically renew upon the current terms and conditions for an additional [*] term. Nothing contained herein shall be interpreted as requiring either party to renew this Agreement.

Notwithstanding the foregoing, the terms of this Agreement shall continue in full force and effect for any Sprint purchase order that is outstanding at the time of any termination or expiration of this Agreement.

2. Appointment of Sprint

2.1 Appointment. Sycamore appoints Sprint and Sprint accepts such appointment to be Sycamore’s nonexclusive independent reseller for the resale, sublicense, and service of only those Products and

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

SYCAMORE NETWORKS, INC. AND SPRINT COMMUNICATIONS COMPANY, L.P.

2

in the territory (the “Territory”) described in the attached Exhibit A directly to independent, unaffiliated, federal, state and local government end users in the Territory for use in the Territory. For purposes of this Agreement, “federal” shall mean customers within the United States Federal Government, or prime contractors where the end-user is the Federal Government, or other eligible entities as defined by GSAR 552.238-78, Scope of Contract (Eligible Ordering Activities) (May 2003) and General Services Administration (“GSA”) Order No. ADM4800.2E, dated January 3, 2000 regarding Eligibility to Use GSA Sources and Services, as such order and regulation may be amended from time to time, copies of which are attached hereto. For purposes of this Agreement, “state” or “local” shall mean state and local government customers including any state, local regional or tribal government or any instrumentality thereof (including any local educational agency or institution of higher learning or prime contractors or other resellers where the end user is a state or local government customer as defined herein). This appointment does not authorize any other person or entity, including a subsidiary or affiliate of Sprint, to act as a Sycamore reseller without Sycamore’s express written consent.

2.2 Nonexclusive Reseller. Sprint acknowledges that its appointment under this Agreement is nonexclusive including the reselling of Products and Services under Sprint’s General Services Administration (“GSA”) Schedule Contract No. 35F-0329L (“GSA Schedule”). Sprint acknowledges Sycamore’s right to appoint additional resellers, distributors, and other types of distribution channels and service providers and to make direct sales or additional distribution of the Products or any other Sycamore products or services in the Territory to any customers in or outside of Sprint’s Territory to any customer without liability or obligation to Sprint. Sycamore disclaims any representation or warranty as to potential success of Sprint’s business operations hereunder.

3. Reseller’s Obligations

3.1 Sale of Product. Sprint shall use its best efforts to sell, sublicense and promote the Products within the Territory and shall not perform any act which may hinder or interfere with the supply and/or licensing of the Products. In no event shall Sprint make any representations or warranties regarding the Products which are not included in or which are inconsistent with information provided by Sycamore to Sprint.

3.2 Sales Plan. Sprint shall use its best efforts to obtain annual sales goals contained in the reseller sales plan (the “Sales Plan”) as mutually agreed between the parties. The first Sales Plan is attached as Exhibit C. If for any reason a new Sales Plan is not agreed to by the parties for any subsequent year, the Sales Plan for the prior year shall apply. The Sales Plan may be changed at any time by mutual agreement of the parties, provided that if the Sales Plan changes during the term of the Agreement, the new Sales Plan shall be applicable to the remaining portion, but not the prior portion of that term.

3.3 Trademarks. In selling or sublicensing the Products, Sprint shall not remove all Sycamore trademarks, logos, markings, colors or other insignia which are affixed to the Products or related materials at the time of Sycamore’s shipment to Sprint. Sycamore expressly prohibits any other direct or indirect use, reference to, or employment of Sycamore’s trademarks, logos, trade names or any other logos, trademarks or trade names confusingly similar to Sycamore’s unless otherwise authorized in writing by Sycamore. Sprint agrees to refrain from registering or applying to register such trademarks, logos, or trade names in its own name.

3.4 Qualifications. Sprint represents that it is familiar with the market for the Products, has the facilities, resources, personnel and experience to promote, advertise, market, license and sell the

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Products, and to perform its obligations under this Agreement. Sprint represents that it has the expertise to support the Products, if applicable. Sprint agrees that it will use reasonable efforts to develop and promote Sycamore’s business reputation. Sprint agrees to attend any product or similar training seminars which may be periodically offered by Sycamore by sending sales and support personnel. Sycamore Product and training seminars shall be offered to Sprint at its then-current training prices. Such seminars will be conducted at locations designated by Sycamore. Sprint shall bear all travel, lodging, meal and other expenses of its personnel connected with such seminars.

3.5 Single Tier Reseller. In recognition of the complexity of computer networking technology and to ensure the success of Product sales, Sprint shall remain a single-tier Reseller of Sycamore Products, selling directly to end-users, except as noted in Section 2.1. The resale of Products by Sprint to entities that intend to resell the Product, rather than use the Products for their own internal business purposes, except as specifically authorized by Section 2.1 and the resale of the Products outside of the Territory is strictly prohibited.

3.6 Customer Satisfaction; Trained Staff. Sprint shall take all reasonable, prompt and efficient actions to ensure customer satisfaction with the Products and shall resolve all customer complaints in a timely manner consistent with Sprint’s prime contract requirements. Sprint shall maintain sufficiently trained personnel to ensure its ability to adequately service and support its Sycamore customers. At least one member of Sprint’s staff shall be designated to coordinate all of Sprint’s Sycamore-related business. [*]

4. Sycamore’s Obligations

4.1 Information. Sycamore agrees to make available to Sprint a reasonable supply of Product sales literature and marketing information at its then-current prices. Sprint shall not translate or modify any materials furnished to Sprint by Sycamore.

4.2 Training. Sycamore shall provide to Sprint at mutually agreeable terms, and Sprint must complete, the Product Certification and Sales training classes for applicable Products, which will be conducted at a location and in a format to be determined by Sycamore. Sycamore shall determine, in its sole discretion, the nature of the training to be provided. Sprint shall bear all travel, lodging, meal and other expenses of its personnel connected with such training classes.

5. Prices

5.1 During the Term of this Agreement, Sprint shall be entitled to purchase the Products set forth on Exhibit A at the [*] prices and product manufacturing lead times set forth in [*], as it may be amended from time to time, [*] set forth in Sycamore’s then current discount schedule, a current version of which is attached hereto as Exhibit B. Discounts shall only apply to those Products that are designated in the Price List as discountable. All prices set forth in Sycamore’s Price List are exclusive of any applicable value-added, excise, sales, use or consumption taxes, customs duties or other governmental charges.

5.2 Sycamore shall be free to periodically change the Price List for any Products sold under this Agreement provided [*] days advance notice is given to Sprint of any price or Product changes.

(a) In the event of a Sycamore price increase, all Products ordered on or after the effective date of such price increase shall be filled at the new higher price provided notice of the price increase as required above has been provided to Sprint. Sycamore shall, however, honor all written and

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

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accepted Sprint Orders for the Products received by Sycamore prior to the price increase announcement at the prices in effect as of the date the Order was received. Sycamore will price protect Sprint for outstanding customer price quotations for up to [*] days after the effective date of the price increase provided that Sprint gives written notification of such quotes (including customer name and Product list) within [*] days after the effective date of the price increase.

[*]

5.3 Sprint shall be free to establish the pricing it charges its customers for the Products provided however, that Sycamore shall be free to suggest and advertise a suggested retail price for its Products and Sycamore shall incur no liability to Sprint for the direct or indirect results of such activities.

5.4 [*]

6. Payment

6.1 Sycamore shall invoice Sprint upon shipment of the Products and/or acceptance of the EFI&T Services performed. Sycamore shall invoice Sprint for all other Services in accordance with the relevant Exhibit. Sprint agrees to pay all such invoices in US Dollars Sprint agrees to pay all undisputed invoiced amounts net [*] days after receipt of a proper invoice. Unless otherwise directed by Sycamore, all such invoices will be payable by wire transfer, to the following account, in United States dollars:

[Wire Instructions to be provided upon execution of the contract]

Account:

Routing:

Account Name: Sycamore Networks, Inc.

Non-receipt of payment from a Sprint customer shall not excuse or delay payment to Sycamore. In the event that Sprint fails to make any payment when due, Sycamore may withhold further shipments until such time as the past-due payment is made, and may require that subsequent orders be paid in full prior to shipment.

Invoices must show Sycamore’s name and remittance instructions, the invoice number, the invoice date, the name of Sycamore’s Sprint contact, the Prime Contract number and the Order number, the date shipment was made and the shipping point for Products. Each line item on the invoice must match the corresponding line item on the Order, including the price and description, unless there has been a price decrease.

6.2 Except for taxes based on [*] shall pay any applicable sales, use, excise, or other taxes, or amounts levied in lieu of such taxes, now or later imposed under the authority of any Federal, state or local taxing authority, based on or measured by (i) charges set forth in this Agreement or (ii) upon sales of the Products to Sprint or their use, which will be separately stated as a single line item and included on each invoice, unless Sprint provides Sycamore with a certificate exempting [*] from the payment of such taxes.

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

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6.3 [*] shall pay or reimburse [*] for all shipping costs including transportation, brokerage, handling, insurance charges, special packing or freight charges and other costs that [*] may incur in [*] the Products [*].

6.4 [*]

6.5 Sprint and Sycamore may desire to facilitate certain commercial transactions between them electronically in Electronic Data Interchange (“EDI”) format in substitution for conventional paper-based documents. EDI transactions under this Agreement may include transmitting and receiving EDI data for ordering, invoicing and payment. Sprint’s Trading Agreement, which is attached as Exhibit F, sets forth the terms and conditions of the EDI transaction.

7. Ordering

7.1 Shipments of the Products and performance of Services shall be made against written purchase orders issued by Sprint (“Order”). At a minimum, each Order shall specify the following items:

a. A complete list of the Products and/or Services covered by the Order, specifying the quantity, model number and description of each and a statement of requirements for Services, if applicable;

b. The price of each Product or Service, any applicable discounts, and any additional charges and costs;

c. The billing address, the destination to which the Products will be delivered or Services performed, and the requested delivery date; and

d. The signature of Sprint’s employee or agent who possesses the authority to place such an order.

e. If Sprint determines that an Order supports specific requirements included in a contract or subcontract between Sprint and its federal or state government customers, Sycamore shall be subject to certain federal and state acquisition regulations, such as requirements related to equal opportunity and affirmative action for Vietnam era veterans. Sycamore shall be subject only to those laws that must be included in all subcontracts as a matter of law and such other mutually agreed upon terms and conditions of Sprint’s contract or subcontract that apply to Sycamore’s performance. In the event of a conflict between the terms and conditions of this Agreement and the contract-specific terms and condition included in an Order or an Exhibit to this Agreement, the terms and conditions of the Order or the Exhibit shall apply. Specific terms and conditions applicable to Sycamore’s performance under Sprint’s GSA Schedule are included in Exhibit H. Additional contract-specific Exhibits may be added to this Agreement by mutual agreement of the parties.

7.2 Sycamore shall acknowledge Sprint’s Orders in writing within [*] business days after receipt. Sycamore’s acknowledgment shall note any exceptions regarding matters such as the items ordered, configuration, and Product pricing. Sycamore shall also confirm the requested delivery date or provide an alternative delivery date. In no event shall any Order be binding on Sycamore until Sprint’s Order and Sycamore’s acknowledgment are in agreement as to the items ordered, configuration, pricing, delivery dates, and all other material terms.

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

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7.3 No Order, acknowledgment form, or other ordering document or communication from either party shall vary the terms and conditions on this Agreement unless both parties expressly agree in writing. In the event of any conflict between the terms and conditions of this Agreement and those of any Order acknowledgment form or other ordering document or communication, the terms and conditions of this Agreement shall prevail.

7.4 [*]

8. Delivery and Product Availability

8.1 All deliveries of the Products purchased pursuant to this Agreement will be made F.O.B. Sycamore’s manufacturing facility. Sycamore shall select a freight forwarder to be used for the shipping of the products to Sprint or the Sprint-specified destination from Sprint’s approved list of carriers included in Exhibit G, Sprint Transportation Routing Guide. All Products will be packaged for shipment in accordance with best commercial practices. Sprint may charge excess transportation charges back to Sycamore in the event Sycamore fails to use Sprint’s carriers as specified in Exhibit G. However, excess transportation charges shall not be charged to Sycamore if Sycamore has obtained Sprint’s prior consent to its use of an alternate freight forwarder to meet a required delivery date.

8.2 Title (excluding software) and risk of loss to the Products shall pass to Sprint upon delivery to the selected common carrier at Sycamore’s plant. All transportation, shipping, and insurance costs shall be charged to Sprint’s account.

8.3 Sycamore reserves the right to make changes in the Products in whole or in part to be supplied to Sprint at any time prior to delivery to include electrical or mechanical design refinements deemed appropriate by Sycamore without any obligation to modify or change any Products previously delivered to Sprint. Sycamore also reserves the right at any time to effect changes in or discontinue the sale or license of any of its Products. Sycamore agrees to immediately notify Sprint of any Product changes or discontinuance.

Sycamore will manufacture any Product, or offer a Product of similar form, fit, or function, for [*] years from the Effective Date. During the term of this Agreement and after its expiration or termination, Sycamore agrees to provide Sprint a commercially reasonable notice of its intent to discontinue any Product supplied by Sycamore to Sprint. [*]

Sycamore will continue to offer services to repair and/or provide replacement parts to support any Product purchased by Sprint for at least [*] years after notice of its intent to discontinue any Product supplied by Sycamore to Sprint.

8.4 Sycamore shall use its best efforts to ship Products and perform Services to meet the delivery date specified in any Order. If Sycamore fails to meet the delivery date specified in an Order, based upon the manufacturer lead times specified in Exhibit A, Sprint may direct expedited Product routing, and Sprint may bill such excess costs to Sycamore.

9. Rescheduling of Orders

9.1 Sprint may reschedule delivery dates of any pending Orders upon reasonable notice to Sycamore provided that its government customer reschedules such Order(s) and Sprint provides Sycamore with proof of such rescheduling.

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

SYCAMORE NETWORKS, INC. AND SPRINT COMMUNICATIONS COMPANY, L.P.

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10. Sublicense of Software Products and Firmware

10.1 Subject to the provisions of this Section, Sycamore grants to Sprint during the Term a nonexclusive, nontransferable license to use the object code form of the software Products only as necessary to carry out the following activities in accordance with this Agreement: (i) market and distribute the software Products pursuant to Section 10.2 below solely for use in conjunction with Sycamore’s Products, (ii) demonstrate the software Products to potential end-users of the Products and (iii) service and support Sprint’s customers to the extent that Sprint is required to do so by the terms of the Support Agreement entered into between Sprint and Sycamore, attached hereto as Exhibit D. Except as otherwise permitted in this Section, Sprint’s use of the software Products shall be subject to the Sycamore Software License Agreement attached as Exhibit E.

10.2 To enable Sprint to market and distribute the software Products, Sycamore grants to Sprint during the Term the right to sublicense the software Products in object code form to its customers, as sublicensees, for their internal use only by means of a written nonexclusive and nontransferable software license agreement (“Reseller Software License Agreement”) between Sprint and such customer in a form substantially similar to and no less restrictive or limited than the Sycamore Software License Agreement contained in the attached Exhibit E. Such substantially similar Reseller Software License Agreement must be flowed through to the sublicensee end-user before the software Product or firmware is provided to such sublicensee. If requested, Sprint agrees to send a copy of each Reseller Software License Agreement or copies of the accepted terms and conditions incorporated in Sprint’s contract with the sublicensee to Sycamore promptly after such agreement is executed by a sublicensee. Sycamore acknowledges that Sprint’s ability to flow through or enforce the Reseller Software License Agreement to any government customer is subject to Federal and State procurement laws and regulations.

10.3 In addition to Section 10.2, Sprint must specifically include provisions in its Reseller Software License Agreement or incorporated terms and conditions that specify that Sprint’s customers shall not:

a. copy or adapt the software Products except for back-up purposes,

b. use the software Product or firmware except for the customer’s internal use; or,

c. reverse engineer, translate, decompile, or disassemble the software Products; or,

d. incorporate in whole or in part any other product or create derivative works based on all or any part of the Products.

10.4 To the extent commercially reasonable, Sprint shall be responsible for enforcement of such Reseller Software License Agreements or incorporated software license terms and conditions. In the event of a sublicensee’s material breach of its sublicense, Sprint shall promptly notify Sycamore of such breach within [*] and will institute legal action against such sublicensee within [*] calendar days at [*] expense if requested by Sycamore or such claim is automatically assigned to Sycamore [*] days after the material breach to allow Sycamore to pursue a claim itself at Sycamore’s sole discretion against such government customer in Sprint’s name and at [*] expense.

10.5 Under no circumstances shall Sprint decompile, disassemble, engineer, reverse assemble or reverse compile the object code portion of the Software Products to produce a source code version, nor, except as expressly provided herein, copy, modify, lease or loan the Software Products. Sprint shall ensure that any copies of the Software Products made under the terms of this Agreement shall include all of Sycamore’s copyright and other proprietary notices displayed on the original. Except as provided in this Section 10, this Agreement grants no other right, title or interest in any intellectual property right embodied in or associated with the Software Products.

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10.6 Sprint shall not deliver any Software Product, or any technical data relating thereto, to any branch or agency of the United States Government without appropriate markings and notifications to the end user that such items are provided with RESTRICTED RIGHTS ONLY as follows: “Distribution and use of products including computer programs and any related documentation and derivative works thereof, to and by the United States Government, are subject to the Restricted Rights provisions of FAR 52.227-19, paragraph (c)(2) as applicable, except for purchases by agencies of the Department of Defense (DOD). If the Software is acquired under the terms of a Department of Defense or civilian agency contract, the Software is a “commercial item” as that term is defined at 48 C.F.R. 2.101 (Oct. 1995), consisting of “commercial computer software” and “commercial computer software documentation” as such terms are used in 48 C.F.R. 12.212 of the Federal Acquisition Regulations and its successors and 48 C.F.R. 227.7202-1 through 227.7202-4 (June 1995) of the DoD FAR Supplement and its successors. All U.S. Government end users acquire the Software with only those rights set forth in this Agreement. Manufacturer is Sycamore Networks, Inc., 220 Mill Road, Chelmsford, MA 01824, USA. Unpublished—rights reserved under the copyright laws of the United States.”

11. Support

Sprint shall enter into a Reseller Services Agreement with Sycamore as attached in Exhibit D, and Reseller Services shall be provided by Sycamore to Sprint’s end-user customers pursuant to the terms of such Exhibit D. The Parties shall mutually agree upon Exhibit D within 6 months of execution of this Agreement.

12. Records and Audit

12.1 Sprint shall maintain records identifying each Product sold or sublicensed for a minimum of three (3) years after the expiration or termination of this Agreement. During the term of the Agreement and three (3) years thereafter, Sycamore reserves the right to audit, at Sycamore’s expense, all applicable Sprint records relating to Sprint’s Product sales and sublicensing of the Products during regular business hours for the purpose of enforcing the terms and conditions of this Agreement. Upon at least [*] days’ prior written notice by Sycamore, Sprint shall provide access to such records during normal business hours at Sprint’s location(s).

12.2 Sycamore shall maintain all records pertaining to this Agreement for at least three (3) years after expiration or termination of this Agreement.

Sprint will provide Sycamore with at least [*] business days’ prior written notice of an audit. Sycamore will make the information reasonably required to conduct the audit available on a timely basis and assist Sprint and its internal auditors as reasonably necessary. Sycamore will not be responsible for Sprint’s expenses incurred for an audit, [*].

13. Limited Warranty

13.1 Sycamore warrants that it has clean, marketable and unencumbered title to all Products.

13.2 Hardware:

Sycamore warrants that all hardware Products purchased by Sprint under this Agreement shall materially conform to Sycamore’s then-current published specifications for the most current release of such hardware for a period of [*] years from the date of shipment by Sycamore. During

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the warranty period, as Sprint’s [*] remedy, Sycamore will at its option and expense, repair, modify or replace the hardware Products, part or component after the defective Product has been returned to Sycamore. To obtain warranty service, Sprint must return the hardware Products, part or component to Sycamore’s factory after receiving a Return Materials Authorization Number. The warranty on repaired, modified, or replaced hardware Products shall be (i) the remainder of the original warranty period or (ii) [*] days, whichever is longer. [*] This hardware warranty does not, however, apply to any Product which (i) has been altered, except as authorized in writing by Sycamore, (ii) has not been installed, operated, repaired or maintained in accordance with any Sycamore installation, handling, maintenance or operating instructions, (iii) has been subjected to unusual physical or electrical stress, misuse, negligence, or accident or (iv) is being used with products with which it was not designed to operate.

13.3 Services:

For Services performed, Sycamore warrants that Services will be provided in a workmanlike manner and that for a period of [*] days after i) Sycamore’s provision of such Services, or ii) for EFI&T Services Sprint’s acceptance of Services, the Services and will be free from defects in design, materials and workmanship and the Services will conform to the Order specifications.

13.4 Software:

Sycamore warrants that with normal use and service each software or firmware Product shall materially conform to Sycamore’s then-current published specifications for the most current release of such software or firmware Product for a period of [*] from the date of shipment by Sycamore. During the warranty period, as Sprint’s [*] remedy, Sycamore will either (i) use reasonable efforts to correct a software Product’s failure to conform to the warranty, provided that Sprint has notified Sycamore in writing of the nature of the non-conformity; or (ii) replace the software Product with a software product meeting Sycamore’s then-current published specifications. This warranty shall not apply if any software or firmware Product has been (i) modified or altered by anyone other than Sycamore, (ii) abused or misapplied, or (iii) used in combination with hardware or software other than the Sycamore manufactured Products for which it was designed. In no event does Sycamore warrant that the use of software or firmware Products will be error free or uninterrupted, or that all program errors will be corrected.

13.5 To the best of Sycamore’s knowledge, Sycamore Products provided to Sprint under this Agreement, and Sprint’s and its customers’ use of the Products, will in no way constitute an infringement or other violation of any copyright, patent, trade secret, trademark, nondisclosure, or any other intellectual property righ, or right of publicity. To the best of Sycamore’s knowledge, Sycamore Products requiring the use of any software or data provided on a network or stand-alone desktop computer [*].

13.6 Sycamore’s sole obligation under the hardware and software Product warranties shall be to provide the remedies described in this Section. EXCEPT FOR THE EXPRESS WARRANTIES STATED IN THIS SECTION, THE PRODUCTS ARE PROVIDED “AS IS” AND SYCAMORE DISCLAIMS ANY AND ALL OTHER WARRANTIES WHETHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE PRODUCTS PROVIDED UNDER THIS AGREEMENT, AND SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OF NONINFRINGMENT AS WELL AS ANY WARRANTIES ARISING FROM COURSE OF DEALING, USAGE OR TRADE PRACTICE. SYCAMORE’S EXPRESS WARRANTIES WILL NOT BE ENLARGED, DIMINISHED OR AFFECTED BY, AND NO OBLIGATION OR

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LIABILITY WILL ARISE OUT OF, SYCAMORE RENDERING TECHNICAL OR OTHER ADVICE OR SERVICE IN CONNECTION WITH THE PRODUCTS. SOME STATES DO NOT ALLOW LIMITATIONS ON HOW LONG AN IMPLIED WARRANTY LASTS, SO THE ABOVE LIMITATION MAY NOT APPLY. THIS WARRANTY GIVES SPRINT SPECIFIC LEGAL RIGHTS, AND SPRINT MAY ALSO HAVE OTHER RIGHTS WHICH VARY FROM STATE TO STATE.

13.7 Upon the sale or sublicense by Sprint of any of the Products, Sprint shall grant to its customers a warranty from Sprint that is equivalent in scope and effect to the warranty granted under this Section, but such warranty shall specify that the customer’s only remedy or recourse under such warranty shall be against Sprint.

14. Confidentiality

14.1 For purposes of this Agreement, confidential information shall mean any information if (i) it is delivered in written form marked “Confidential”, (ii) it is delivered orally, described as confidential and its confidential nature is confirmed in writing within twenty (20) days, or (iii) if in any event the receiving party might reasonably be expected to judge it as confidential (“Confidential Information”).

14.2 Neither party shall directly or indirectly communicate or disclose to any person, firm, corporation or other entity any Confidential Information provided to it and identified as such by the other party without the prior written consent of the other party unless:

a. Such information is already known by the receiving party, as evidenced by its business records at the time it was provided to the receiving party;

b. Such information is already in the public domain;

c. The receiving party is required to disclose such information pursuant to law or court order, but only after notifying the other party and allowing the other party an opportunity to obtain a protective or other order;

d. Such information lawfully comes into the receiving party’s possession from a source which is not the other party; or

e. Such information is independently developed by the receiving party without reference to the information and such independent development can be shown by documentary evidence.

14.3 Each party agrees not to use such Confidential Information except in its performance under this Agreement. In addition, each party shall treat and protect such information in the same manner as it treats its own information of like character, but with not less than reasonable care. The obligations of this Section with regard to Confidential Information shall continue for a period of five (5) years after termination or expiration of this Agreement. Such Confidential Information must be returned by the receiving party upon termination or expiration of this Agreement or upon written request. At the reasonable request of the disclosing party, the receiving party will furnish an officer’s certificate certifying that any Confidential Information of the disclosing party’s Confidential Information not returned has been destroyed.

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To the extent applicable, if any material non-public information is disclosed, the receiving party agrees that it will comply with SEC Regulation FD (Fair Disclosure).

14.4 No public announcement or other disclosure concerning the existence or terms of this Agreement shall be made by either party without first obtaining the written approval of the other party and agreement upon the nature and text of such announcement, such approval and agreement not to be unreasonably withheld. This Section 14 shall not apply to (i) any disclosure to a third party which a party determines is reasonably necessary in connection with any financing, strategic transaction, acquisition or disposition involving such party provided that the third party signs a non-disclosure agreement with terms and conditions substantially similar to this Section 14 or (ii) any disclosure which a party reasonably determines is required by applicable law, regulation, regulatory authority, legal process or the rules of any stock market on which the securities of such party are listed or quoted for trading.

14.5 No Publicity. Neither party will, without obtaining the prior written consent of the other party, make any news release, public announcement, denial or confirmation of this Agreement or any Order, its value, or its terms and conditions, or in any other manner advertise or publish this Agreement or any Order, its value, or its terms and conditions. Nothing in this Agreement is intended to imply that either party will agree to any publicity whatsoever, and each party may, in its sole discretion, withhold its consent to any publicity.

14.6 Injunctive Relief. Each party agrees that the wrongful disclosure of Confidential Information may cause irreparable injury that is inadequately compensable in monetary damages. Accordingly, either party may seek injunctive relief in any court of competent jurisdiction for the breach or threatened breach of this Section 14 in addition to any other remedies in law or equity.

15. Intellectual Property Rights

15.1 During the term of this Agreement, Sprint is authorized to use Sycamore’s trademarks, trade names and logos in connection with Sprint’s sale, advertisement and promotion of the Products in accordance with Sycamore’s requirements for such use. At Sycamore’s request, Sprint will provide samples of any or all of Sprint’s sale, advertisement and promotion documentation to ensure compliance with Sycamores requirements for the use of its trademarks, trade names, and logos. Upon termination or expiration of this Agreement, Sprint shall cease its use of any of Sycamore’s trademarks, trade names or logos and shall immediately remove any references to Sycamore from its advertising, promotional and all other materials.

15.2 Except as described in this Agreement, Sycamore does not grant and Sprint acknowledges that it shall have no right, license or interest in any of the patents, copyrights, trademarks, or trade secrets owned, used or claimed now or in the future by Sycamore. All applicable rights to such patents, copyrights, trademarks, and trade secrets are and will remain the exclusive property of Sycamore, whether or not the patents, copyrights, trademarks and trade secrets are specifically recognized or perfected under the laws of the Territory. Regardless of any provision to the contrary in this Agreement, no title to or ownership of the intellectual property contained in the Products or any part of the Products or Sycamore’s confidential information is transferred to Sprint.

15.3 Sprint acknowledges that the Products as well as all corrections, enhancements, updates, modifications, local versions, translations or any derivatives of the Products (collectively, the “Enhancements”), and all intellectual property rights in the Products and Enhancements shall remain Sycamore’s property, subject to the rights expressly granted to Sprint by this Agreement. Sprint acknowledges that it has paid no consideration for the use of the Marks or Sycamore’s

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copyrights, and nothing contained in this Agreement will give the Sprint any right, title or interest in any of them.

15.4 Sprint agrees: (i) not to remove, modify or change in any way the Marks which are affixed to the Products and to Sycamore marketing and sales literature when they are shipped to Sprint, and (ii) not to attach any additional trademarks, trade names, logos, insignias, markings or designations to such Products or materials.

15.5 Sycamore agrees not to use the trademarks, service marks, trade names, or logos proprietary to Sprint, for any purpose without Sprint’s prior written consent.

16. Patent and Copyright Indemnification

16.1 Subject to the limitations of Section 16.2 below, Sycamore agrees to indemnify and hold Sprint harmless from and against all valid claims and judicial or governmental determinations that the Products as delivered by Sycamore under this Agreement infringe or misappropriate any United States patent rights, copyrights, trade secrets, trademarks, or any other intellectual property right, or right of publicity. Sycamore shall assume the defense of any such claim of infringement or misappropriation brought against Sprint in the United States by counsel retained at Sycamore’s own expense, provided that Sprint promptly notifies Sycamore in writing of such claim or the commencement of any such suit, action, proceeding or threat covered by this Section. Sycamore shall maintain sole and exclusive control of the defense of any such claim and Sprint shall cooperate in the defense of such claim. In no event shall Sprint consent to any judgment or decree or do any other act in compromise of any such claim without first obtaining Sycamore’s written consent.

16.2 In the event that the use or sale of all or any portion of the Products is enjoined as a result of a suit based on alleged infringement or misappropriation of the third party intellectual property rights, Sycamore agrees to either: (i) procure for Sprint the right to continue to use or sell the Product, or (ii) replace or modify the infringing or misappropriating Product so that it becomes non-infringing. [*]. Upon Sycamore’s fulfillment of the alternatives set out in this Section, Sycamore shall be relieved of any further obligation or liability to Sprint as a result of any such infringement or misappropriation.

16.3 Regardless of any other provisions of this Agreement, this Section shall not apply (i) to any designs, specifications or modifications originating with or requested by Sprint, or (ii) to the combination of any Product with other equipment, software or products not supplied by Sycamore if such infringement or misappropriation would not have occurred but for such combination. Sprint shall indemnify and hold Sycamore harmless against all claims that Sprint’s designs, specifications, modifications or combinations of Products with other equipment infringes or misappropriates any third party’s patent rights, copyrights, trade secrets, trademarks or other intellectual property rights.

16.4 THIS SECTION STATES SYCAMORE’S ENTIRE LIABILITY TO SPRINT, EXCEPT FOR SPRINT’S RIGHTS UNDER SECTION 19 BELOW, FOR ANY INFRINGEMENT OR MISAPPROPRIATION OF ANY PATENT RIGHTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS.

17. General Indemnity and Indemnification Process

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Except for claims covered by Section 16, Sycamore will indemnify and defend Sprint and its directors, officers, agents, and employees (each, a “Sprint Indemnitee”) from and against all claims, damages, losses, liabilities, costs, expenses and reasonable attorney’s fees (collectively “Damages”) arising out of a [*] against a Sprint Indemnitee resulting from or alleged to have resulted from [*] under or related [*].

Sprint will indemnify and defend Sycamore and its respective directors, officers, agents and employees (each, a “Sycamore Indemnitee”) from and against all Damages arising out of a [*].

Promptly, upon becoming aware of any matter that is subject to the provisions of Sections 16 and 17 (a “Claim”), the party seeking indemnification (the “Indemnified Party”) must give notice of the Claim to the other party (“Indemnifying Party”), accompanied by a copy of any written documentation regarding the Claim received by the Indemnified Party.

The Indemnifying Party will retain the right, at its option, to control, settle or defend, at its own expense and with its own counsel, the Claim. The Indemnified Party will have the right, at its option, to participate in the settlement or defense of the Claim, with its own counsel and at its own expense. The Indemnifying Party will not enter into any settlement that imposes any liability or obligation on the Indemnified Party without the Indemnified Party’s prior written consent. The parties will cooperate in the settlement or defense and give each other full access to all relevant information.

If the Indemnifying Party (1) fails to notify the Indemnified Party of the Indemnifying Party’s intent to take any action within [*] days after receipt of a notice of a Claim or (2) fails to proceed in good faith with the prompt resolution of the Claim, the Indemnified Party, with prior written notice to the Indemnifying Party and without waiving any rights to indemnification, may defend or settle the Claim without the prior written consent of the Indemnifying Party. The

Indemnifying Party will reimburse the Indemnified Party on demand for all Damages incurred by the Indemnified Party in defending or settling the Claim.

The Indemnifying Party has no obligation to indemnify and defend to the extent of the material failure if (1) the Indemnified Party fails to promptly notify the Indemnifying Party of the Claim and fails to provide reasonable cooperation and information to defend or settle the Claim; and (2) that failure materially prejudices the Indemnifying Party’s ability to satisfactorily defend or settle the Claim.

18. Independent Contractor Status

Each party shall conduct its business under this Agreement as a principal for its own account at its own expense and risk. The relationship between the parties is that of independent contractors. This Agreement creates no relationship of principal and agent, partner, joint venture or any similar relationship between Sycamore and Sprint. Each Party agrees that it does not have and will not have any authority to act on the other party’s behalf. Each party further agrees that it will not act or represent itself, directly or by implication, to be an agent for the other party and will not attempt to create any obligation or make any representation on behalf of or in the name of the other party.

19. Termination

19.1 Either party may terminate this Agreement at any time, with or without cause, upon one hundred and eighty (180) days’ prior written notice to the other party.

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19.2 Termination for Convenience. Provided Sprint is in receipt of a termination for convenience from its federal or state government customer which terminates in whole or in part any Sprint contract or subcontract that resulted in an Order issued against this Agreement, Sprint may terminate this Agreement or any Order(s) or both, in whole or in part, at any time without liability by providing a termination notice to Sycamore. Unless otherwise provided in the notice, the termination is effective immediately upon Sycamore’s receipt of the notice. Upon receipt of notice, Sycamore must discontinue work, preserve and protect materials, work in progress, and completed work and conclude performance in accordance with Sprint’s instructions. Sprint will pay the contract price for completed goods and services in the affected Order(s) accepted by its customer. Sprint will timely submit Sycamore’s costs incurred, together with a reasonable profit thereon, (substantiated by documentation reasonably satisfactory to Sprint) in the performance of work terminated to its customer for payment and pay such costs and profit to Sycamore to the extent Sprint is reimbursed by its federal or state government customer for such Sycamore costs. Upon the demand of and at the expense of Sycamore, Sprint shall prosecute any appeal of the government customer’s denial of Sycamore’s claim for termination costs or will assign such claim to permit Sycamore to pursue a claim itself, and at its cost, against the government’s customer in Sprint’s name. Sycamore will not be entitled to damages as result of such termination for convenience in excess of the amount paid by Sprint’s government customer to Sprint for that portion of paid damages relating to Sycamore’s claim.

19.3 Termination for Cause. a) If a party materially breaches this Agreement or an Order or both, the other party may give the breaching party a material breach notice, identifying the action or inaction that is the basis of the breach. The party that gave the breach notice may terminate this Agreement or the affected Order or both if the breaching party has not cured the breach within [*] days after the date of the material breach notice. Unless otherwise provided in the notice or unless the breach has been cured, the termination is effective 31 days after the date of the notice.

b) Except for Orders under the GSA Schedule which shall be subject to the terms of Exhibit H, if Sprint is in receipt of a notification of default from its government customer, Sprint may, by written notice of default to Sycamore, terminate the whole or any part of an Order in any one of the following circumstances: [*].

In addition to any of the rights or remedies that Sprint may have under this Section, if Sprint terminates an Order in whole or in part for cause as provided herein, Sprint may [*]. If termination is partial, Sycamore must continue the performance of the remaining portion of the Order. If Sycamore’s failure to perform is caused by the default of a subcontractor at any tier, and if the failure is beyond the control of and without the fault or negligence of Sycamore and its subcontractor, then Sycamore shall not be liable for any excess costs unless the replacement Products or Services were available to Sycamore from another source in time to meet the delivery schedule.

[*]

Sprint shall have no obligations to Sycamore with respect to the terminated part of any Order except as herein provided. In case of Sycamore’s default, Sprint’s rights as set forth herein shall be in addition to Sprint’s other rights although not set forth under this Agreement.

19.4 This Agreement may be terminated for cause by either party in the event that the other party: (i) shall become insolvent; (ii) admits in writing its inability to pay its debts as they mature; or (iii) ceases to function as a going concern or to conduct its operations in the normal course of business.

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In addition, either party may terminate this Agreement if there is a [*]. In the case of termination resulting from a [*], the termination shall become effective [*] days after receipt of a notice of termination.

19.5 The termination or expiration of this Agreement shall in no case relieve either party from its obligation to pay to the other any sums accrued under this Agreement prior to such termination or expiration. Termination of this Agreement is without prejudice to any other right or remedy of the parties. Termination of this Agreement for any cause does not release either party from any liability which, at the time of termination, has already accrued to the other party, or which may accrue in respect of any act or omission prior to termination or from any obligation which is expressly stated to survive the termination.

19.6 Within ten (10) days after termination or expiration of this Agreement, Sprint shall return to Sycamore all signs, literature, logos and other materials identifying Sycamore that remain in Sprint’s possession. Sprint shall also cease production and/or distribution of any such materials upon expiration or termination of this Agreement. Sycamore shall invoice Sprint for any final amounts due under the terminated Order(s). The parties will discontinue making any statements or taking any actions that might cause third parties to infer that any business relationship continues to exist between the parties under the terminated Order, and where necessary or advisable, inform third parties that the parties no longer have a business relationship under the terminated Order.

20. Limitation of Liability

Neither party will be liable to the other for consequential, indirect or punitive damages for any cause of action, whether in contract, tort or otherwise, except for:

1. [*];

2. [*]; or

3. [*].

Consequential damages include, but are not limited to, lost profits, lost revenue, and lost business opportunities, whether or not the other party was or should have been aware of the possibility of these damages.

21. Sycamore will obtain and keep in force during the term of this Agreement not less than the following insurance:

a) Commercial General Liability insurance, including bodily injury, property damage, personal and advertising injury liability, and contractual liability covering operations, independent contractor and products/completed operations hazards, with limits of not less than [*] combined single limit per occurrence and [*] annual aggregate, naming Sprint, its officers, directors and employees as additional insureds;

b) Workers’ Compensation as provided for in any jurisdiction where work is performed by Sycamore Personnel who are engaged in the performance of Services under this Agreement with an Employer’s Liability limit of not less than [*] for bodily injury by accident or disease;

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c) Business Auto insurance covering owned, non-owned and hired autos with limit of not less than [*] combined single limit per accident for bodily injury and property damage liability, naming Sprint, its officers, directors, and employees; and

d) Umbrella/Excess Liability with limits of not less than [*] combined single limit in excess of the above-referenced Commercial General Liability, Employer’s Liability and Business Auto Liability.

All required insurance policies must be taken out with financially reputable insurers reasonably acceptable to Sprint and licensed to do business in all jurisdictions where Services are provided under this Agreement. Sycamore will provide Sprint with a certificate of insurance, satisfactory in form and content to Sprint, evidencing that all the required coverages are in force and have been endorsed to provide that no policy will be canceled without first giving Sprint 30 days’ prior notice. Nothing contained in this Section 21 limits Sycamore’s liability to Sprint to the limits of insurance certified or carried.

22. General

22.1 Sycamore represents and warrants that it has the right and has obtained all necessary corporate approvals to enter into this Agreement. Sprint represents and warrants that:

a. Sprint has the right and has obtained all necessary corporate and, if required, governmental approvals to enter into this Agreement; and

b. Sprint will, at all times, comply with all applicable laws, statutes, treaties or regulations of the Territory and of the United States relating to the Products, confidential information and relevant technical data as well as the purchase, sale, license, sublicense and distribution of same including any governmental export control laws and procedures applicable to the export of Products and shall obtain any permits and license required for the operation or use of Products.

22.2 This Agreement supersedes all prior and contemporaneous agreements, representations, warranties and understandings and contains the entire agreement between the parties. No amendment, modification, termination, or waiver of any provision of this Agreement or consent to any departure from this Agreement shall be effective unless it is in writing and signed by a duly authorized representative of each party. No failure or delay on the part of either party in exercising any right or remedy under this Agreement shall operate as a waiver of such right or remedy.

22.3 This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, but neither party shall have the right to assign or otherwise transfer its rights under this Agreement without receiving the express prior written consent of the other party. Each party may, however, assign this Agreement in the event of a sale of all or substantially all of that party’s assets.

22.4 All notices, requests, demands, and other communications provided for under this Agreement shall be in writing and be sent by registered or certified mail, postage prepaid, to the receiving party at its address as set forth in this Agreement or to any other address that the receiving party may have provided to the sending party in writing. When feasible, any such notice, request, demand or other communication shall also be transmitted by facsimile as follows or to such other facsimile number as provided by the receiving party in writing:

• Sprint’s Facsimile Number: (703) 904-2717 ATTN:

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• Sycamore’s Facsimile Number: (978) 256-3434 ATTN:

Any notice, request, demand or other communication sent by facsimile will be deemed to have been received on the day it is sent. Any notice, request, demand or other communication sent by registered or certified mail will be deemed to have been received on the seventh (7th) business day after its date of posting, unless it is sent by facsimile prior to such seventh (7th) business day.

22.5 This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Kansas, without regard to any conflict of laws principles. This Agreement will not be governed or interpreted in any way by referring to any law based on the Uniform Computer Information Transaction Act (UCITA), even if such law is adopted in Kansas.

Any court proceeding brought by either party must be brought, as appropriate, in Kansas District Court located in Johnson County Kansas, or in the United States District Court for the District of Kansas in Kansas City, Kansas. Each party agrees to personal jurisdiction in either court.

The parties may, but are not obligated to, resolve any issue, dispute, or controversy arising out of or relating to this Agreement using the following procedures. Any party may give the other party notice of any dispute not resolved in the normal course of business. Within 10 days after delivery of such notice, representatives of both parties may meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute by the respective representatives of both parties within the time frames and escalation process set forth below:

	Sprint (Title)	Sycamore (Title)
Within 10 days	Senior Negotiator, Supply Chain Management	Project Manager
Within 20 days	Manager, Regional Supply Chain Operations	Vice President Sales, North America
Within 30 days	Director, Supply Chain Management	Vice President, Worldwide Sales and Support

If a party intends to be accompanied at a meeting by an attorney, the other party will be given at least 2 business days’ notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Section 23.0 are confidential and will be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and State Rules of Evidence.

22.6 This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. The provisions of this Agreement are declared severable. In the event that any provision contained in this Agreement shall be held to be unenforceable or invalid, the remaining provisions shall be given full effect, and the parties agree to negotiate, in good faith, a substitute valid provision which most nearly approximates the parties’ intent. Headings in this Agreement are included for reference only and shall not constitute a part of this Agreement for any other purpose.

22.7 Neither party shall be liable to the other party for any loss, injury, delay, expenses, damages, or other casualty suffered or incurred by the other party arising out of any cause or event not within a party’s reasonable control and without its fault or negligence including, but not limited to: riots, wars or hostilities between any nations; Acts of God, fires, storms, floods or earthquakes; strikes, labor disputes, vendor delays, or shortages or curtailments of raw materials; labor, power or other

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

SYCAMORE NETWORKS, INC AND SPRINT COMMUNICATIONS COMPANY, L.P.

18

utility services; governmental restrictions or trade disputes; manufacturing delays; or, other contingencies.

22.8 No action, regardless of form, arising out of the transactions under this Agreement, may be brought by either party more than [*] years after the cause of action accrues.

22.9 The parties agree that the provisions of the Agreement that by their nature would survive the expiration of earlier termination of this Agreement shall survive such expiration or earlier termination including, but not limited to, the following provisions: Sublicense of Software Products and Firmware, Limited Warranty, Intellectual Property Rights, Patent and Copyright Indemnification, General Indemnity and Indemnification Process, Limitation of Liability, Confidentiality, and General.

22.10 This Agreement will not be construed against either party due to authorship. Except for the indemnification rights and obligations in Section 16 and 17, nothing in this Agreement gives anyone, other than the parties and any permitted assignees, any rights or remedies under this Agreement.

22.11 Sycamore agrees to conduct business with Sprint in an ethical manner that is consistent with The Sprint Principles of Business Conduct for Consultants, Contractors and Suppliers, which Sycamore acknowledges has been provided to Sycamore as a reference.

[REMAINDER OF PAGE INTENTIONALLY LET BLANK

CONFIDENTIAL AND PROPERIETARY INFORMATION OF

SYCAMORE NETWORKS, INC AND SPRINT COMMUNICATIONS COMPANY, L.P.

19

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by their duly authorized representatives as of the effective date written below.

SYCAMORE NETWORKS, INC.	SPRINT COMMUNICATIONS COMPANY, L.P.
By:	By:
Name:	Name:
Title:	Title:
Effective Date:	Date

Exhibits:

Exhibit A:	Products and Reseller’s Territory
Exhibit B:	Discount Schedule and Price List
Exhibit C:	Sales Plan
Exhibit D:	Reseller Services Agreement
Exhibit E:	Sycamore Software License Agreement
Exhibit F:	Sprint’s Trading Agreement
Exhibit G:	Sprint Transportation Routing Guide
Exhibit H:	[*]
Exhibit I:	[*]

CONFIDENTIAL AND PROPRIETARY INFORMATION OF

SYCAMORE NETWORKS, INC AND SPRINT COMMUNICATIONS COMPANY, L.P.

20

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel E. Smith, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Sycamore Networks, Inc.;

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

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

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2004

/s/ DANIEL E. SMITH

Daniel E. Smith

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Frances M. Jewels, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Sycamore Networks, Inc.;

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

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

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2004

/s/ FRANCES M. JEWELS

Frances M. Jewels

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending January 24, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel E. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

/s/ Daniel E. Smith

Daniel E. Smith

President and Chief Executive Officer

February 12, 2004

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sycamore Networks, Inc. (the “Company”) on Form 10-Q for the period ending January 24, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frances M. Jewels, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company, as of, and for the periods presented in the Report.

/s/ Frances M. Jewels

Frances M. Jewels

Chief Financial Officer, Vice President,

Finance and Administration, Secretary and Treasurer

February 12, 2004