10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2004

¨ 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 office)

(978) 250-2900

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK $0.001 PAR VALUE

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

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

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

As of July 31, 2004 there were 273,887,455 shares outstanding of the registrant’s common stock, $0.001 par value. As of January 23, 2004 the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $996,596,000.

DOCUMENTS INCORPORATED BY REFERENCE

PART III—Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 20, 2004 are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) to this Form 10-K.

PART I

ITEM 1. BUSINESS

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

Overview

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 (collectively referred to as “service providers”). Our optical networking product portfolio includes fully integrated edge-to-core optical switching products, network management products and design and planning tools. We believe that our products enable service providers to cost effectively and easily transition their existing fiber optic network into a network infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers.

In early 2001, the telecommunications industry began a severe decline which had a significant impact on our business. The telecommunications industry decline and the continued spending constraints in the optical networking market caused a decrease in the demand for our products which had an adverse impact on our revenue and profitability. Total revenue for fiscal 2004 was $44.5 million, an increase of 16.4% compared to fiscal 2003. Total revenue for fiscal 2003 was $38.3 million, a decrease of 41.3% compared to fiscal 2002. Our net losses for fiscal 2004 and 2003 were $44.9 million and $55.1 million, respectively, and we have incurred a cumulative net loss of $781.1 million as of July 31, 2004.

In response to these market conditions, we enacted three separate restructuring programs through the fourth quarter of fiscal 2002, which have reduced our cost structure and focused our business on optical switching products, network management products and design and planning tools. As a result of our restructuring programs we have incurred net charges totaling $402.7 million, comprised as follows: $175.1 million of net charges related to excess inventory, $202.8 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments, as described in detail in Note 10 to our consolidated financial statements.

Despite challenging market conditions throughout fiscal 2004, we continued to maintain a significant cost structure, particularly within the research and development, sales and customer service organizations which we believe is necessary to develop, market and sell our products to current and prospective customers. As a result of these investments we were able to advance our technology and secure new business. We recognize however, that our progress in fiscal 2004 did not produce significant improvement in our operating results.

Recent industry reports continue to be very cautious regarding the optical networking environment. More specifically, Sycamore’s target market, the optical switching segment, remains a very small percentage of the total market. Competition for these limited switching opportunities is intense. We expect that market conditions will continue to have an adverse impact on our cost of revenue, gross margins and operating results.

In light of our fiscal year 2004 operating results and recent industry reports, in order to maximize shareholder value, we are focusing on a review of the strategic and financial alternatives available to Sycamore

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including but not limited to: (i) alliances with or a sale to another entity, (ii) acquisitions of, or mergers or other combinations with companies with either complementary technologies or in adjacent market segments, (iii) remaining a stand-alone entity, and (iv) recapitalization alternatives including stock buybacks and cash dividends. We have engaged Morgan Stanley to assist us in the review of our strategic and financial alternatives. During the course of this review, we intend to follow our strategy and objective as a stand-alone provider of optical networking equipment.

Industry Background

Industry Trends

The world’s telecommunications infrastructure is largely supported by fiber optic networks primarily owned and operated by service providers. Following deregulation and privatization in the global telecommunications industry, there were many new entrants into the service provider market. Emerging service providers built networks and began competing with incumbent service providers in an effort to accommodate rapid traffic growth and projected growth on the public network. At the same time, readily available capital further fueled the growth in the number of service providers. Many equipment vendors offered substantial vendor financing to service providers as an inducement to build their networks. These events created significant demand for networking equipment.

In early 2001, access to capital decreased and in response service providers began curtailing their network build-outs. Within a short time period, service providers dramatically reduced their overall capital spending. Equipment vendors also ceased providing vendor financing, which further decreased available capital. As a result, there was a slowdown in service provider equipment purchases and a sharp decline in demand for networking equipment. During this time period, several service providers failed and a number of them sought bankruptcy protection. At the same time, however, some service providers looked to new optical products to help them more efficiently optimize and expand their networks to handle the increased traffic load while also managing their spending and expenses.

In addition, following September 11, 2001, for defense and homeland security purposes, government agencies have increased investments in advanced, high-speed networking and communications technology.

Optical networking

Despite the telecommunications industry’s economic difficulties, data traffic on the public telecommunications network continues to increase with the widespread use of the Internet and the World Wide Web. Consumers and businesses increasingly use the Internet for applications such as electronic mail, electronic commerce, and other voice, video and data services. This growth is expected to increase the demand for capacity, or bandwidth, at all levels of the public network.

We believe that a service provider’s competitive advantage and differentiation comes from its ability to provide bandwidth when and where needed and to create and offer new services quickly and cost effectively. Given the economic decline in the telecommunications industry, we believe that service providers want to minimize their capital expenditures, lower their operating costs and improve the profitability of their voice and data services.

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

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

• Inefficient utilization of network capacity. In traditional optical networks, only one half of the available capacity is used for delivering services. The other half remains idle in the event of a network failure. This

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traditional architecture supports the high-availability requirements of traditional voice services, but is inefficient for data traffic, which is more dynamic in nature and does not always require the same level of protection.

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

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

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

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

The Sycamore Solution

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

• Improved network design. Using our expertise in optical technology, network management, data networking, and advanced hardware and software systems design, we develop innovative optical switching products that lower the costs of building and managing optical networks, and optimizes the network for the growing level of data traffic.

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

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

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

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

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

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

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

Sycamore’s Strategy

In light of our fiscal year 2004 operating results and industry reports, in order to maximize shareholder value, we are focusing on a review of the strategic and financial alternatives available to Sycamore including but not limited to: (i) alliances with or a sale to another entity; (ii) acquisitions of, or mergers or other combinations with companies with either complementary technologies or in adjacent market segments, (iii) remaining a stand-alone entity, and (iv) recapitalization alternatives including stock buybacks and cash dividends.

Throughout this review, we continue to pursue our strategy and objective to be a leading provider of optical networking products. We remain focused on balancing strategic investment in the business with our efforts to carefully manage operating costs and preserve our cash position. We continue to invest significant amounts in research and development in order to continue to deliver innovative optical networking solutions and to reduce the manufacturing costs of our products. We are also investing in our sales and customer service infrastructure, which we believe is necessary to expand and support our customer base. While we continue to invest in these areas of the business, we also continue to focus on cost management and cash preservation. Key elements of our strategy as a stand-alone entity include the following:

• Expand our customer base. We intend to actively pursue additional new customers both domestically and internationally, while continuing to expand our relationships with existing customers. While the telecommunications industry decline has impacted our ability to significantly expand our customer base, we believe that data traffic growth will cause service providers to seek optical networking solutions that will optimize network capacity and transition their networks toward a more flexible and data-optimized infrastructure.

• Expand strategic relationships including resellers. Our sales and marketing efforts focus primarily on strategic relationships, particularly with resellers, to expand our access to a broader set of customers around the world. We believe that such strategic relationships may address portions of the market, such as the government market, that we cannot reach with our own sales force without a significant investment of time and resources.

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

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

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

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

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

• Drive demand for new services. We work collaboratively with our customers to help them identify and create new services for their end-user customers. Our professional and customer service teams provide assistance in such areas as network planning, design and implementation to facilitate the introduction of these services. By helping our customers to create new services, we help generate additional revenue opportunities for our customers and enhance the value proposition of our products.

Sycamore’s Optical Networking Products

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

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

Network management. SILVX^®, our optical network management system, provides end-to-end management of services across a service provider’s optical switch network. SILVX provides comprehensive network management, planning and administration tools that communicate with existing network management systems through common standards. SILVX simplifies network configuration, service provisioning and network management by automating many labor-intensive operational processes. The combination of SILVX and our sophisticated networking software allows the SN 3000, SN 16000 SC and SN 16000 to exchange real-time information about network traffic, thereby enabling service providers to quickly provision services and more efficiently manage network capacity. In addition, SILVX allows service providers to model a broad range of optical network architectures, forecast and plan for capacity expansion, and analyze network traffic.

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

Customers

Our current and prospective customers include domestic and international large, established telecommunications service providers, Internet service providers, non-traditional telecommunications service providers, newer start-up service providers, systems integrators, governments and enterprise organizations with private fiber networks. We expect that substantially all of our revenue will be generated from a limited number of customers. We currently have ten product revenue customers as of July 31, 2004.

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During the year ended July 31, 2004, four customers, Sprint Government Systems Division (as a reseller to the federal government), Vodafone Group PLC, Neuf Telecom and NTT Communications, a subsidiary of Nippon Telephone and Telegraph Corporation accounted for 41%, 27%, 13% and 13% of our revenue, respectively. During the year ended July 31, 2003, three customers, Vodafone Group PLC, Neuf and NTT Communications accounted for 43%, 22% and 14% of our revenue, respectively. During the year ended July 31, 2002, two customers, Vodafone and NTT Communications, accounted for 45% and 20% of our revenue, respectively. International revenue was 59% of total revenue during the year ended July 31, 2004, compared to 91% of total revenue during the year ended July 31, 2003, and 87% of total revenue during the year ended July 31, 2002. See “Concentrations and Significant Customer Information” and “Segment Information” in Note 2 to our consolidated financial statements for additional details.

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

Sales and Marketing

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

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

The primary focus of our sales efforts is to develop strong relationships with resellers and incumbent service providers. Our sales and presales engineering organizations work collaboratively with both current and prospective customers to identify optical switching applications that create value in their network as well as create new services that they can offer to their customers. We also provide comprehensive post-sales customer support including network planning and deployment, technical assistance centers and logistics support. Our customer support organization leverages a network of highly qualified service partners to extend our reach and capabilities.

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

Research and Development

We believe that continued investment in research and development is necessary in order to continue to provide innovative optical networking solutions that meet our current and prospective customers’ needs. We believe that our current and prospective customers require optical networking solutions that will allow them to optimize bandwidth and capacity management while also allowing them to reduce their capital expenditures and operating costs. In order to provide such products to our customers, we believe we must make significant and

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sustained investment in research and development. Our research and development effort focuses primarily on improvements to the features and functionality of existing products and the development of new products. We believe that this investment in research and development is necessary even during periods when our revenue has declined as a result of the decreased demand for telecommunications equipment. Sycamore intends to focus its research and development efforts on optical switching and may pursue strategic alliances or acquisitions to address current and prospective customers’ needs.

Our research and development expenditures were $45.7 million, $52.4 million and $109.7 million for the years ended July 31, 2004, 2003 and 2002, respectively. All of our expenditures for research and development, as well as stock-based compensation expense relating to research and development of $2.7 million, $3.0 million and $9.9 million, for the years ended July 31, 2004, 2003 and 2002, respectively, have been expensed as incurred. As of July 31, 2004, we had approximately 222 employees involved in research and development.

Competition

There are limited optical switching opportunities since our current and prospective customers have reduced their capital expenditures. Competition for these opportunities is intense. Based on the current level of spending by telecommunications service providers, we expect that competition will continue to be very intense.

Sycamore’s competition includes larger, more established vendors of network infrastructure equipment and optical networking equipment, such as Nortel Networks, Lucent Technologies, Alcatel, Cisco, Tellabs and Ciena Corporation. Many of our established competitors have longer operating histories and greater financial, technical, sales, marketing and manufacturing resources and are able to devote greater resources to the research and development of new products. In addition, these competitors generally have more diverse product lines which allow them the flexibility to price their products more aggressively and absorb the significant cost structure associated with optical switching research and development across their entire business. Many of our competitors also have more extensive customer bases and broader customer relationships than us, including relationships with our prospective customers. In addition, to a lesser extent, we see new entrants into the optical networking market with new products that compete with our products. In order to compete effectively in this market, we must deliver products that:

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

• lower a service provider’s cost of building and operating their fiber optic network;

• provide extremely high network reliability;

• interoperate with existing network devices;

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

• provide effective network management.

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

Proprietary Rights and Licensing

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and to operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We license software to our customers pursuant to signed or shrinkwrap license agreements, which impose certain restrictions on the licensee’s ability to utilize the software. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon

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commencing employment or consulting with us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. We enforce our intellectual property rights vigorously against infringement or misappropriation.

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

As of July 31, 2004, we had received 25 United States patents and had pending 47 United States patent applications. We had seven pending foreign patent applications. Of the United States patents that have been issued, the earliest any will expire is February 2019. As of July 31, 2004, we had eight allowed or registered United States trademarks and 17 allowed or registered foreign trademarks. All of the registered United States trademarks have a duration of ten years from the date of application, the earliest of which will expire in February 2011.

Manufacturing

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

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

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

We currently purchase several key components, including commercial digital signal processors, central processing units, field programmable gate arrays, switch fabric, and optical transceivers, from single or limited sources. We purchase each of these components on a purchase order basis and have no long-term contracts for these components. Although we believe that there are alternative sources for each of these components, in the event of a disruption in supply, we may not be able to develop an alternate source in a timely manner or at favorable prices.

Throughout the downturn in the telecommunications industry and the continued spending constraints in the optical networking market, the optical component industry has been downsizing manufacturing capacity while consolidating product lines from earlier acquisitions. Several suppliers have exited the market for optical components, and others have announced reductions of their product offerings. These announcements, or similar decisions by other suppliers, could result in reduced competition and higher prices for the components we purchase. In addition, the loss of a source of supply for key components could require us to incur additional costs to redesign our products that use those components.

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Employees

As of July 31, 2004, we employed approximately 353 persons of which 222 were primarily engaged in research and development, 36 in sales and marketing, 27 in customer service and support, 26 in manufacturing, and 42 in general and administration. None of our employees are currently represented by a collective bargaining unit. We believe our relations with our employees are good.

Executive Officers of the Registrant

Set forth below is information concerning our current executive officers and their ages as of August 15, 2004.

Name	Age	Position
Daniel E. Smith	54	President, Chief Executive Officer and Director
Frances M. Jewels	39	Chief Financial Officer, Vice President, Finance and Administration, Treasurer and Secretary
John E. Dowling	51	Vice President, Operations
Araldo Menegon	45	Vice President, Worldwide Sales and Support
Kevin J. Oye	46	Vice President, Systems and Technology

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

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

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

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

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

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ITEM 2. PROPERTIES

We currently lease three facilities in Chelmsford, Massachusetts, containing approximately 305,000 square feet in the aggregate. In Wallingford, Connecticut, we currently lease one facility containing a total of approximately 30,000 square feet. These facilities consist of offices and engineering laboratories used for research and development, administration, sales and customer support, ancillary light manufacturing, storage and shipping activities. We also maintain smaller offices to provide sales and customer support at various domestic and international locations. These facilities are presently adequate and suitable for our needs, and we do not expect to require additional space during fiscal 2005. We own a parcel of undeveloped land, containing approximately 106 acres, in Tyngsborough, Massachusetts. This land was acquired for the purpose of developing a campus that would serve as our corporate headquarters, if we should require additional facilities over the next several years.

ITEM 3. LEGAL PROCEEDINGS

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. The complaints were consolidated into a single action and an amended complaint was filed on April 19, 2002. The amended complaint, 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 Securities and Exchange Commission, (“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 action seeks 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 settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately three hundred issuer defendants and the individual defendants currently or formerly associated with those companies. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not 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 settlement agreement 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 settlement agreement, which has not yet been executed, has been submitted to the Court for approval. Approval by the Court cannot be assured. 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

11

ordered the parties to select up to twenty “test” cases. To date, along with eleven 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.

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

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

None.

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PART II

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

Price Range of Common Stock

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

	High		Low
Fiscal year 2004:
Fourth Quarter ended July 31, 2004	$	4.41	$	3.49
Third Quarter ended April 24, 2004		5.81		3.91
Second Quarter ended January 24, 2004		6.29		4.36
First Quarter ended October 25, 2003		5.36		3.75
	High		Low
Fiscal year 2003:
Fourth Quarter ended July 31, 2003	$	4.63	$	3.12
Third Quarter ended April 26, 2003		3.25		2.90
Second Quarter ended January 25, 2003		3.46		2.48
First Quarter ended October 26, 2002		3.04		2.29

As of July 31, 2004, there were approximately 1,290 stockholders of record.

Dividend Policy

We have never paid or declared any cash dividends on our common stock or other securities. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business condition, results of strategic and financial review and such other factors as the board of directors may deem relevant.

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

In the three months ended July 31, 2004, the Company purchased the following shares of common stock (in thousands, except per share data):

	Total shares purchased *	Average price paid per share
April 25, 2004 – May 22, 2004	5	$	0.09
May 23, 2004 – June 19, 2004	3		0.00
June 20, 2004 – July 31, 2004	1		0.00
Total	9	$	0.06

* Purchased from departing employees pursuant to preexisting contractual rights.

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

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this report. The historical results are not necessarily indicative of results to be expected for any future period.

	As of July 31,
	2004			2003			2002			2001			2000
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue	$	44,547		$	38,276		$	65,174		$	374,746		$	198,137
Cost of revenue		29,108			35,104			152,704			317,796			106,419
Gross profit (loss)		15,439			3,172			(87,530	)		56,950			91,718
Operating expenses:
Research and development		45,692			52,438			109,654			159,607			71,903
Sales and marketing		18,108			19,763			39,687			83,478			30,650
General and administrative		7,366			7,239			10,166			16,820			9,824
Stock-based compensation		5,075			6,627			22,812			62,092			19,634
Restructuring charges and related asset impairments		—			(4,447	)		124,990			81,926			—
Acquisition costs		—			—			—			4,948			—
Total operating expenses		76,241			81,620			307,309			408,871			132,011
Loss from operations		(60,802	)		(78,448	)		(394,839	)		(351,921	)		(40,293	)
Losses on investments		—			—			(24,845	)		—			—
Interest and other income, net		15,890			23,342			40,027			85,299			41,706
Income (loss) before income taxes		(44,912	)		(55,106	)		(379,657	)		(266,622	)		1,413
Income tax expense		—			—			—			13,132			745
Net income (loss)	$	(44,912	)	$	(55,106	)	$	(379,657	)	$	(279,754	)	$	668
Basic net income (loss) per share	$	(0.17	)	$	(0.21	)	$	(1.49	)	$	(1.18	)	$	0.00
Diluted net income (loss) per share	$	(0.17	)	$	(0.21	)	$	(1.49	)	$	(1.18	)	$	0.00
Shares used in per-share calculation—basic		272,123			265,702			254,663			237,753			166,075
Shares used in per-share calculation—diluted.		272,123			265,702			254,663			237,753			233,909
	As of July 31,
	2004			2003			2002			2001			2000
	(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments	$	961,325		$	995,583		$	1,043,545		$	1,248,549		$	1,517,103
Working capital		618,986			651,832			636,530			783,665			1,147,131
Total assets		990,918			1,032,628			1,118,575			1,551,321			1,697,915
Long term debt, less current portion		—			—			—			—			1,157
Total stockholders’ equity	$	955,440		$	992,515		$	1,038,523		$	1,387,860		$	1,591,118

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

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this report. Except for the historical information contained herein, we wish to caution you that certain matters discussed in this report constitute forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including, without limitation, those risks and uncertainties discussed under the heading “Factors That May Affect Future Results” contained in this Form 10-K and any other reports filed by us from time to time with the Securities and Exchange Commission. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise. Forward-looking statements include statements regarding our expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may, “ “should,” “will,” and “would” or similar words.

Executive Summary

Sycamore develops and markets optical networking products for telecommunications service providers worldwide. 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 (collectively referred to as “service providers”). We believe that our products enable service providers to cost effectively and easily transition their existing fiber optic network into a network infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers.

Our business has been significantly impacted by the decline in the telecommunications industry which began in 2001. As a result of this decline, service providers decreased their capital spending resulting in a reduction in demand for our products. Since fiscal 2001, our revenue decreased by $330.2 million and we enacted three separate restructuring programs in order to reduce our cost structure and focus our business on the optical switching market. We incurred net restructuring charges of $402.7 million, comprised as follows: $175.1 million of net charges related to excess inventory, $202.8 million of net charges for restructuring and related asset impairments, and $24.8 million of losses on investments, as described in detail in Note 10 to our consolidated financial statements.

Total revenue for fiscal 2004 was $44.5 million, an increase of 16.4% compared to fiscal 2003. Total revenue for fiscal 2003 was $38.3 million, a decrease of 41.3% compared to fiscal 2002. Throughout the telecommunications industry decline, our revenue has varied significantly. As part of our strategy, however, we continue to maintain 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. Due to our decreased revenues, our restructuring programs and our decision to maintain a significant cost structure, we have incurred a cumulative net loss of $781.1 million at July 31, 2004. While our fiscal 2004 operating results improved modestly over fiscal 2003, we expect that current market conditions will continue to have an adverse impact on our business. We anticipate that we will continue to generate operating losses and consume cash for at least the next several quarters, if not longer.

In particular, as service providers limit their capital spending, competition for optical switching opportunities is intense and continues to be dominated by large, incumbent equipment suppliers. We believe that large incumbent suppliers have numerous competitive advantages that include pricing leverage, established customer relationships, broad product portfolios and large service and support teams. In addition, industry reports continue to be very cautious regarding the optical networking environment. Sycamore’s target market, the optical switching segment, remains a very small percentage of the total market.

15

In light of our fiscal year 2004 operating results, recent industry reports and continuing challenges as a focused optical switching vendor, in order to maximize shareholder value, we are focusing on a review of the strategic and financial alternatives available to Sycamore including but not limited to: (i) alliances with or a sale to another entity; (ii) acquisitions of, or mergers or other combinations with companies with either complementary technologies or in adjacent market segments, (iii) remaining a stand-alone entity, and (iv) recapitalization alternatives including stock buybacks and cash dividends. We have engaged Morgan Stanley to assist us in the review of our strategic and financial alternatives. Changes, if any, implemented as a result of the strategic alternatives review could affect the basic nature of our Company. During the course of this review, we intend to follow our strategy and objective as a stand-alone provider of optical networking equipment.

Our total cash, cash equivalents and investments were $961.3 million at July 31, 2004. Included in this amount were cash and cash equivalents of $152.8 million. We intend to fund our operations, including fixed commitments under operating leases, and any required capital expenditures over the next few years using our existing cash, cash equivalents and investments. We believe that, based on our business plans and current conditions, our existing cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for the next twelve months. We also believe that our current cash, cash equivalents and investments will enable us to pursue the strategic and financial alternatives discussed above.

As of July 31, 2004, Sycamore and its subsidiaries employed approximately 353 persons, which was a net reduction of 20 persons from the approximately 373 persons employed on July 31, 2003.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those relating to the allowance for doubtful accounts, inventory allowance, valuation of investments, warranty obligations, restructuring liabilities and asset impairments, litigation and other contingencies. Estimates are based on our historical experience and other assumptions that we consider reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe that the following critical accounting policies affect the most significant judgments, assumptions and estimates we use in preparing our consolidated financial statements. Changes in these estimates can affect materially the amount of our reported net income or loss.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. The most significant revenue recognition judgments typically involve customer acceptance, whether collection is reasonably assured and multiple element arrangements. In instances where customer acceptance is specified, revenue is deferred until all acceptance criteria have been met. We determine collectibility based on creditworthiness of customer, analysis and customer’s payment history. Service revenue is recognized as the services are performed or ratably over the service period. Some of our transactions involve the sale of products and services under multiple element arrangements. While each individual transaction varies according to the terms of the purchase order or sales agreement, a typical multiple element arrangement may include some or all of the following components: product shipments, installation services, maintenance and training. The total sales price is allocated based on the relative fair value of each component, which generally is the price charged for each component when sold separately and recognized when revenue recognition criteria for each element is met.

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Allowance for Doubtful Accounts

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

Warranty Obligations

We accrue for warranty costs at the time revenue is recognized based on contractual rights and on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims above historical experience or our costs to provide warranty services increase, we may be required to increase our warranty accrual. An increase in the warranty accrual will have an adverse impact on our gross margins.

Inventory Allowance

We continuously monitor inventory balances and record inventory allowances for any excess of the cost of the inventory over its estimated market value, based on assumptions about future demand and market conditions. While such assumptions may change from period to period, we measure the net realizable value of inventories using the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or we experience a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, additional inventory allowances may be required, 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.

Restructuring Liabilities and Asset Impairments

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 fourth quarter of fiscal 2004, we recorded a net charge of $0.3 million to operating expenses due to less favorable sublease assumptions. Additionally, 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 July 31, 2004, we had $11.5 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 $0.9 million, which represents our current estimate of the assumed sublease recoveries.

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Results of Operations

Fiscal Years ended July 31, 2004 and 2003

Revenue

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

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

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

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

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

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

Gross profit (loss)

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

	Year Ended July 31,
	2004			2003
Gross profit (loss):
Product	$	12,159		$	4,240
Service		3,280			(1,068	)
Total	$	15,439		$	3,172
Gross profit (loss):
Product		37.2	%		16.2	%
Service		27.8	%		(8.8	)%
Total		34.7	%		8.3	%

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Product gross profit

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

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

Service gross profit (loss)

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

Service gross profit may be affected in future periods by various factors such as the change in mix between technical support services and advanced services, as well as the timing of technical support service contract initiations and renewals.

Operating Expenses

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

	Year Ended July 31,					Variance in Dollars			Variance in Percent
	2004		2003
Research and development	$	45,692	$	52,438		$	(6,746	)	(12.9	)%
Sales and marketing		18,108		19,763			(1,655	)	(8.4	)%
General and administrative		7,366		7,239			127		1.8	%
Stock-based compensation		5,075		6,627			(1,552	)	(23.4	)%
Restructuring charges and related asset impairments		—		(4,447	)		4,447		—
Total operating expenses	$	76,241	$	81,620		$	(5,379	)	(6.6	)%

Research and Development Expenses

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

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

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Sales and Marketing Expenses

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

General and Administrative Expenses

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

Stock-Based Compensation Expense

Stock-based compensation expense primarily resulted from the granting of stock options and restricted shares with exercise or sale prices that were deemed to be below fair market value. Total stock-based compensation expense decreased in fiscal 2004 compared to fiscal 2003. The decrease was primarily due to lower headcount levels. We currently expect to continue to incur stock-based compensation expense through the fourth quarter of fiscal 2005.

Restructuring Charges and Related Asset Impairments

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

The net charges of $402.7 million include a net $0.3 million charge to operating expenses in the fourth quarter of fiscal 2004 resulting from less favorable sublease assumptions and a net $4.4 million credit to operating expenses recorded in the third and fourth quarters of fiscal 2003, due to various changes in estimates relating to its restructuring programs. The changes in estimates consisted primarily of 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, the Company recorded a $0.5 million credit to cost of revenue relating to a favorable settlement with a supplier.

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

Interest and Other Income, Net

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

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

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

Provision for Income Taxes

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

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Fiscal Years ended July 31, 2003 and 2002

Revenue

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

	Year Ended July 31,				Variance in Dollars			Variance in Percent
	2003		2002
Revenue
Product	$	26,166	$	43,516	$	(17,350	)	(39.9	)%
Service		12,110		21,658		(9,548	)	(44.1	)%
Total revenue	$	38,276	$	65,174	$	(26,898	)	(41.3	)%

Total revenue decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily due to the decrease in demand for optical networking products worldwide.

Product and service revenue decreased in fiscal 2003 compared to fiscal 2002 primarily due to lower demand for our products resulting from the downturn in the telecommunications industry. Three customers accounted for 43%, 22% and 14% of revenue in fiscal 2003, whereas two customers accounted for 45% and 20% of revenue in fiscal 2002. International revenue represented 91% of revenue in fiscal 2003, compared to 87% of revenue in fiscal 2002.

Gross profit (loss)

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

	Year Ended July 31,
	2003			2002
Gross profit (loss):
Product	$	4,240		$	(83,796	)
Service		(1,068	)		(3,734	)
Total	$	3,172		$	(87,530	)
Gross profit (loss):
Product		16.2	%		(192.6	)%
Service		(8.8	)%		(17.2	)%
Total		8.3	%		(134.3	)%

Product gross profit (loss)

Product gross profit for fiscal 2003 and fiscal 2002 were adversely impacted by the decrease in product revenue without a proportionate decrease in cost of revenue. The fiscal 2003 product gross profit included a credit of $0.5 million relating to a change in estimate relating to the excess inventory charge recorded in fiscal 2002. The product gross loss for fiscal 2002 included an excess inventory net charge of $91.6 million for inventory write-downs and non-cancelable purchase commitments.

Service gross profit (loss)

Service gross loss for fiscal 2003 and fiscal 2002 were adversely impacted by the decrease in service revenue without a proportionate decrease in the costs associated with the service organization. The service gross loss for fiscal 2003 includes costs associated with a further realignment within the customer support organization, including employee severance and related costs.

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Operating Expenses

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

	Year Ended July 31,					Variance in Dollars			Variance in Percent
	2003			2002
Research and development	$	52,438		$	109,654	$	(57,216	)	(52.2	)%
Sales and marketing		19,763			39,687		(19,924	)	(50.2	)%
General and administrative		7,239			10,166		(2,927	)	(28.8	)%
Stock-based compensation		6,627			22,812		(16,185	)	(70.9	)%
Restructuring charges and related asset impairments		(4,447	)		124,990		(129,437	)	(103.6	)%
Total operating expenses	$	81,620		$	307,309	$	(225,689	)	(73.4	)%

Research and Development Expenses

Research and development expenses decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily due to lower project material costs and lower personnel-related expenses due to our prior restructuring programs.

Sales and Marketing Expenses

Sales and marketing expenses decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily due to lower personnel-related expenses due to our prior restructuring programs.

General and Administrative Expenses

General and administrative expenses decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily due to lower personnel-related expenses due to our prior restructuring programs.

Stock-Based Compensation Expense

Stock-based compensation expense primarily resulted from the granting of stock options and restricted shares with exercise or sale prices that were deemed to be below fair market value. Stock-based compensation decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily due to stock-based compensation expense for restricted stock and stock options relating to the acquisition of Sirocco Systems, Inc., which were fully amortized in the fourth quarter of fiscal 2002. Stock-based compensation expense also declined as a result of personnel reductions from our prior restructuring programs.

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 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 expense—$24.8 million. The originally recorded restructuring charges were subsequently reduced by credits totaling $14.6 million (cost of revenue—$10.8 million and operating expenses—$3.8 million). 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 a 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

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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 during fiscal 2003, we recorded a $0.5 million credit to cost of revenue relating to a favorable settlement with a supplier. We have reduced the accrual for potential legal matters based on our current estimate as adjusted for events, 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 July 31, 2003, we had $19.1 million in accrued restructuring costs, consisting primarily of $18.0 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.

First Quarter Fiscal 2002 Restructuring:

The first quarter of 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 abandoned fixed assets. 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 $3.8 million credit to operating expenses relating to various changes in estimates. The changes in estimates consisted of a $8.4 million reduction in potential legal matters associated with the restructuring programs and the reversal of an accrued liability of $0.8 million for workforce reductions, partially offset by $5.6 million of additional facility consolidation charges. During the third and fourth quarters of fiscal 2003, we recorded a net $0.1 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted of a $4.5 million reduction in potential legal matters associated with the restructuring programs, partially offset by $4.4 million of additional facility consolidation charges due to less

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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 July 31, 2003, the projected future cash payments of $14.7 million consist primarily 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 and first quarter fiscal 2002 restructuring programs, and the reserve activity since that time, are summarized as follows (in thousands):

	Original Restructuring Charge		Non-cash Charges		Cash Payments		Adjustments		Accrual Balance at July 31, 2002		Payments		Adjustments		Accrual Balance at July 31, 2003
Workforce reduction	$	11,280	$	1,002	$	9,309	$	969	$	—	$	—	$	—	$	—
Facility consolidations and certain other costs		41,618		9,786		7,103		2,829		21,900		7,077		113		14,710
Inventory and asset write-downs		292,736		187,512		93,671		10,804		749		749		—		—
Losses on investments		22,737		22,737		—		—		—		—		—		—
Total	$	368,371	$	221,037	$	110,083	$	14,602	$	22,649	$	7,826	$	113	$	14,710

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 Optical Transport Node and the SN 10000 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 July 31, 2003, the projected future cash payments of $4.4 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):

	Total Restructuring Charge		Non-cash Charges		Cash Payments		Accrual Balance at July 31, 2002		Payments		Adjustments		Accrual Balance at July 31, 2003
Workforce reduction	$	8,713	$	814	$	2,059	$	5,840	$	5,070	$	770	$	—
Facility consolidations and certain other costs		20,132		—		454		19,678		11,662		3,640		4,376
Asset write-downs		22,637		22,637		—		—		—		—		—
Losses on investments		2,108		2,108		—		—		—		—		—
Total	$	53,590	$	25,559	$	2,513	$	25,518	$	16,732	$	4,410	$	4,376

Interest and Other Income, Net

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

	Year Ended July 31,				Variance in Dollars			Variance in Percent
	2003		2002
Interest and other income, net	$	23,342	$	40,027	$	(16,685	)	(41.7	)%

Interest and other income decreased in fiscal 2003 compared to fiscal 2002. The decrease was primarily attributable to lower interest rates and a lower invested cash balance during fiscal 2003.

Provision for Income Taxes

We did not provide for income taxes for fiscal 2003 or fiscal 2002 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 our deferred tax assets.

Liquidity and Capital Resources

Total cash, cash equivalents and investments were $961.3 million at July 31, 2004. Included in this amount were cash and cash equivalents of $152.8 million, compared to $250.6 million at July 31, 2003. The decrease in cash and cash equivalents of $97.8 million was attributable to cash used in operating activities of $33.1 million and cash used in investing activities of $71.3 million, partially offset by cash provided by financing activities of $6.6 million.

Cash used in investing activities of $71.3 million consisted primarily of net purchases of investments of $68.1 million. Cash used in operating activities of $33.1 million consisted of the net loss for the period of $44.9 million, adjusted for net non-cash charges totaling $15.3 million and changes in working capital totaling $3.5 million. The most significant changes in working capital were a decrease in accrued restructuring costs of $7.1 million, a decrease in accrued expenses and other current liabilities of $5.2 million, partially offset by an increase in deferred revenue of $5.5 million and an increase in accounts payable of $2.1 million. Net non-cash charges included depreciation and amortization, provision for doubtful accounts and stock-based compensation. Cash provided by financing activities of $6.6 million consisted primarily of the proceeds received from employee stock plan activity.

Our primary source of liquidity comes from our cash and cash equivalents and investments, which totaled $961.3 million at July 31, 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 July 31, 2004, $482.3 million of investments with maturities of less than one year were classified as short-term investments, and $326.3

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million of investments with maturities of greater than one year were classified as long-term investments. At current revenue levels, we anticipate that some portion of our existing cash and cash equivalents and investments will continue to be consumed by operations. Our accounts receivable, while not considered a primary source of liquidity, represents a concentration of credit risk because the accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. At July 31, 2004, more than 80% of our accounts receivable balance was attributable to two customers.

As of July 31, 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 expect to continue to fund our operations, including our fixed commitments under operating leases, and any required capital expenditures over the next few years, using our existing cash, cash equivalents and investments as our primary source of liquidity.

Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and investments will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. We will continue to consider appropriate action with respect to our cash position in light of the present and anticipated business needs as well as providing a means by which our shareholders may realize value in connection with their investment.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

At July 31, 2004, our off-balance sheet arrangements, which consist entirely of contractual commitments for operating leases and inventory purchase commitments, were as follows (in thousands):

	Total		Less than 1 Year		1-3 Years		3-5 Years
Operating Leases	$	15,300	$	5,372	$	9,928	—
Inventory Purchase Commitments		7,251		7,251		—	—
Total	$	22,551	$	12,623	$	9,928	—

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

Related Party Transactions

In July 2000, we made an investment of $2.2 million in Tejas Networks India Private Limited (“Tejas”). The Chairman of the Board of Sycamore also serves as the Chairman of the Board of Tejas. An executive officer of our Company also attends meetings of the board of directors of Tejas for the sole purpose of representing the Company’s business interests, if any. We have no obligation to provide any additional funding to Tejas. During the years ended July 31, 2004 and 2002, we did not engage in any material transactions with Tejas. During the year ended July 31, 2003, we recognized revenue of $0.2 million relating to transactions with Tejas.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

• 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.

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

We face numerous challenges as a focused optical switching vendor. In order to address these challenges we may, as part of our strategic alternatives review, pursue alternatives available to us, including but not limited to: (i) alliances with or a sale to another entity, (ii) acquisitions of, or mergers or other combinations with companies with either complementary technologies or in adjacent segments and (iii) remaining a stand-alone entity. Any decision regarding strategic alternatives 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 or benefits of the strategic alternative selected. 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 including but not limited to stock buybacks and cash dividends. We have engaged Morgan Stanley to assist us in the review of strategic and financial alternatives for our Company. There can be no assurances that any transaction or other corporate action will result from our review of strategic and financial alternatives. Further, there can be no assurance concerning the type, form, structure, nature, results, timing or terms and conditions of any such potential action, even if such an action does result from this review.

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

Our revenue depends on the commercial success of our line of optical networking products. Our research and development efforts focus exclusively on optical switching products. In order to remain competitive, we

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believe that continued investment in research and development is necessary in order to provide innovative solutions to our current and prospective customers. We cannot assure you that we will be successful in:

• anticipating evolving customer requirements;

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

• enhancing our existing products.

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

CURRENT ECONOMIC CONDITIONS MAKES FORECASTING DIFFICULT.

Current economic and market conditions have limited our ability to forecast the volume and product mix of our sales, making it difficult to provide estimates of revenue and operating results. We continue to have limited visibility into the capital spending plans of our current and prospective customers. Fluctuations in our revenue can lead to even greater fluctuations in our operating results. Our planned expense levels depend in part on our expectations of 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 develop, market and sell our products to current and prospective customers, 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 our revenue and operating results are below the expectations of our investors and market analysts, it could cause a decline in the price of our common stock.

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

Our business has been significantly impacted by the decline in the telecommunications industry. Since 2001, our revenue decreased by $330.2 million, and we enacted three separate restructuring programs which have reduced our cost structure and focused our business on the optical switching market. In order to remain competitive, we continue to 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 current and prospective customers. Due to our decreased revenues, our restructuring programs and our decision to maintain a significant cost structure, we have incurred a net loss for fiscal 2004 of $44.9 million and a cumulative net loss of $781.1 million at July 31, 2004. We expect that our decision to maintain a significant cost structure will require us to generate significantly higher revenue over current levels in order to achieve and maintain profitability. As a result, we expect to continue to incur net losses. We cannot assure you that our revenue will increase or that we will generate sufficient revenue to achieve or sustain such profitability.

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

As service providers limit their capital spending, competition for optical switching opportunities is intense and continues to be dominated by large, incumbent equipment suppliers. Competition is based upon a combination of price, established customer relationships, broad product portfolios, large service and support teams, functionality and scalability. Large companies, such as Nortel Networks, Lucent Technologies, Alcatel, Cisco, Tellabs and Ciena Corporation, have historically dominated this market. Many of our competitors have long operating histories and greater financial, technical, sales, marketing and manufacturing resources than we do and are able to devote greater resources to the research and development of new products. These competitors also have long standing existing relationships with our current and prospective customers. To a lesser extent, new

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competitors have entered the optical networking market using the latest available technology in order to compete with our products. Our competitors may forecast market developments more accurately and could develop new technologies that compete with our products or even render our products obsolete.

The decline in the telecommunications industry beginning in early 2001 has reduced product demand for our products and 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 diverse product lines that allow them the flexibility to price their products more aggressively and absorb the significant cost structure associated with optical switching research and development across their entire business. If we are unable to offset any reductions in the average selling price of our products by a reduction in the cost of our products, our gross margins will be adversely affected.

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 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.

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

There are limited optical switching opportunities since our current and prospective customers have reduced their capital expenditures and competition for these opportunities is intense. In recent quarters our revenue has been concentrated among a limited number of customers. None of our customers are contractually committed to purchase any minimum quantities of products from us and orders are generally cancelable prior to shipment. We expect that our revenue will continue to depend on sales of our products to a limited number of customers. While expanding our customer base is a key objective, at the present time, the number of prospective 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 prospective customers, slow purchases and delay optical switching deployment decisions.

Our direct sales efforts primarily target incumbent service providers, many of which have made significant investments in traditional optical networking infrastructures. In addition we are establishing channel relationships with distribution partners including resellers, distributors and systems integrators for the sale of our products to

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the federal government and commercial customers. 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. Since we have only limited experience in developing and managing such channels, the extent we will be successful is uncertain. If we are unable to develop and manage new channels of distribution to sell our products to incumbent service providers and the federal government, or if our distribution partners are unable to convince incumbent service providers or the federal government to deploy our optical networking solutions, our business, financial condition and results of operations will be materially adversely affected.

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

We believe that in order to succeed, we must build a larger and more diverse customer base. Recently, we entered into a reseller agreement for the sale of our products to the federal government and our products were selected to serve as the optical digital cross connect platform for DISA’s GIG-BE project. Since we have only limited experience in developing and managing such channels, the extent we will be successful is uncertain. Sales to the federal government require compliance with on-going complex procurement rules and regulations with which we have little experience. We will not be able to succeed in the federal government market and sell our products to federal government contractors if we cannot comply with these rules and regulations. The federal government is not contractually committed to purchase our products for the GIG-BE project, and there can be no assurance that it will purchase our products in the future. Our failure to sell products to the federal government, including for use in the GIG-BE project, could adversely affect our ability to achieve our planned levels of revenue, which would affect our profitability and results of operations.

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

For the year ended July 31, 2004, approximately 41% of our revenue was derived from a government agency through our reseller. This government agency (DISA) may be subject to budget cuts, budgetary constraints, a reduction or discontinuation of funding or changes in the political or regulatory environment that may cause the agency to terminate the projects, divert funds or delay implementation. The agency may terminate the contract at any time without cause. A significant reduction in funds available for the agency to purchase equipment would significantly reduce our revenue and cash flows. The significant reduction or delay in orders by the agency would also significantly reduce our revenue and cash flows. Additionally, government contracts are generally subject to audits and investigations by government agencies. If the results of these audits or investigations are negative, our reputation could be damaged, contracts could be terminated or significant penalties could be assessed. If a contract is terminated for any reason, our ability to fully recover certain amounts may be impaired resulting in a material adverse impact on our financial condition and results of operations.

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 such acquisitions to broaden our product portfolio, gain access to a particular customer base or market, or to take immediate advantage of a strategic opportunity. In the event of an acquisition, we may:

• issue stock that would dilute our current stockholders’ holdings;

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

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• incur debt or assume liabilities;

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

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

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs; or

• become subject to litigation.

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

• problems combining the purchased operations, technologies or products;

• unanticipated costs or liabilities;

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

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

• problems entering markets in which we have no or limited prior experience;

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

• additional regulatory compliance issues.

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

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

In general, our revenue and operating results in any reporting period may fluctuate significantly due to a variety of factors including:

• fluctuation in demand for our 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 employee stock option grants made at fair market value; and

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

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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. In addition, we could receive purchase orders on an irregular and unpredictable basis. Because of the nature of our business, we cannot predict these sales and deployment cycles. The long sales cycles, as well as our expectation that customers may tend to 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 decline or recover at a slower rate than anticipated by us or analysts and investors. In either event, the price of our common stock could decrease.

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

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

The contract manufacturing industry is a highly competitive, capital-intensive business with relatively low profit margins, and acquisition activity is relatively common. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming, and could result in a significant interruption in the supply of our products. If we are required or choose to change contract manufacturers for any reason, our revenue, gross margins and customer relationships could be adversely affected.

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

We 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 acceptable terms. Any such failure could impair our ability to deliver products to customers, which would adversely affect our revenue and operating results.

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

32

During the past year, component suppliers have planned their production capacity to better match demand. If the demand for certain components increases beyond the component suppliers planned production capacity, there may be component shortages which may increase procurement costs. In addition, consolidation in the optical component industry could result in reduced competition for supply of key components and higher component prices. If any of these events occurred, our revenue and operating results could be adversely affected.

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

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

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

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

• loss of revenue or delay in revenue recognition or accounts receivable collection;

• loss of customers and market share;

• inability to attract new customers or achieve market acceptance;

• diversion of development and other resources;

• increased service, warranty and insurance costs; and

• legal actions by our customers.

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

OUR BUSINESS IS SUBJECT TO RISKS FROM INTERNATIONAL OPERATIONS.

International sales represented 59% of total revenue in fiscal 2004, and 91% of total revenue in fiscal 2003, and we have a substantial international customer base. We are subject to foreign exchange translation risk to the extent that our revenue is denominated in currencies other than the U.S. dollar. Doing business internationally requires significant management attention and financial resources to successfully develop direct and indirect sales channels and to support customers in international markets. We may not be able to maintain or expand international market demand for our products.

In addition, international operations are subject to other inherent risks, including:

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

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

33

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

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

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

• the impact of slowdowns or recessions in economies outside the United States;

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

• certification requirements;

• currency fluctuations;

• reduced protection for intellectual property rights in some countries;

• potentially adverse tax consequences; and

• political and economic instability, particularly in emerging markets.

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

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 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 the defendant in a securities lawsuit and a party to other litigation and claims in the normal course of our business. Litigation is by its nature uncertain and there can be no assurance that the ultimate resolution of such claims will not exceed the amounts accrued for such claims, if any. Litigation can be expensive, lengthy, and disruptive to normal business operations. An unfavorable resolution of a legal matter could have a material adverse affect on our business, operating results, or financial condition. For additional information regarding certain lawsuits 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 products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our

34

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.

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

Any parties asserting that our products infringe upon their proprietary rights would 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.

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

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

From time to time we have received 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. In the past, 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.

OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.

Historically, the market for technology stocks has been extremely volatile. Our common stock has experienced, and may continue to experience, substantial price volatility. The occurrence of any one or more of the factors noted above could cause the market price of our common stock to fluctuate significantly. In addition, the following factors could cause the market price of our common stock to fluctuate significantly:

• loss of a major customer;

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

35

• 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.

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

As of July 31, 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

The primary objective of our current investment activities is to preserve investment principal while maximizing income without significantly increasing risk. We maintain a portfolio of cash equivalents and short-term and long-term investments in a variety of securities including commercial paper, certificates of deposit, money market funds and government debt securities. These available-for-sale investments are subject to interest rate risk and may fall in value if market interest rates increase. If market interest rates increased immediately and uniformly by 10 percent from levels at July 31, 2004, the fair value of the portfolio would decline by approximately $1.5 million. Depending on the outcome of our review of strategic and financial alternatives, we may not hold our investments to maturity and as a result, may realize a gain or loss.

Exchange Rate Sensitivity

While the majority of our operations are based in the United States, our business includes sales globally, with international revenue representing 59% of total revenue in fiscal 2004. To the extent that international sales represent a significant portion of our revenue, fluctuations in foreign currencies may have an impact on our financial results. To date the impact has not been material. We are prepared to hedge against fluctuations in foreign currencies if the exposure is material, although we have not engaged in hedging activities to date.

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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	38
Consolidated Balance Sheets as of July 31, 2004 and 2003	39
Consolidated Statements of Operations for the years ended July 31, 2004, 2003 and 2002	40
Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2004, 2003 and 2002	41
Consolidated Statements of Cash Flows for the years ended July 31, 2004, 2003 and 2002	42
Notes to Consolidated Financial Statements	43

37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sycamore Networks, Inc. and its subsidiaries at July 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/    PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

August 18, 2004

38

SYCAMORE NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	July 31, 2004			July 31, 2003
A S S E T S
Current assets:
Cash and cash equivalents	$	152,754		$	250,595
Short-term investments		482,274			421,784
Accounts receivable, net of allowance for doubtful accounts of $4,132 and $4,184 at July 31, 2004 and July 31, 2003, respectively		10,605			10,769
Inventories		4,294			5,117
Prepaids and other current assets		3,611			3,680
Total current assets		653,538			691,945
Property and equipment, net		9,419			14,589
Long-term investments		326,297			323,204
Other assets		1,664			2,890
Total assets	$	990,918		$	1,032,628
L I A B I L I T I E S  A N D  S T O C K H O L D E R S’  E Q U I T Y
Current liabilities:
Accounts payable	$	5,602		$	3,475
Accrued compensation		2,071			3,545
Accrued warranty		2,017			4,651
Accrued expenses		3,077			4,203
Accrued restructuring costs		12,005			19,086
Deferred revenue		7,226			2,677
Other current liabilities		2,554			2,476
Total current liabilities		34,552			40,113
Deferred revenue		926			—
Total liabilities		35,478			40,113
Commitments and contingencies (Notes 5 and 11)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000 shares authorized, none issued and outstanding at July 31, 2004 and July 31, 2003		—			—
Common stock, $.001 par value; 2,500,000 shares authorized, 273,887 and 272,099 shares issued at July 31, 2004 and July 31, 2003, respectively.		274			272
Additional paid-in capital		1,740,293			1,733,476
Accumulated deficit		(781,104	)		(736,192	)
Deferred compensation		(1,279	)		(6,822	)
Treasury stock, at cost; 0 and 147 shares held at July 31, 2004 and July 31, 2003, respectively.		—			(11	)
Accumulated other comprehensive income (loss)		(2,744	)		1,792
Total stockholders’ equity		955,440			992,515
Total liabilities and stockholders’ equity	$	990,918		$	1,032,628

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

39

SYCAMORE NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

	Year Ended July 31,
	2004			2003			2002
Revenue
Product	$	32,729		$	26,166		$	43,516
Service		11,818			12,110			21,658
Total revenue		44,547			38,276			65,174
Cost of revenue
Product		20,264			21,155			126,373
Service		8,144			12,537			24,516
Stock-based compensation:
Product		306			771			939
Service		394			641			876
Total cost of revenue		29,108			35,104			152,704
Gross profit (loss)		15,439			3,172			(87,530	)
Operating expenses:
Research and development		45,692			52,438			109,654
Sales and marketing		18,108			19,763			39,687
General and administrative		7,366			7,239			10,166
Stock-based compensation:
Research and development		2,748			3,021			9,866
Sales and marketing		994			1,696			10,713
General and administrative		1,333			1,910			2,233
Restructuring charges and related asset impairments		—			(4,447	)		124,990
Total operating expenses		76,241			81,620			307,309
Loss from operations		(60,802	)		(78,448	)		(394,839	)
Losses on investments		—			—			(24,845	)
Interest and other income, net		15,890			23,342			40,027
Loss before income taxes		(44,912	)		(55,106	)		(379,657	)
Income tax expense		—			—			—
Net loss	$	(44,912	)	$	(55,106	)	$	(379,657	)
Basic and diluted net loss per share	$	(0.17	)	$	(0.21	)	$	(1.49	)
Shares used in per-share calculation—basic and diluted		272,123			265,702			254,663

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

40

SYCAMORE NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Deferred Compensation			Treasury Stock					Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amount												Shares		Amount
Balance, July 31, 2001.	273,681		$	274		$	1,738,505		$	(301,429	)	$	(54,110	)	680		$	(126	)	$	4,746		$	1,387,860
Net loss.	—			—			—			(379,657	)		—		—			—			—			(379,657	)
Unrealized loss on investments	—			—			—			—			—		—			—			(189	)		(189	)
Total comprehensive loss																								(379,846	)
Treasury stock purchases.	—			—			—			—			—		3,716			(319	)		—			(319	)
Issuance of common stock under employee and director stock plans.	—			—			4,878			—			—		(2,463	)		287			—			5,165
Stock-based compensation expense.	—			—			2,209			—			22,418		—			—			—			24,627
Adjustments to deferred compensation for terminated employees	—			—			(13,782	)		—			13,782		—			—			—			—
Compensation expense relating to stock option acceleration	—			—			1,036			—			—		—			—			—			1,036
Balance, July 31, 2002.	273,681			274			1,732,846			(681,086	)		(17,910	)	1,933			(158	)		4,557			1,038,523
Net loss.	—			—			—			(55,106	)		—		—			—			—			(55,106	)
Unrealized loss on investments	—			—			—			—			—		—			—			(2,765	)		(2,765	)
Total comprehensive loss																								(57,871	)
Treasury stock purchases.	—			—			—			—			—		1,861			(163	)		—			(163	)
Treasury stock retirements	(2,861	)		(3	)		(243	)		—			—		(2,861	)		246			—			—
Issuance of common stock under employee and director stock plans	1,279			1			3,460			—			—		(786	)		64			—			3,525
Stock-based compensation expense.	—			—			525			—			7,514		—			—			—			8,039
Adjustments to deferred compensation for terminated employees	—			—			(3,574	)		—			3,574		—			—			—			—
Compensation expense relating to stock option acceleration	—			—			462			—			—		—			—			—			462
Balance, July 31, 2003.	272,099			272			1,733,476			(736,192	)		(6,822	)	147			(11	)		1,792			992,515
Net loss.	—			—			—			(44,912	)		—		—			—			—			(44,912	)
Unrealized loss on investments	—			—			—			—			—		—			—			(4,536	)		(4,536	)
Total comprehensive loss																								(49,448	)
Treasury stock purchases.	—			—			—			—			—		289			(25	)		—			(25	)
Treasury stock retirements	(436	)		—			(36	)		—			—		(436	)		36			—			—
Issuance of common stock under employee and director stock plans	2,224			2			6,621			—			—		—			—			—			6,623
Stock-based compensation expense.	—			—			513			—			5,262		—			—			—			5,775
Adjustments to deferred compensation for terminated employees	—			—			(281	)		—			281		—			—			—			—
Balance, July 31, 2004.	273,887		$	274		$	1,740,293		$	(781,104	)	$	(1,279	)	—		$	—		$	(2,744	)	$	955,440

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

41

SYCAMORE NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended July 31,
	2004			2003			2002
Cash flows from operating activities:
Net loss	$	(44,912	)	$	(55,106	)	$	(379,657	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		9,618			21,114			41,900
Restructuring charges and related asset impairments		—			1,000			159,581
Stock-based compensation		5,775			8,039			24,627
Provision for doubtful accounts		(52	)		(500	)		(89	)
Changes in operating assets and liabilities:
Accounts receivable		216			7,918			23,379
Inventories		823			7,823			833
Prepaids and other current assets		69			(233	)		10,292
Deferred revenue		5,475			(2,301	)		(1,629	)
Accounts payable		2,127			(2,629	)		(56,409	)
Accrued expenses and other liabilities		(5,156	)		(5,928	)		(12,535	)
Accrued restructuring costs		(7,081	)		(28,619	)		(12,836	)
Net cash used in operating activities		(33,098	)		(49,422	)		(202,543	)
Cash flows from investing activities:
Purchases of property and equipment		(4,448	)		(4,007	)		(15,915	)
Purchases of investments		(833,884	)		(558,671	)		(1,161,410	)
Maturities of investments		765,765			681,805			1,046,383
Decrease in other assets		1,226			4,870			8,797
Net cash provided by (used in) investing activities		(71,341	)		123,997			(122,145	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		6,623			3,525			5,165
Purchase of treasury stock		(25	)		(163	)		(319	)
Net cash provided by financing activities.		6,598			3,362			4,846
Net increase (decrease) in cash and cash equivalents		(97,841	)		77,937			(319,842	)
Cash and cash equivalents, beginning of period		250,595			172,658			492,500
Cash and cash equivalents, end of period	$	152,754		$	250,595		$	172,658
Supplemental cash flow information:
Cash paid for interest		—			—			—
Cash paid for income taxes		—			—			—

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

42

SYCAMORE NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business:

Sycamore Networks, Inc. (the “Company”) was incorporated in Delaware on February 17, 1998. The Company develops and markets optical networking products that are designed to enable telecommunications service providers to cost-effectively and easily transition their existing fiber optic network into a network infrastructure that can provision, manage and deliver economic, high-bandwidth services to their customers.

2. Significant Accounting Policies:

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to be consistent with the current year presentation.

Cash Equivalents and Investments

Cash equivalents are short-term, highly liquid investments with original maturity dates of three months or less at the date of acquisition. Cash equivalents are carried at cost plus accrued interest, which approximates fair market value. The Company’s investments are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. At July 31, 2004 and 2003, substantially all of the gross unrealized losses on investments classified as available-for-sale have been in a continuous unrealized loss position for less than 12 months. The fair value of investments is determined based on quoted market prices at the reporting date for those instruments. As of July 31, 2004 and 2003, investments consisted of (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
July 31, 2004:
Certificates of deposit	$	30,331	$	3	$	(23	)	$	30,311
Commercial paper		223,449		71		(212	)		223,308
Government securities		557,535		28		(2,611	)		554,952
Total	$	811,315	$	102	$	(2,846	)	$	808,571
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
July 31, 2003:
Certificates of deposit	$	22,681	$	4	$	(5	)	$	22,680
Commercial paper		267,350		940		(142	)		268,148
Government securities		453,165		1,571		(576	)		454,160
Total	$	743,196	$	2,515	$	(723	)	$	744,988

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At July 31, 2004, contractual maturities of the Company’s investment securities were as follows (in thousands):

	Amortized Cost		Fair Market Value
Less than one year	$	483,034	$	482,274
Due in one to three years		328,281		326,297
Total	$	811,315	$	808,571

The Company also has certain investments in non-publicly traded companies for the promotion of business and strategic objectives. These investments are included in other long-term assets in the Company’s balance sheet and are generally carried at cost. As of July 31, 2004 and 2003, $0.4 million and $0.5 million of these investments are included in other long-term assets, respectively. The Company monitors these investments for impairment and makes appropriate reductions in carrying values, if necessary. During the year ended July 31, 2002, the Company recorded impairment charges totaling $24.8 million against the value of these investments, due to other than temporary declines in value.

Inventories

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

Revenue Recognition

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

Some of the Company’s transactions involve the sale of products and services under multiple element arrangements. While each individual transaction varies according to the terms of the purchase order or sales agreement, a typical multiple element arrangement may include some or all of the following components: product shipments, installation services, maintenance and training. The total sales price is allocated based on the relative fair value of each component, which generally is the price charged for each component when sold separately and recognized when revenue recognition criteria for each element is met.

Stock-Based Compensation

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

	Year Ended July 31,
	2004			2003			2002
Net loss:
As reported	$	(44,912	)	$	(55,106	)	$	(379,657	)
Stock-based compensation expense included in reported net loss under APB 25		5,775			8,039			24,627
Stock-based compensation expense that would have been included in reported net loss if the fair value provisions of SFAS 123 had been applied to all awards		(38,591	)		(49,714	)		(141,095	)
Pro forma	$	(77,728	)	$	(96,781	)	$	(496,125	)
Basic and diluted net loss per share:
As reported	$	(0.17	)	$	(0.21	)	$	(1.49	)
Pro forma	$	(0.29	)	$	(0.36	)	$	(1.95	)

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

	Year Ended July 31,
	2004		2003		2002
Risk free interest rate	3.0	%	2.2	%	3.3	%
Dividend yield	0	%	0	%	0	%
Expected volatility	93	%	96	%	100	%
Expected life	3.2 years		3.9 years		3.5 years

The assumptions used for awards under the Company’s Employee Stock Purchase Plan were the same as those listed above, except that an expected life of 0.5 years was used for each period. The weighted average grant date fair value of stock awards granted during the years ended July 31, 2004, 2003 and 2002 was $2.92, $2.19 and $2.87 per share, respectively. For purposes of the pro forma information, the estimated fair values of the employee stock options are amortized to expense using the straight-line method over the vesting period. The pro forma effect of applying SFAS No. 123 for the periods presented is not necessarily representative of the pro forma effect to be expected in future years.

The weighted average exercise prices for options granted at fair value were $3.80, $3.37 and $4.27 for fiscal 2004, 2003 and 2002, respectively. The weighted average fair values for options granted at fair value were $2.34, $2.19 and $2.87 for fiscal 2004, 2003 and 2002, respectively. No options were granted below fair value in fiscal 2004 and 2002. The weighted average fair value of options granted below fair value in fiscal 2003 was $2.21.

Property and Equipment

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

Computer and telecommunications equipment	2 to 3 years
Computer software	3 years
Furniture and office equipment	5 years
Leasehold improvements	Shorter of lease term or useful life of asset

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

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

Research and Development and Software Development Costs

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

Income Taxes

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Concentrations and Significant Customer Information

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, investments and accounts receivable. The Company invests its excess cash primarily in deposits with commercial banks, high-quality corporate securities and U.S. government securities. For the year ended July 31, 2004, GIG-BE revenue accounted for 41% and three international customers accounted for 27%, 13% and 13% of the Company’s revenue. For the year ended July 31, 2003, three international customers accounted for 43%, 22% and 14% of the Company’s revenue. For the year ended July 31,

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2002, two international customers accounted for 45% and 20% of the Company’s revenue. The Company generally does not require collateral for sales to customers, and the Company’s accounts receivable balance at any point in time typically consists of a relatively small number of customer account balances. At July 31, 2004 more than 80% of the Company’s accounts receivable balance was attributable to two domestic customers. At July 31, 2003, more than 90% of the Company’s accounts receivable balance was attributable to three international customers.

Many emerging service providers, from which the Company had derived a large percentage of its revenue through fiscal 2001, have experienced severe financial difficulties, causing them to dramatically reduce their capital expenditures, and in some cases, file for bankruptcy protection. As a result, the Company is directing its sales efforts towards incumbent service providers, which typically have longer sales evaluation cycles than emerging service providers. The Company expects that its revenue and related accounts receivable balances will continue to be concentrated among a relatively small number of customers.

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

Allowance for Doubtful Accounts

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

	Year Ended July 31,
	2004			2003			2002
Beginning balance	$	4,184		$	4,684		$	4,773
Additions (credits) charged to expenses		(52	)		(500	)		(89	)
Ending balance	$	4,132		$	4,184		$	4,684

Other Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130). For all periods presented, the unrealized gain or loss on investments, which is recorded as a component of stockholders’ equity, was the only difference between the reported net income (loss) and total comprehensive income (loss).

Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period less unvested restricted stock. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Common equivalent shares are composed of unvested shares of restricted common stock and the incremental common shares issuable upon the exercise of stock options and warrants outstanding. For all periods presented, due to the net loss sustained in each period, there was no difference between the shares used to calculate basic and diluted net loss per share, since the impact of the common equivalent shares would have been anti-dilutive.

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

	Year Ended July 31,
	2004			2003			2002
Numerator:
Net loss	$	(44,912	)	$	(55,106	)	$	(379,657	)
Denominator:
Weighted-average shares of common stock outstanding		272,881			271,602			272,162
Weighted-average shares subject to repurchase		(758	)		(5,900	)		(17,499	)
Shares used in per-share calculation—basic		272,123			265,702			254,663
Weighted-average shares of common stock outstanding		272,123			265,702			254,663
Weighted common stock equivalents		—			—			—
Shares used in per-share calculation—diluted		272,123			265,702			254,663
Net loss per share:
Basic	$	(0.17	)	$	(0.21	)	$	(1.49	)
Diluted	$	(0.17	)	$	(0.21	)	$	(1.49	)

Options to purchase 30.8 million, 30.2 million and 36.1 million shares of common stock at average exercise prices of $6.95, $7.44 and $8.33 have not been included in the computation of diluted net income (loss) per share for the years ended July 31, 2004, 2003 and 2002, respectively, as their effect would have been anti-dilutive. Warrants to purchase 150,000 shares of common stock at an exercise price of $11.69 have not been included in the computation of diluted net loss per share for the years ended July 31, 2003 and 2002, as their effect would have been anti-dilutive. These warrants expired unexercised during the year ended July 31, 2003.

Segment Information

The Company has determined that it conducts its operations in one business segment. For the year ended July 31, 2004, the geographical distribution of revenue was as follows: United States—41%, England—21%, France—13%, Japan—13% and all other countries—12%. For the year ended July 31, 2003, the geographical distribution of revenue was as follows: United States—9%, England—44%, France—22%, Japan—15% and all other countries—10%. For the year ended July 31, 2002, the geographical distribution of revenue was as follows: United States—13%, England—47%, Japan—20% and all other countries—20%. Long-lived assets consist entirely of property and equipment and are principally located in the United States for all periods presented.

3. Inventories

Inventories consisted of the following at July 31, 2004 and 2003 (in thousands):

	2004		2003
Raw materials	$	702	$	861
Work in process		1,405		498
Finished goods		2,187		3,758
Total	$	4,294	$	5,117

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4. Property and Equipment

Property and equipment consisted of the following at July 31, 2004 and 2003 (in thousands):

	2004			2003
Computer software and equipment	$	63,300		$	59,380
Land		3,000			3,000
Furniture and office equipment		1,443			1,443
Leasehold improvements		2,834			2,765
		70,577			66,588
Less accumulated depreciation and amortization		(61,158	)		(51,999	)
Total	$	9,419		$	14,589

Depreciation and amortization expense was $9.6 million, $21.1 million and $41.9 million for the years ended July 31, 2004, 2003 and 2002, respectively.

5. Lease Commitments

Operating Leases

Rent expense under operating leases was $2.5 million, $2.3 million and $4.0 million for the years ended July 31, 2004, 2003 and 2002, respectively. At July 31, 2004, future minimum lease payments under all non-cancelable operating leases are as follows (in thousands):

2005	$	5,372
2006		7,080
2007		2,848
Total future minimum lease payments	$	15,300

The amounts shown above include future lease payments relating to excess facilities for which the Company has abandoned and recorded charges for lease terminations and non-cancelable lease costs as part of its restructuring programs (Note 10). At July 31, 2004, $11.5 million is included as part of the restructuring liability relating to these facilities.

Vendor Financing

We currently do not have any outstanding customer financing commitments. During the first quarter of fiscal 2002, each of our two major vendor financing customers experienced a significant deterioration in their financial condition. As a result, we determined that we were unlikely to realize any significant proceeds from these vendor financing agreements. Accordingly, we recorded an impairment charge for the leased assets related to these financing agreements. Since revenue had been recognized under the vendor financing agreements on a cash basis, the amount of the impairment loss was limited to the cost of the systems shipped to the vendor financing customers, which had been classified in other long-term assets.

6. Income Taxes

Substantially all of the loss before income taxes as shown in the Consolidated Statement of Operations for the years ended July 31, 2004, 2003 and 2002 is derived in the United States.

During the years ended July 31, 2004, 2003 and 2002, due to the Company’s cumulative taxable losses, the net losses incurred during each period and the inability to carryback these losses, the Company has not recorded a current tax benefit for the net operating losses.

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

	July 31,
	2004			2003			2002
Statutory federal income tax (benefit)	$	(15,719	)	$	(19,287	)	$	(132,880	)
State taxes, net of federal benefit		(1,283	)		(1,609	)		(11,851	)
Non-deductible stock compensation		1,820			1,905			6,151
Valuation allowance		18,419			19,619			142,533
Other		(3,237	)		(628	)		(3,953	)
	$	—		$	—		$	—

The significant components of the Company’s net deferred tax assets as of July 31, 2004 and 2003 are as follows (in thousands):

	2004			2003
Assets:
Net operating loss and credit carryforwards	$	314,573		$	289,228
Restructuring and related accruals		24,905			27,408
Accruals …		3,346			4,539
Depreciation		592			3,105
Other, net		2,282			2,999
Total net deferred tax assets		345,698			327,279
Valuation allowance		(345,698	)		(327,279	)
	$	—		$	—

The Company recorded increases to the valuation allowance of $18.4 million and $19.6 million, respectively, to offset the increase in the net deferred tax assets, since the Company believes it is more likely than not that the net deferred tax assets will not be realized. No tax benefits associated with the Company’s stock plans were recorded during the years ended July 31, 2004 and 2003.

The Company had federal and state tax net operating loss carryforwards at July 31, 2004 of approximately $755.9 million and $165.1 million, respectively. The federal and state tax loss carryforwards will begin to expire in 2018 and 2004, respectively. Included in the net operating loss carryforwards are stock option deductions of approximately $166.7 million. The benefits of these stock option deductions approximate $58.3 million and will be credited to additional paid-in capital when realized or recognized. The Company also has federal and state research tax credit carryforwards of approximately $9.4 million and $4.2 million respectively, which will begin to expire in 2018 and 2013, respectively. Under provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership over a three year period may significantly limit the amount of the net operating loss carryforwards and research and development credit carryforwards, which can be utilized each year in future periods to offset taxable income.

7. Stockholders’ Equity

Preferred Stock

The Company’s Board of Directors (the “Board”) has the authority to issue up to 5,000,000 shares of preferred stock without stockholder approval in one or more series and to fix the rights, preferences, privileges and restrictions of ownership. No shares of preferred stock were outstanding at July 31, 2004 or July 31, 2003.

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Common Stock

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

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

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

Stock Incentive Plans

The Company currently has three primary stock incentive plans: the 1998 Stock Incentive Plan (the “1998 Plan”), the 1999 Stock Incentive Plan (the “1999 Plan”) and the Sirocco 1998 Stock Option Plan (the “Sirocco 1998 Plan”). A total of 121,835,692 shares of common stock have been reserved for issuance under these plans. The 1999 Plan is the only one of the three primary plans under which new awards are currently being issued. The total amount of shares that may be issued under the 1999 Plan is the remaining shares to be issued under the 1998 Plan, plus 25,000,000 shares, plus an annual increase equal to the lesser of (i) 18,000,000 shares, (ii) 5% of the outstanding shares on August 1 of each year, or (iii) a lesser number as determined by the Board. The plans provide for the grant of incentive stock options, nonstatutory stock options, restricted stock awards and other stock-based awards to officers, employees, directors, consultants and advisors of the Company. No participant may receive any award, or combination of awards, for more than 1,500,000 shares in any calendar year. Options may be granted at an exercise price less than, equal to or greater than the fair market value on the date of grant. The Board determines the term of each option, the option exercise price, and the vesting terms. Stock options generally expire ten years from the date of grant and vest over three to five years.

All employees who have been granted options by the Company under the 1998 and 1999 Plans are eligible to elect immediate exercise of all such options. However, shares obtained by employees who elect to exercise prior to the original option vesting schedule are subject to the Company’s right of repurchase, at the option exercise price, in the event of termination. The Company’s repurchase rights lapse at the same rate as the shares would have become vested under the original vesting schedule. As of July 31, 2004, there were 750 shares related to immediate option exercises subject to repurchase by the Company through fiscal 2005 at a price of $3.83 per share.

Restricted Stock

Restricted stock may be issued to employees, officers, directors, consultants, and other advisors. Shares acquired pursuant to a restricted stock agreement are subject to a right of repurchase by the Company which lapses as the restricted stock vests. In the event of termination of services, the Company has the right to repurchase unvested shares at the original issuance price. The vesting period is generally four to five years. The

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Company issued no shares of restricted stock during the years ended July 31, 2004, 2003 and 2002. As of July 31, 2004, there were 165,185 shares of restricted stock subject to repurchase by the Company through fiscal 2005 at their original issuance price of $0.00 per share.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan under which a total of 2,250,000 shares of common stock have been reserved for issuance. Eligible employees may purchase common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six-month offering period. Participation is limited to 10% of an employee’s eligible compensation not to exceed amounts allowed by the Internal Revenue Code. On August 1 of each year, the aggregate number of common shares available for purchase under the Employee Stock Purchase Plan is automatically increased by the number of common shares necessary to cause the number of common shares available for purchase to be 2,250,000. During the years ended July 31, 2004, 2003 and 2002, 641,520, 869,370 and 1,079,619 shares of common stock were issued under the plan, respectively. At July 31, 2004, 1,608,480 shares were available for future issuance.

Non-Employee Director Option Plan

The Company has a Non-Employee Director Option Plan (“the Director Plan”) under which a total of 1,980,000 shares of common stock have been reserved for issuance. As of August 1 of each year, the aggregate number of common shares available for the grant of options under the Director Plan is automatically increased by the number of common shares necessary to cause the total number of common shares available for grant to be 1,500,000. Each non-employee director is granted an option to purchase 90,000 shares which vests over three years upon their initial appointment as a director, and immediately following each annual meeting of stockholders, each non-employee director is automatically granted an option to purchase 30,000 shares which vests in one year. The Company granted 120,000, 210,000 and 90,000 options under the Director Plan during the years ended July 31, 2004, 2003 and 2002, respectively. At July 31, 2004, 1,380,000 shares were available for grant under the Director Plan.

Deferred Stock Compensation

In connection with the grant of certain stock options and restricted shares to employees through the year ended July 31, 2001, the Company recorded deferred stock compensation equal to the difference between the deemed fair market value of the common stock on the date of grant and the exercise price. Deferred compensation related to options and restricted shares which vest over time is recorded as a component of stockholders’ equity and is amortized over the vesting periods of the related options and restricted shares. During the years ended July 31, 2004, 2003 and 2002, the Company recorded stock-based compensation expense relating to these options and restricted shares totaling $5.8 million, $8.0 million and $24.6 million, respectively. During the years ended July 31, 2004, 2003 and 2002, the Company reversed deferred stock compensation of $0.3 million, $3.6 million and $13.8 million, respectively, relating to former employees that had terminated prior to vesting in the stock options and restricted shares.

Non-Employee Stock Compensation

During the years ended July 31, 2004, 2003 and 2002, the Company granted 6,000, 18,000 and 15,000 shares of fully vested non-forfeitable common stock awards to non-employees, respectively, and recognized compensation expense of $22,500, $40,000 and $30,000, respectively. The fair value of each stock option was estimated using the Black-Scholes option-pricing model with the following assumptions for the years ended July 31, 2004, 2003 and 2002, respectively: weighted-average risk free interest rates of 3.2%, 3.0% and 5.0%, weighted-average expected option life of 5.0, 3.8 and 2.0 years, no dividend yield and 98%, 100% and 90% volatility.

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During the year ended July 31, 2001, the Company issued a two-year warrant to purchase 150,000 shares of common stock at $11.69 per share, exercisable immediately in exchange for general and administrative services. The fair value of the warrant of $0.9 million was charged to expense during the year ended July 31, 2001, and was determined using the Black-Scholes model with the following assumptions: 6.5% risk free interest rate, 90% expected volatility, 2 year expected life and no dividend yield. This warrant expired unexercised during the year ended July 31, 2003.

Stock Option Exchange Offer

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

A total of 17.6 million options were accepted for exchange under the Exchange Offer and accordingly, were canceled in June 2001. A total of 1.7 million shares of restricted stock were issued in June 2001 and the Company recorded deferred compensation of $12.6 million related to these grants at that time. Due to cancellations of restricted stock relating to employee terminations, which were primarily due to the Company’s fiscal 2002 restructuring programs as described in Note 10, the total deferred compensation relating to the Exchange Offer was reduced to approximately $7.3 million. The deferred compensation costs will be amortized ratably over the vesting periods of the restricted stock, generally over a four year period, with 25% of the shares vesting one year after the date of grant and the remaining 75% vesting quarterly thereafter. Until the restricted stock vests, such shares are subject to forfeiture in the event the employee leaves the Company.

Upon the completion of the Exchange Offer, options to purchase approximately 15.9 million shares were originally expected to be granted in the second quarter of fiscal 2002, no sooner than six months and one day from June 20, 2001. However, due to the effect of employee terminations, which were primarily due to the Company’s fiscal 2002 restructuring programs as described in Note 10, the number of options which were granted in the second quarter of fiscal 2002 related to the Exchange Offer was approximately 12.6 million shares. The new options will generally vest over three years, with 8.34% of the options vesting on the date of grant and the remaining 91.66% vesting quarterly thereafter subject to forfeiture in the event the employee leaves the Company. The new options were granted with an exercise price of $4.89 per share, equal to the fair market value of the Company’s common stock on the date of grant.

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Stock Option Activity

Stock option activity under all of the Company’s stock plans during the three years ended July 31, 2004 is summarized as follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding at July 31, 2001	19,516,902		$	15.87
Options granted	23,503,385			4.27
Options exercised	(1,382,738	)		1.18
Options canceled	(5,585,817	)		19.40
Outstanding at July 31, 2002	36,051,732		$	8.33
Options granted	5,782,139			3.35
Options exercised	(1,196,128	)		1.36
Options canceled	(10,449,415	)		8.93
Outstanding at July 31, 2003	30,188,328		$	7.44
Options granted	4,191,700			3.80
Options exercised	(1,582,635	)		3.00
Options canceled	(1,950,921	)		11.04
Outstanding at July 31, 2004	30,846,472		$	6.95

The following table summarizes information about stock options outstanding at July 31, 2004:

	Options Outstanding				Vested Options Exercisable
Range of Exercise Prices	Number of Shares Outstanding	Weighted Average Remaining Contract Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  0.11–$    3.34	10,629,820	7.3	$	2.90	7,550,601	$	2.84
$  3.37–$    4.59	8,139,215	8.9	$	3.83	2,011,320	$	3.98
$  4.60–$    4.89	6,436,284	7.4	$	4.88	5,831,161	$	4.88
$  4.91–$  12.67	4,492,773	6.0	$	9.24	4,231,948	$	9.26
$15.63–$154.00	1,148,380	6.0	$	69.08	935,467	$	70.99
$  0.11–$154.00	30,846,472	7.5	$	6.95	20,560,497	$	7.96

At July 31, 2003 and 2002, approximately 14.6 million and 10.3 million outstanding options were vested and exercisable, respectively. The weighted average exercise prices for vested and exercisable outstanding options were $9.08 and $10.95 at July 31, 2004 and 2003, respectively.

Treasury Stock

At July 31, 2003, the Company held 147,000 shares of treasury stock, recorded at the acquisition cost of $11,000. Treasury stock relates to the repurchase upon employee terminations of unvested shares of restricted stock and options exercised prior to vesting. The shares of treasury stock held are either retired or reissued upon the exercise of options or the issuance of other stock-based equity awards. During the years ended July 31, 2004 and 2003, the Company retired 0.3 million and 2.9 million shares of treasury stock at its acquisition cost of approximately $ 25,000 and $246,000, respectively.

8. Employee Benefit Plan

The Company sponsors a defined contribution plan covering substantially all of its employees which is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to

54

contribute to the 401(k) plan through payroll deductions within statutory and plan limits. The Company made matching contributions of $0.5 million, $0.5 million and $1.0 million to the plan during fiscal 2004, 2003 and 2002, respectively.

9. Related Party Transactions

In July 2000, the Company and the Chairman of the Company’s Board of Directors (the “Chairman”), entered into an Investor Agreement with Tejas Networks India Private Limited, a private company incorporated in India (“Tejas”), pursuant to which the Company and the Chairman each invested $2.2 million in Tejas in exchange for equity shares of Tejas. The Chairman also serves as the Chairman of the Board of Directors of Tejas. An executive officer of the Company also attends meetings of the Board of Directors of Tejas for the sole purpose of representing the Company’s business interests, if any. The Company has entered into various agreements with Tejas under which the Company has licensed certain proprietary software development tools to Tejas, and Tejas will assist the Company’s business development efforts in India and also provide maintenance and other services to the Company’s customers in India. During the years ended July 31, 2004 and 2002, the Company did not engage in any material transactions with Tejas. During the year ended July 31, 2003, the Company recognized revenue relating to transaction with Tejas of $0.2 million

10. 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 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. During the fourth quarter of fiscal 2004, the Company recorded a net charge of $0.3 million to operating expense resulting from changes in estimates relating to its restructuring programs. In the event that other contingencies associated with the restructuring programs occur, or the estimates associated with the restructuring programs are revised, the Company may be required to record additional charges or credits against the reserves previously recorded for its restructuring programs.

As of July 31, 2004, the Company had $12.0 million in accrued restructuring costs, consisting primarily of $11.5 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.

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First Quarter Fiscal 2002 Restructuring:

The first quarter fiscal 2002 restructuring program included a workforce reduction of 239 employees, consolidation of excess facilities and charges related to excess inventory and other asset impairments. As a result, the Company recorded restructuring charges and related asset impairments of $77.3 million classified as operating expenses and an excess inventory charge of $102.4 million classified as cost of revenue. In addition, the Company recorded charges totaling $22.7 million, classified as a non-operating expense, relating to impairments of investments in non-publicly traded companies that were determined to be other than temporary. The restructuring charges included $7.1 million of costs relating to the workforce reduction, $11.2 million related to the write-down of certain land, lease terminations and non-cancelable lease costs and $6.0 million for potential legal matters, administrative expenses and professional fees associated with the restructuring programs, including employment termination related claims. The restructuring charges also included $102.4 million for inventory write-downs and non-cancelable purchase commitments for inventories due to a severe decline in the forecasted demand for the Company’s products and $53.1 million for asset impairments related to the Company’s vendor financing agreements and fixed assets that the Company abandoned. The first quarter fiscal 2002 restructuring program was substantially completed during the fourth quarter of fiscal 2002.

During the third and fourth quarters of fiscal 2002, the Company recorded credits totaling $10.8 million to cost of revenue due to changes in estimates, the majority of which related to favorable settlements with contract manufacturers for non-cancelable inventory purchase commitments. In addition, during the fourth quarter of fiscal 2002, the Company recorded a net $3.8 million credit to operating expenses relating to various changes in estimates. The changes in estimates consisted of a $8.4 million reduction in potential legal matters associated with the restructuring programs and the reversal of an accrued liability of $0.8 million for workforce reductions, partially offset by $5.6 million of additional facility consolidation charges. During the third and fourth quarters of fiscal 2003, the Company recorded a net $0.1 million credit to operating expenses due to various changes in estimates. The changes in estimates consisted of a $4.5 million reduction in potential legal matters associated with the restructuring programs, partially offset by $4.4 million of additional facility consolidation charges due to less favorable sublease assumptions. In addition, the Company recorded a $1.0 million non-cash charge to operating expenses for the write-down of certain land and a $0.5 million credit to cost of revenue relating to a favorable settlement with a supplier. During the fourth quarter of fiscal 2004, the Company recorded a net $0.3 million charge to operating expenses for additional facility consolidation charges due to less favorable sublease assumptions.

As of July 31, 2004, the projected future cash payments of $10.5 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 first quarter fiscal 2002 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		Adjustments			Accrual Balance at July 31, 2004
Workforce reduction	$	11,280	$	1,002	$	9,309	$	969	$	—	$	—	$	—		$	—
Facility consolidations and certain other costs		41,618		9,786		14,180		2,942		14,710		4,496		(260	)		10,474
Inventory and asset write-downs		292,736		187,512		94,420		10,804		—		—		—			—
Losses on investments		22,737		22,737		—		—		—		—		—			—
Total	$	368,371	$	221,037	$	117,909	$	14,715	$	14,710	$	4,496	($	260	)	$	10,474

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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 Optical Transport Node and the SN 10000 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 July 31, 2004, the projected future cash payments of $1.5 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 July 31, 2004
Workforce reduction	$	8,713	$	814	$	7,129	$	770	$	—	$	—	$	—
Facility consolidations and certain other costs		20,132		—		12,116		3,640		4,376		2,845		1,531
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	$	2,845	$	1,531

11. Commitments and Contingencies

Litigation

Beginning on July 2, 2001, several purported class action complaints were filed in the United States District Court for the Southern District of New York against the Company and several of its officers and directors (the “Individual Defendants”) and the underwriters for the Company’s initial public offering on October 21, 1999. Some of the complaints also include the underwriters for the Company’s follow-on offering on March 14, 2000. The complaints were consolidated into a single action and an amended complaint was filed on April 19, 2002. The amended complaint, which is the operative complaint, was filed on behalf of persons who purchased the Company’s common stock between October 21, 1999 and December 6, 2000. The amended complaint alleges 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

57

Prospectuses filed with the Securities and Exchange Commission, or the SEC, in October 1999 and March 2000 because of the failure to disclose (a) the alleged solicitation and receipt of excessive and undisclosed commissions by the underwriters in connection with the allocation of shares of common stock to certain investors in the Company’s public offerings and (b) that certain of the underwriters allegedly had entered into agreements with investors whereby underwriters agreed to allocate the public offering shares in exchange for which the investors agreed to make additional purchases of stock in the aftermarket at pre-determined prices. 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 settlement agreement and related agreements which set forth the terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately three hundred issuer defendants and the individual defendants currently or formerly associated with those companies. Among other provisions, the settlement provides for a release of the Company and the Individual Defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not 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 settlement agreement 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 settlement agreement, which has not yet been executed, has been submitted to the Court for approval. Approval by the Court cannot be assured. 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 eleven 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.

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

58

modified after December 31, 2002 for those items that only require disclosure. As of July 31, 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 the product warranty liability (in thousands):

	Year Ended July 31,
	2004			2003
Beginning Balance	$	4,651		$	5,499
Adjustments relating to preexisting warranties		(2,100	)		—
Accruals for warranties during the period		654			537
Settlements		(1,188	)		(1,385	)
Ending Balance	$	2,017		$	4,651

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12. Selected Quarterly Financial Data (Unaudited)

	October 25, 2003			January 24, 2004			April 24, 2004			July 31, 2004
	(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue	$	8,441		$	6,875		$	14,718		$	14,513
Cost of revenue		5,904			4,423			9,899			8,882
Gross profit.		2,537			2,452			4,819			5,631
Operating expenses:
Research and development		11,298			11,751			11,257			11,386
Sales and marketing		4,411			4,345			4,896			4,456
General and administrative		1,968			1,482			1,642			2,274
Stock-based compensation		1,305			1,768			1,082			920
Total operating expenses		18,982			19,346			18,877			19,036
Loss from operations		(16,445	)		(16,894	)		(14,058	)		(13,405	)
Interest and other income, net		4,268			3,895			3,485			4,242
Loss before income taxes		(12,177	)		(12,999	)		(10,573	)		(9,163	)
Income tax expense		—			—			—			—
Net loss	$	(12,177	)	$	(12,999	)	$	(10,573	)	$	(9,163	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.05	)	$	(0.04	)	$	(0.03	)

	October 26, 2002			January 25, 2003			April 26, 2003			July 31, 2003
	(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue	$	5,938		$	10,825		$	10,601		$	10,912
Cost of revenue		7,499			10,944			9,043			7,618
Gross profit (loss)		(1,561	)		(119	)		1,558			3,294
Operating expenses:
Research and development		13,927			13,432			12,679			12,400
Sales and marketing		4,942			5,070			4,884			4,867
General and administrative		1,658			1,751			1,852			1,978
Stock-based compensation		2,017			1,747			1,656			1,207
Restructuring charges and related asset impairments		—			—			(2,193	)		(2,254	)
Total operating expenses		22,544			22,000			18,878			18,198
Loss from operations		(24,105	)		(22,119	)		(17,320	)		(14,904	)
Interest and other income, net		6,743			6,002			5,426			5,171
Loss before income taxes		(17,362	)		(16,117	)		(11,894	)		(9,733	)
Income tax expense		—			—			—			—
Net loss	$	(17,362	)	$	(16,117	)	$	(11,894	)	$	(9,733	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.06	)	$	(0.04	)	$	(0.04	)

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. 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 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls. Our management has concluded that our disclosure controls and procedures and internal controls provide reasonable assurance that the objectives of our control system are met. However, our management (including our chief executive officer and chief financial officer) does not expect that the disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within the company have been or will be detected.

ITEM 9B. OTHER INFORMATION

On July 26, 2004, we entered into Amendment No. 1 with Plexus Services Corp., which amended the Manufacturing Services Agreement between Plexus and us. The Amendment relates to revised terms and conditions for Plexus to provide manufacturing and assembly services to us.

On April 22, 2004, we entered into a Master Purchase Agreement for Technical Equipment and Related Services with Sprint/United Management Company. The agreement relates to the sale of products and the provision of services by us to Sprint. We entered into Amendment No. 1 and Amendment No. 2 to the agreement on June 29, 2004 and July 19, 2004.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the heading “Executive Officers” in Part I hereof and set forth under the caption “Election of Directors” appearing in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on December 20, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, is incorporated herein by reference.

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

ITEM 11. EXECUTIVE COMPENSATION

The information appearing under the heading “Executive Officers” in Part I hereof and set forth under the caption “Compensation and Other Information Concerning Executive Officers” in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on December 20, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, is incorporated herein by reference.

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

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Compensation and Other Information Concerning Executive Officers” appearing in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on December 20, 2004 which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption “Certain Relationships and Related Transactions” appearing in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on December 20, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information set forth under the caption “Principal Accounting Fees and Services” appearing in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on December 20, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

The financial statements listed in the accompanying Index to Consolidated Financial Statements on page 37 are filed as part of this report.

2. Financial Statement Schedules

None

3. Exhibits

Number	Exhibit Description
3.1	Amended and Restated Certificate of Incorporation of the Company (3)
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (3)
3.3	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (6)
3.4	Amended and Restated By-Laws of the Company (3)
4.1	Specimen common stock certificate (1)
4.2	See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-Laws of the Registrant defining the rights of holders of common stock of the Company (3)(6)
*10.1	1998 Stock Incentive Plan, as amended (1)
*10.2	1999 Non-Employee Directors’ Option Plan (1)
*10.3	1999 Stock Incentive Plan, as amended (7)
*10.4	Form of Indemnification Agreement between Sycamore, the Directors of Sycamore Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17, 1999 (2)
*10.5	Form of Change in Control Agreement between Sycamore Networks, Inc. and executive officers of Sycamore Networks, Inc. each dated November 17, 1999 or August 5, 2002 (2)
10.6	Lease Agreement between Sycamore Networks, Inc. and Farley White Associates, LLC dated March 23, 2000 (4)
*10.7	Sirocco Systems, Inc. 1998 Stock Plan (5)
10.8	Lease dated as of October 27, 2000, between Sycamore Networks, Inc. and BCIA New England Holdings LLC for One Executive Drive, Chelmsford, Massachusetts (6)
+10.9	Manufacturing Services Agreement between Sycamore Networks, Inc. and Jabil Circuit, Inc. (7)
*10.10	Indemnification Agreement between Sycamore Networks, Inc. and Paul W. Chisholm (8)
+10.11	Manufacturing Services Agreement between Sycamore Networks, Inc. and Plexus Services Corp. (9)
10.12	Lease Agreement between Sycamore Networks, Inc. and New Boston Mill Road Limited Partnership dated March 8, 2000 (3)
++10.13	Reseller Agreement dated January 6, 2004 between Sycamore Networks, Inc. and Sprint (10)
++10.14	Exhibit I dated February 25, 2004 to the Reseller Agreement dated January 6, 2004 between Sycamore Networks, Inc. and Sprint (11)
++10.15	Master Purchase Agreement for Technical Equipment and Related Services dated April 22, 2004 between Sycamore Networks, Inc. and Sprint/United Management Company, including Amendment No. 1 dated June 29, 2004 and Amendment No. 2 dated July 19, 2004.
++10.16	Amendment No. 1 to Manufacturing Services Agreement between Sycamore Networks, Inc. and Plexus Services Corp. dated July 26, 2004

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Number	Exhibit Description
21.1	List of subsidiaries
23.1	Consent of PricewaterhouseCoopers LLP
24.1	Power of Attorney (see signature page)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-84635).

(2) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 30, 1999 filed with the Commission on December 13, 1999.

(3) Incorporated by reference to Sycamore Networks, Inc.’s Registration Statement on Form S-1 (Registration Statement No. 333-30630).

(4) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended April 29, 2000 filed with the Commission on June 12, 2000.

(5) Incorporated by reference to Sycamore Networks, Inc.’s Annual Report on Form 10-K for the annual period ended July 31, 2000 filed with the Commission on October 24, 2000.

(6) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 27, 2001 filed with the Commission on March 13, 2001.

(7) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended April 28, 2001 filed with the Commission on June 12, 2001.

(8) Incorporated by reference to Sycamore Networks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 26, 2002 filed with the Commission on December 6, 2002.

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

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

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

* Denotes a management contract or compensatory plan or arrangement.

+ Confidential treatment granted for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

++ Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission.

(b)     Exhibits

The Company hereby files as part of this Form 10-K the exhibits listed in the Exhibit Index beginning on page 63.

(c)    Financial Statement Schedules:

None

64

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chelmsford, Commonwealth of Massachusetts, on this 23rd day of August, 2004.

SYCAMORE NETWORKS, INC.
By:	/s/    DANIEL E. SMITH
	Daniel E. Smith
	President and Chief Executive Officer

POWER OF ATTORNEY AND SIGNATURES

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

Pursuant to the requirements of the Securities Act, this Annual Report on Form 10-K has been signed below by the following persons in the capacities indicated on this 23rd day of August, 2004.

/s/    GURURAJ DESHPANDE         Gururaj Deshpande	Chairman of the Board of Directors
/s/    DANIEL E. SMITH         Daniel E. Smith	President, Chief Executive Officer and Director
/s/    FRANCES M. JEWELS         Frances M. Jewels	Chief Financial Officer, Vice President, Finance and Administration, Secretary and Treasurer (Principal Financial and Accounting Officer)
/s/    TIMOTHY A. BARROWS         Timothy A. Barrows	Director
/s/    PAUL W. CHISHOLM         Paul W. Chisholm	Director
/s/    PAUL J. FERRI         Paul J. Ferri	Director
/s/    JOHN W. GERDELMAN         John W. Gerdelman	Director

65

EX-10.15

Exhibit 10.15

MASTER PURCHASE AGREEMENT FOR

TECHNICAL EQUIPMENT AND RELATED

SERVICES

BETWEEN

SPRINT/UNITED MANAGEMENT COMPANY

AND

SYCAMORE NETWORKS, INC.

TABLE OF CONTENTS

1.0	DEFINITIONS	1
2.0	SCOPE	5
2.1	GENERAL	5
2.2	[ * ]	5
2.3	FORECASTING	5
2.4	SPRINT SERVICES	5
3.0	AFFILIATE TRANSACTIONS	6
4.0	PRICES, INVOICING AND PAYMENT	6
4.1	PRICES	6
4.2	EXPENSES	6
4.3	TAXES	7
4.4	INVOICING, ITEMIZATION AND PAYMENT PROCEDURES	7
4.5	NO PAYMENT IN THE EVENT OF MATERIAL BREACH	7
4.6	PROMPT INVOICING	7
4.7	ELECTRONIC TRANSACTIONS	8
5.0	ORDERING	8
5.1	PURCHASE ORDERS	8
5.2	KITS	8
5.3	LEAD TIME	8
5.4	SYSTEM SUBSTITUTION	8
5.5	PURCHASE ORDER ACKNOWLEDGEMENT	9
5.6	[ * ]	9
5.7	SPRINT’S PURCHASE ORDER CHANGE RIGHTS	10
6.0	SHIPPING AND RISK OF LOSS OF PRODUCT	10
6.1	GENERAL	10
6.2	SHIPPING	10
6.3	EXPORT CONTROL REGULATIONS:	10
6.4	LATE SHIPMENT	10
6.5	EARLY SHIPMENT	11
7.0	RETURN AUTHORIZATION PROCESS	11
8.0	INSPECTION OF PRODUCT	11
8.1	INSPECTION	11
9.0	ACCEPTANCE PROCESS AND CRITERIA FOR THE FIELD EVALUATION SYSTEM, EQUIPMENT AND SOFTWARE	11
10.	HOMOLOGATION	11
11.0	SERVICES	12
11.1	TRAINING SERVICES	12
11.2	INSTALLATION SERVICES	12
11.3	WARRANTY SERVICES & PERFORMANCE MEASURES	12
11.4	MISCELLANEOUS PROVISIONS RELATED TO SERVICES	12
12.0	SOFTWARE LICENSE	13
12.1	RIGHT TO USE	13
12.2	SCOPE OF USE	13

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

1

12.3	TITLE TO SOFTWARE	14
13.0	SOURCE CODE ESCROWS	14
13.1	DEPOSIT OF SOFTWARE PRODUCT	14
13.2	RELEASE OF DEPOSIT	15
13.3	OBJECTION PERIOD	15
13.4	SPECIFIC RIGHTS AFTER REJECTION OR TERMINATION IN BANKRUPTCY	15
13.5	SPECIFIC RIGHTS BEFORE REJECTION IN BANKRUPTCY	16
14.0	WARRANTIES	16
14.1	GENERAL PRODUCT AND SYSTEM WARRANTY	16
14.2	SPECIFICATIONS COMPLIANCE	17
14.3	INTEROPERABILITY WARRANTY	17
14.4	BACKWARDS COMPATIBILITY WARRANTY	18
14.5	MEDIA WARRANTY	18
14.6	NON-INFRINGEMENT WARRANTY	18
14.7	[ * ]	18
14.8	REPLACEMENT DELIVERABLES	19
14.9	SERVICES WARRANTY	19
14.10	SUPPLIER PERSONNEL WARRANTY	19
14.12	EXCLUSIONS	19
15.0	[ * ]	19
15.1	[ * ]	19
15.2	[ * ]	19
15.3	[ * ]	19
15.4	[ * ]	19
16.0	[ * ]	19
16.1	[ * ]	19
16.2	[ * ]	20
17.0	[ * ]	20
18.0	TERM; TERMINATION AND DEFAULT	20
18.1	TERM	20
18.2	TERMINATION FOR CAUSE AND REPLACEMENT DELIVERABLES	20
18.3	TERMINATION FOR CHANGE OF CONTROL	20
18.5	EFFECT OF TERMINATION	20
19.0	GENERAL REPRESENTATIONS AND WARRANTIES	21
19.1	FORMATION; AUTHORIZATION; LITIGATION	21
19.2	NO VIOLATIONS; APPROVALS	21
19.3	LITIGATION	21
20.0	MISCELLANEOUS OTHER COVENANTS	21
20.1	COMPLIANCE WITH LAWS	21
20.2	PUBLIC SOFTWARE	21
20.3	SAFETY	21
20.4	USE OF SUBCONTRACTORS	22
21.0	CONFIDENTIAL INFORMATION	22
21.1	GENERAL	22
21.2	CONFIDENTIALITY	22
21.3	EXCEPTIONS	22
21.4	INTEROPERABILITY	23
21.5	THIRD PARTY CONFIDENTIAL INFORMATION	23
21.6	NO PUBLICITY	23
21.7	INJUNCTIVE RELIEF	23

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

2

21.8	SEC COMPLIANCE	23
22.0	OWNERSHIP	24
22.1	SPRINT-OWNED PROPERTY	24
22.2	DEVELOPED PROPERTY	24
23.0	RIGHT OF AUDIT	24
23.1	RECORDS MAINTENANCE	24
23.2	PROCEDURES	24
24.0	INSURANCE	24
24.1	INSURANCE REQUIREMENTS	24
24.2	CERTIFICATES OF INSURANCE	25
24.3	NO LIABILITY LIMIT	25
25.0	LIMITATION OF LIABILITY	25
26.0	INDEMNITY	25
26.1	SUPPLIER’S GENERAL THIRD PARTY INDEMNITY	25
26.2	SPRINT’S GENERAL THIRD PARTY INDEMNITY	26
26.3	SUPPLIER’S INTELLECTUAL PROPERTY INDEMNIFICATION	26
26.4	INDEMNIFICATION PROCEDURES	26
27.0	DISPUTE RESOLUTION	27
27.1	OPTION TO NEGOTIATE DISPUTES	27
27.2	FORUM SELECTION	27
27.3	[ * ]	28
27.4	CONTINUING PERFORMANCE	28
28.0	GENERAL PROVISIONS	28
28.1	NOTICES	28
28.2	MATERIAL/MECHANIC’S LIEN	29
28.3	BUSINESS CONDUCT CODE	29
28.4	ASSIGNMENT	29
28.5	INDEPENDENT CONTRACTOR	29
28.6	GOVERNING LAW	29
28.7	WAIVER	29
28.8	SEVERABILITY	29
28.9	SURVIVAL	30
28.10	SPRINT MARKS	30
28.11	FEDERAL ACQUISITION REGULATIONS	30
28.12	DIVERSITY	30
28.13	CONSTRUCTION	30
28.14	TRANSFER OF TITLE TO THE TRIAL EVALUATION EQUIPMENT	30
28.15	FORCE MAJEURE	30
28.17	ENTIRE AGREEMENT; MODIFICATIONS; INCONSISTENCIES	31

Schedule A – Technical Annex

Schedule B – Electronic Transactions

Schedule C – Acceptance Form

Schedule D – Product Acceptance

Schedule E – Training Services

Schedule F – Installation Services

Schedule G – Warranty Services and Software Support Plan

Schedule H – Sprint Routing Guide

Schedule I – Utilization of MBE, WBE and DVBE

Schedule J – Pricing

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

3

Schedule K – Sprint Affiliates

Schedule L – Homologated Countries

Schedule M – Subcontractors

Schedule N – Documentation and Reports

Schedule O – Full Protection Services

Schedule P – Title Transfer of Trial Equipment

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

4

MASTER PURCHASE AGREEMENT FOR TECHNICAL EQUIPMENT

AND RELATED SERVICES

This Master Purchase Agreement for Technical Equipment and Related Services (the “Agreement”) dated as of April 22, 2004 (“Effective Date”) is between Sprint/United Management Company, a Kansas corporation (“Sprint”), and Sycamore Networks, Inc., a Delaware corporation (“Supplier”).

BACKGROUND

A. Supplier is in the business of providing certain products, systems and services to its customers.

B. Sprint and Supplier contemplate that they will enter into one or more Purchase Orders for the provision of Deliverables by Supplier to Sprint.

C. Sprint and Supplier desire to specify the standard terms that will apply to those Purchase Orders.

OPERATIVE PROVISIONS

1.0 DEFINITIONS

“Acceptance” is defined in Section 9.0 and Schedule D.

“Agreement” refers to this Agreement and its Schedules.

“Backwards Compatibility” means the referenced prior Software Feature Enhancement Revision Level(s) of the applicable Product or System remain fully functional after the integration with the [ * ] Software Feature Enhancement Revision Levels and that after such integration the prior Software Feature Enhancement Revision Level(s) do not lose any functionality and the new Revision Level(s) or Interoperates with all functionalities of the [ * ] Software Feature Enhancement Revision Levels.

“Confidential Information” means information identified in written or oral format by the disclosing party as confidential, trade secret or proprietary information and, if disclosed orally, summarized in written format within [ * ] days of disclosure, including (i) this Agreement and the discussions, negotiations and proposals related to this Agreement, and (ii) any information exchanged in connection with this Agreement concerning the other party’s business including, tangible, intangible, visual, electronic, or written information, such as: (w) trade secrets, (x) financial information and pricing, (y) technical information, such as research, development, procedures, algorithms, data, designs, and know-how, and (z) business information, such as operations, planning, marketing interests, and products, and (iii) that in any event the receiving party should reasonably be expected to judge as confidential, trade secret or proprietary whether, under any of the clauses (i), (ii) or (iii) of this definition, received directly or indirectly from the other party.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

1

“Control” means: (i) the power to vote 50% or more of the voting interests of an entity; or (ii) ownership of 50% or more of the beneficial interests in income or capital of an entity unless otherwise mutually agreed.

“Deliverable” means any Product, System or Service delivered or to be delivered by Supplier under this Agreement and any applicable Purchase Order.

“Documentation” means all written instructions, manuals, descriptions, and any other documents (i) related to the Deliverables, (ii) necessary for Sprint to support Sprint’s business requirements (such as provisioning, testing, certificates of compliance, operating and troubleshooting) in connection with the Deliverables and (iii) detailed, comprehensive, and prepared in conformance with generally accepted industry standards of professional care, skill, diligence and competence applicable to telecommunications and operational practices similar to Sprint’s.

“Embedded Software” means software that is embedded in hardware and is not intended to be separated from the hardware to function.

“Equipment” means all hardware and other items of personal property as well as Embedded Software, that are provided or to be provided by Supplier under this Agreement, including the Equipment listed in the applicable Schedule and Equipment Modifications and Equipment Feature Enhancements.

“Equipment Feature Enhancement” means (i) feature enhancements that materially improve functionality or performance of Equipment and that Supplier markets as separate commercially available product or (ii) custom developed features for Sprint or another customer of Supplier.

“Equipment Modifications” means any patch, fix, alteration, improvement, correction, revision, release, new version or any other change to the Equipment that is required to address a field affecting change, except for Equipment Feature Enhancements.

“Feature Delivery Date” means the date on which Supplier has agreed that a Technical Annex Deliverable will be made commercially available.

“FRU” means field replaceable unit, for example cards, inter-bay cabling and power supplies, and does not include chassis.

“Full Protection Services” is defined in Schedule O.

“Illicit Code” means any Deliverable containing code that the Supplier intends to use or uses to gain unauthorized in-band access to Sprint systems or networks via call completion or transport device transponders or ports, network or any form of “back-door” access to Sprint networks. Notwithstanding the above, Supplier shall retain the ability to provide support to Sprint and Sprint Customers on a remote basis.

“Installation Related Materials” are described in a work statement attached to a Purchase Order. Installation Related Materials may include third-party branded equipment, software, or other materials and are not Products. A bill of materials listing the Installation Related Materials will be provided to Sprint at the end of the engineering phase of engineering, furnishing, installation & test services (“EFI&T”).

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

2

“Interexchange Carrier” means a telephone company that is allowed to provide long distance telephone service between LATAs. LATA means local access and transport area (also known as service area) as set forth in the Modified Final Judgment between the United States Department of Justice and AT&T.

“Interoperability” or “Interoperate” means the Product and/or System may interconnect and successfully operate with other products and systems in accordance with current industry standards and as set forth in the Specification.

“IXC” means Interexchange Carrier (also known as an “IEC” or “IC”).

“LEC” means local exchange carrier. Local exchange carrier means any person that is engaged in the provision of telephone exchange service or exchange access.

“Maintenance Services” means the hardware support provided by Sycamore under the terms and conditions contained in Schedule G Section 5 and the prices contained in Schedule J. The Maintenance Service is in addition to the Warranty Services.

“Malicious Software” means any key, node, lock, time-out, “virus,” “back door,” trapdoor,” “booby trap,” “drop dead device,” “data scrambling device,” “Trojan Horse,” means for enabling self-help, restraint, disabling program codes or other functions, whether implemented by electronic, mechanical or other means, which restricts or may restrict use or access to any portion of any Software data or information created by or accessed using the Software. Notwithstanding the above, Supplier shall retain the ability to provide support to Sprint and Sprint Customers on a remote basis.

“Net Price” means the final price paid by Sprint and Sprint Affiliates after all discounts are applied.

“Network Services” are the services provided by Sprint or a Sprint Affiliate to Sprint Customers, which services may include, but are not limited to, the following: (a) access to the Internet, (b) data and voice transmission and (c) telecommunications services related to such access and transmission, including managed network services whereby Sprint or a Sprint Affiliate manages network elements belonging to Sprint or a Sprint Affiliate, but located at the premises of a Sprint Customer in conjunction with Sprint’s or a Sprint Affiliate’s providing services to the Sprint Customer.

“Purchase Order(s)” means any written purchase order for Deliverables issued by Sprint to Supplier under this Agreement.

“Product” means the collective reference to Equipment and Software.

“Resolution” means the satisfactory conclusion of a service request. Resolution can be one of the following occurrences: (a) the identified problem has been resolved; or (b) a documented action plan containing the solution and timeframe for delivery. Resolution may include Supplier providing one or more interim patches or workarounds. The provision of a mutually acceptable patch(s) or workaround(s) shall reduce the severity level of the case.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

3

“Revision Level” means, with respect to any Product or System, any change from the immediately preceding version, including, any Software Upgrade, Software Feature Enhancement, Equipment Modifications and Equipment Feature Enhancement.

“Services” means any services related to the Products or System that Supplier may offer, such as Warranty Services, Software Support Plan, other Software support, installation services and training services.

“Software” means the computer software programs provided or to be provided by Supplier under this Agreement, including the Software listed in the applicable Schedule, any Software Upgrade, Software Feature Enhancement, Embedded Software and any related Documentation.

“Software Feature Enhancement” means (i) feature enhancements that materially improve functionality or performance of Software and that Supplier markets as a separate commercially available product or (ii) custom developed features for Sprint or another customer of Supplier. A Software Feature Enhancement in Supplier’s Revision Level numbering convention is denominated by the second character of its numbering system. For example in the Revision Level 6.2.1, the “Software Feature Enhancement” number is “2.”

“Software Support Plan” means the software support provided by Sycamore under the terms and conditions contained in Schedule G Section 6 and the prices contained in Schedule J. The Software Support Plan is in addition to the Software Warranty.

“Software Upgrade” means any commercially available upgrade, enhancement, modification, patch, fix, alteration, improvement, correction, revision, release, new version or any other change to the Software or Documentation, except for Software Feature Enhancements. A Software Upgrade in Supplier’s Revision Level numbering convention is denominated by the third character of its numbering system. For example in the Revision Level 6.2.1, the “Software Upgrade” number is “1.”

“Specification(s)” means the technical requirements and associated performance standards set forth in Schedule A.

“Sprint Affiliate” means (i) any entity, directly or indirectly, Controlling, Controlled by or under common Control with Sprint; and (ii) any entity that is listed in Schedule K, which may be amended from time to time as mutually agreed; and (iii) any entity to which any Sprint Affiliate as defined in clause (i) or (ii) of this definition is required by law or regulation to provide services or products and (iv) as the Parties otherwise mutually agree.

“Sprint Customer” means the entity to which Sprint or a Sprint Affiliate provides managed Network Services through use of the Products.

“Sprint Routing Guide” is attached as Schedule H.

“Supplier Personnel” means any employees, subcontractors or agents of Supplier who perform Services, act on Supplier’s behalf or are paid by Supplier in connection with this Agreement.

“Supplier Personnel Compensation” means wages, salaries, fringe benefits and other compensation, including contributions to any employee benefit, medical or savings plan and all payroll taxes, unemployment compensation benefits, including withholding obligations.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

4

“System” means an SN16000 MC, SN16000 SC or SN3000 or other Sycamore Product that may be added to this Agreement by mutual written consent.

“Technical Annex” means Schedule A.

“Technical Annex Deliverable” means any Equipment or Software required to gain compliance with a Specification identified in the applicable Schedule as a “Future Deliverable” or “Delayed Closure.”

“Unmitigated Vulnerabilities” means any Deliverables (i) containing items listed by Carnegie Mellon CERT^® Coordination Center (www.cert.org), (ii) containing items listed in the Mitre Common Vulnerabilities and Exposures List (www.cve.mitre.org), or (iii) that must be configured in a manner inconsistent with due diligence or industry-accepted best practices such that the Supplier is only able to provide contracted features or functionality under this Agreement with Deliverables configured in a manner susceptible to exploitation.

“Warranty Service(s)” means the services with respect to the Products and Systems further described in this Agreement and in Schedule G.

2.0 SCOPE

2.1 General

This Agreement sets forth general terms and conditions that apply to any Purchase Order Sprint or a Sprint Affiliate may issue to Supplier for Deliverables. Purchase Orders may be issued to Supplier for use by Sprint or Sprint Customers. Each Purchase Order specifically incorporates the terms of this Agreement.

All references to “Sprint” refer equally to Sprint or the Sprint Affiliate issuing a Purchase Order under this Agreement.

2.2 [ * ]

[ * ] Sprint’s issuance of a Purchase Order is Sprint’s offer to pay for Deliverables and is conditioned upon Supplier’s acceptance of the Purchase Order, in each case in accordance with this Agreement and the applicable Purchase Order.

2.3 Forecasting

Sprint will provide, on a [ * ] basis, a [ * ] forecast for Deliverables to Supplier to assist Supplier in planning in accordance with the appropriate Schedule. Any forecast will not be a Purchase Order or otherwise considered a commitment by Sprint. Each forecast will be provided to Supplier’s North American Sales Vice President or an assigned representative during the [ * ] program review or as otherwise mutually agreed.

2.4 Sprint Services

Supplier will allow Sprint to submit a proposal for Supplier’s telecommunications services as its current commitments expire. Telecommunications services include voice (wireline

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

5

and wireless), data, Internet connectivity, local, phone systems, teleconferencing and video.

3.0 AFFILIATE TRANSACTIONS

Any Sprint Affiliate may issue a Purchase Order under this Agreement. Supplier is obligated to provide the Deliverables to the Sprint Affiliate in accordance with this Agreement and the applicable Purchase Order. All references to Sprint in this Agreement refer equally to Sprint or the Sprint Affiliate executing a particular Purchase Order. Only the Sprint Affiliate executing the Purchase Order incurs any obligation or liability to Supplier with respect to the particular Purchase Order.

If Supplier deems a Sprint Affiliate to be not creditworthy, then Supplier may reasonably reject any Purchase Order from that Sprint Affiliate. Supplier will inform Sprint of such rejection within [ * ] days after Supplier’s receipt of the Purchase Order. If Supplier elects to accept a Purchase Order from a Sprint Affiliate that Supplier has reasonably deemed to be not creditworthy, then Supplier has the right to require letters of credit from that Sprint Affiliate.

4.0 PRICES, INVOICING AND PAYMENT

4.1 Prices

Prices (including any applicable discounts) for Products and Systems are set forth in Schedule J. [ * ]

The prices for Services are set forth in the Schedule describing the particular Services (see Section 11.0).

4.2 Expenses

Sprint will reimburse Supplier for travel, living, and other expenses if they are (i) authorized in the Purchase Order, (ii) reasonably incurred and documented, and (iii) in conformance with Sprint’s travel and reimbursement policy set forth below:

(a) Sprint will reimburse Supplier only for expenses if Supplier submits the expense report for reimbursement to Sprint within [ * ] days after the relevant expenses are incurred.

(b) Unless otherwise mutually agreed, Supplier must book all travel arrangements, including, without limitation, air travel, vehicle rentals and hotel accommodations, through the Sprint Business Travel Center by calling (800) 347-2639. All air travel must be coach or economy. When making travel arrangements, Supplier must identify itself as a supplier for Sprint.

(c) Sprint will reimburse Supplier for use of a personal vehicle for business purposes at the rate set forth in the IRS regulations in effect at the time the expense is incurred. Sprint will not reimburse Supplier for personal expenses, including, without limitation, phone calls, meals and vehicle use not related to the Services or Products supplied under this Agreement.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

6

(d) For reimbursement, Supplier must submit, as applicable, the following in Supplier’s expense report: (i) passenger flight coupon and travel itinerary, (ii) the original receipt for meals and parking and toll fees, in excess of $15 (tear tab receipts are not accepted), (ii) the original receipt for hotel accommodations, vehicle rental costs, fuel costs for rental vehicle usage, parking fees and toll fees (regardless of the amount).

4.3 Taxes

Sprint is responsible for any sales, use, excise, value added or similar municipal, state, county or federal taxes (“Taxes”) which may be levied on the sale, license or transfer, ownership or installation of the Equipment and Software and the delivery of Services. Supplier will disclose the Taxes on Supplier’s invoices. Except as otherwise provided in this Agreement, Supplier is responsible for all other taxes imposed upon [ * ]. If Sprint is exempt from taxation for the purposes of a Purchase Order, it will submit an exemption certificate to the Supplier prior to shipment.

4.4 Invoicing, Itemization and Payment Procedures

Supplier must send invoices to the following address:

Sprint/United Management Company

Supplier Disbursements Department

Mailstop: KSOPKD0101

6860 W. 115th Street

Overland Park, Kansas 66211

Each invoice must include: (i) Supplier’s name and remit address, (ii) invoice number, (iii) invoice date, (iv) the name of Supplier’s contact, (v) the contract number that Sprint assigned to this Agreement, and (vi) the Purchase Order. With respect to Products, the invoice must include a description of the Products being ordered, the date shipment was made and the shipping origination and destination. In addition, the line item on the invoice must match the line item on the Purchase Order to the extent reasonably practicable, including the Net Price and description. Unless otherwise specified in a Schedule, undisputed amounts will be paid within [ * ] days of date of Supplier’s invoice. Sprint must inform Supplier if it disputes an amount within [ * ] days of the date of Supplier’s invoice. Disputed amounts will be paid, if owed, within [ * ] days of resolution of the dispute.

4.5 No Payment in the Event of Material Breach

In the event the Supplier materially breaches any Purchase Order, Sprint will provide a written notice to the Supplier allowing it [ * ] days to correct any material breach. If Supplier fails to correct the material breach within the [ * ] days, Sprint will not be obligated to make payment on the disputed portion of the Purchase Order. If the Supplier produces a mutually agreed upon plan to cure the default within [ * ] days of receipt of the material breach notice, then upon Supplier proceeding to diligently cure the default in accordance with the plan, Sprint will pay the disputed portion of the Purchase Order.

4.6 Prompt Invoicing

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

7

4.7 Electronic Transactions

Sprint and Supplier will facilitate invoicing and payment through either the use of an electronic data interchange or an Internet-based e-commerce solution within [ * ] days of the Effective Date. Sprint and Supplier will work towards facilitating electronic ordering through either the use of an electronic data interchange or an Internet-based e-commerce solution upon the shipment of approximately [ * ] FRU’s. The requirements that will govern electronic transactions are attached as Schedule B.

5.0 ORDERING

5.1 Purchase Orders

Sprint will purchase Deliverables by issuing Purchase Orders to Supplier. Each Purchase Order will specify, at a minimum, Sprint contact name and billing address, Purchase Order Number and date of issuance (i) with respect to Products the quantity, item number, the Net Price, the requested ship date, the shipping method and the carrier, the delivery date, and the ship-to location, (ii) with respect to Services, the service offering, the Net Price, requested start and completion dates and the location for the Supplier provided Services, (iii) the signature of the Sprint employee or agent who possesses the authority to place the order (iv) the engineering, furnishing, installation and testing Services requested by Sprint in respect of Products covered by the order as set forth in the applicable work statement incorporated into the order, (v) Maintenance Services and Software Support Plan services, training or resident engineer services requested by Customer in respect of Products covered by the order, (vi) if an engineering, furnishing, installation and testing order includes the purchase of Installation Related Materials, the bill of materials and a requested ship date, ship to address and installation address for such Installation Related Materials, and (vii) if the Products for which Services are being ordered have been separately ordered, a complete list of the Products to which the Services relate (which may be made by cross-referencing Product purchase orders already accepted by Supplier hereunder).

5.2 Kits

Supplier agrees to offer Kits to Sprint as described in Schedule J. Sprint shall only issue Purchase Orders for Kits that contain a minimum of no less than [ * ] cards per Kit and must require that the cards be delivered at the same time as the Kits. As used above “cards” is defined to mean line cards and not the common cards.

5.3 Lead Time

Supplier will provide Products to Sprint in the time frames set forth below:

[ * ]

5.4 System Substitution

Supplier may not ship unauthorized substitute System or System components to Sprint or Sprint’s customers without Sprint’s prior written consent.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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5.5 Purchase Order Acknowledgement

Supplier will provide Sprint with an electronic notice of receipt of the Purchase Order within [ * ] hours. Supplier will issue a written acknowledgement (via email, or other electronic means) of acceptance or rejection within [ * ] business days of receipt of a Purchase Order from Sprint. Such acknowledgement will set forth either: (a) the Supplier scheduled ship date for accepted Purchase Orders; or (b) the reasons for Supplier’s rejection of the Purchase Order. Sprint may rescind (cancel or replace), in writing, a Purchase Order without penalty at any time within such [ * ] day period. A Purchase Order may be rejected by Supplier for any reason. [ * ]; and (b) the terms of such Purchase Order are in accordance with the terms of this Agreement, including, without limitation, Net Price and lead time for Deliverables. In the event Supplier rejects any terms, Sprint may deliver a revised Purchase Order to Supplier, the acceptance of which shall be handled in accordance with this Section. With respect to any Purchase Order issued by Sprint and rejected by Supplier, Supplier may, in lieu of a rejection notice thereof, counteroffer revised terms in writing to Sprint. Sprint shall notify Supplier in writing within [ * ] days of receipt of such counteroffer whether it will accept or reject the counteroffer; provided that no notification within such [ * ] period shall constitute rejection of such counteroffer.

This Agreement shall control over pre-printed portions of Purchase Order(s) and/or acknowledgments, and such pre-printed portions of Purchase Order(s) and/or acknowledgments shall have no force and effect.

Any term in the acknowledgment that is inconsistent with this Agreement is of no force and effect. Unless otherwise agreed, Supplier will use best commercial efforts to ship [ * ] prior to the Purchase Order due date.

5.6 [ * ]

5.6.1 [ * ]

Sprint may cancel all or any part of any Purchase Order for any reason for Products following Purchase Order acceptance in the time frames set forth below:

[ * ]

5.6.2 For Cause

Prior to Acceptance, in the event the Supplier materially breaches any Purchase Order, Sprint will provide a written notice to the Supplier allowing it [ * ] days to correct any material breach. If Supplier fails to correct the material breach within the [ * ] days, Sprint will not be obligated to make payment for the disputed portion of the Purchase Order. If the Supplier produces a plan for the cure of the default within such [ * ]-day period and proceeds diligently to cure the default in accordance with the plan, Sprint will pay the disputed portion of the Purchase Order. If a Purchase Order is terminated for cause and the Deliverables have been shipped or delivered, Sprint will return the Deliverables at Supplier’s expense.

If termination of a Purchase Order is partial, if practicable Supplier must continue to perform the remaining portion of the Purchase Order and Sprint will pay for such remaining portion.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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5.7 Sprint’s Purchase Order Change Rights

Sprint may upon [ * ] days prior written notice to Supplier prior to shipment direct, in writing, changes, including but not limited to changes in any one or more of the following: [ * ].

Notwithstanding the foregoing, Sprint may reschedule the delivery of Products scheduled for shipment [ * ].

Any claim by Supplier for adjustment under this Section must be made within [ * ] business days from the date of receipt by Supplier of the notification of Changes or such other time period as mutually agreed to otherwise by the parties in writing. Supplier shall proceed with the Purchase Order, as changed, upon receipt of Sprint’s written amendment or revision detailing the agreed upon changes in price or schedule, or both.

6.0 SHIPPING AND RISK OF LOSS OF PRODUCT

6.1 General

All shipments will be identified with large, easily readable type, including the shipping location, the Purchase Order number, and any other special purchase or shipping instructions required by Sprint. Supplier may not ship partial Purchase Orders without Sprint’s prior written consent; however, such consent will not be unreasonably withheld if, upon Sprint’s sole determination, the partial shipment provides substantial useful functionality to Sprint. [ * ]

6.2 Shipping

Delivery of Equipment or Software will be [ * ] for shipments delivered in the United States and shall be [ * ] from any Supplier premises for shipments delivered outside of the United States. Title (except title to Software) and risk of loss for Equipment will pass [ * ]. Supplier will ship all Orders following the Sprint Routing Guide set forth in Schedule H of this Agreement, unless otherwise mutually agreed in writing.

6.3 Export Control Regulations

The parties undertake to comply with all relevant export control laws, orders, regulations and restrictions such as, but not limited to, those imposed by the United States of America, the United Nations and the European Union. Sprint specifically acknowledges that the System and technology supplied by Supplier, its affiliates, subsidiaries, or subcontractors hereunder may be subject to trade sanctions and the aforementioned export control laws, orders, regulations and restrictions and shall not be exported, re-exported, transshipped, diverted or transferred, directly or indirectly, contrary to such laws, orders, regulations or restrictions.

6.4 Late Shipment

6.4.1 If Supplier is late in shipping Product, following a [ * ] business day cure period, as [ * ].

[ * ] will be responsible for all expedited shipping charges. Further, Supplier hereby verifies that it does not discriminate the demands of one customer versus another and

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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stipulates that Sprint will receive the same priority in terms of availability, shipping, and delivery of Deliverables as any other valued customer under similar circumstances.

6.5 Early Shipment

If Supplier ships materially ahead of the time period required under Section 5.4, Sprint may, at its option, (i) return the Product to Supplier at [ * ] expense for timely re-delivery, or (ii) [ * ].

7.0 RETURN AUTHORIZATION PROCESS

Upon request by Sprint for a return authorization for repair or replacement of Product, whether or not under warranty, Supplier will either issue a return authorization or provide Sprint with written substantiation for the refusal to issue the return authorization within [ * ] of receipt of a request to return. [ * ] Upon delivery of the replacement Product, Sprint will make all reasonable efforts to return the defective Product in a timely manner.

8.0 INSPECTION OF PRODUCT

8.1 Inspection

Sprint may inspect or test any Product at Supplier’s location before Supplier ships it provided that it obtains permission in advance from Supplier. The parties will mutually agree on any out-of-pocket expenses associated with an inspection charged by Supplier’s contract manufacturer. Supplier must provide, at its expense, reasonable assistance for inspections and tests. Sprint also may test and inspect the Product after its receipt at Sprint’s location.

Sprint’s right to inspect and test (i) does not relieve Supplier from any of its other obligations under this Agreement, including warranty and quality control obligations and (ii) does not constitute Acceptance of the Product.

9.0 ACCEPTANCE PROCESS AND CRITERIA FOR THE FIELD EVALUATION SYSTEM, EQUIPMENT AND SOFTWARE

[ * ]

10. HOMOLOGATION

Upon the Effective Date, Supplier has met the applicable Homologation requirements for the Systems as set forth in Schedule L. “Homologation” means that the Supplier has:

i) obtained [ * ] approvals needed [ * ];

ii) made required revisions to signaling code; and

iii) obtained all certifications [ * ].

[ * ]. For all Systems purchased for installation in a country set forth in Schedule L, Sprint shall indicate on the Purchase Order the country in which the System is to be installed.

If Supplier, its distributor or a Supplier affiliate complies with the Homologation requirements for such Equipment, Software or System in any country not set forth in Schedule L, then Sprint shall have the right to use the results of such Homologation.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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If Sprint desires to purchase any Equipment, Software or System for a country not set forth in Schedule L and the mandatory Homologation requirements for such have not yet been complied with, then Sprint and Supplier shall mutually agree on pricing, terms and conditions relating to such Homologation.

11.0 SERVICES

11.1 Training Services

Schedule E details Supplier provided training services and fees.

11.2 Installation Services

Schedule F details Supplier provided installation services and fees.

11.3 Warranty Services & Performance Measures

Schedule G details Supplier provided Warranty Services and Performance Measures.

11.4 Miscellaneous Provisions Related to Services

11.4.1 Personnel Compliance

Supplier will require Supplier personnel to comply with the applicable terms of this Agreement.

11.4.2 Sprint’s Right to Remove Supplier Personnel

In the event that Sprint reasonably determines that particular Supplier Personnel are not conducting himself or herself in accordance with this Section or not providing satisfactory service, Sprint may require the removal of such personnel. Supplier shall promptly investigate the matter and take appropriate action which may include removing the applicable person from working on Sprint Services (and provide Sprint with prompt notice of such removal). The parties will mutually agree on any impacts to any schedule changes and [ * ] related to the removal of any Supplier Personnel.

11.4.3 Weapons Prohibition

Supplier’s personnel are prohibited from carrying weapons or ammunition onto Sprint’s premises and from using or carrying weapons while conducting any ancillary services for Sprint or while attending Sprint-sponsored activities. Supplier agrees to comply with any postings and notices located at Sprint’s premises regarding safety, security, or weapons.

11.4.4 Background Checks

Supplier will perform background checks on all Supplier personnel assigned to provide Services under this Agreement. Background checks will include: (i) employment checks, and (ii) reference checks. Sprint may require Supplier to perform more extensive background checks for Supplier’s personnel that may be working on Sprint premises.

11.4.5 Security Requirements and Access

Supplier will adhere to Sprint security requirements. Security access rights to Sprint premises will be designated by Sprint according to Sprint’s security guidelines. Supplier will abide by

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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all procedures and policies applicable to Sprint premises access rights. All Supplier personnel will receive a security badge from Sprint before performing any Services on Sprint’s premises and will be required to wear the badge at all times while on Sprint’s premises.

11.4.6 Investigations

Any security breach will be referred to Sprint’s Corporate Security. Supplier must make Supplier personnel available to Sprint for purposes of investigating accidents or incidents.

12.0 SOFTWARE LICENSE

12.1 Right to Use

Supplier grants to Sprint a [ * ], non-exclusive, [ * ], non-transferable right and license to install, execute, use, copy, test, display and perform the Software for Sprint’s internal business purposes (including, without limitation, in conjunction with Sprint’s provision of services to its end-user customers, but not for resale) for use on, or in conjunction with the Equipment with which it was originally delivered. Such license is subject to Sprint’s payment in full of the Net Price of the Equipment and applicable license fees for the Software, if any. Notwithstanding the foregoing, Sprint may transfer its rights under this Section to its Controlled subsidiaries. For the avoidance of doubt, the parties have agreed that [ * ] shall be treated as Controlled subsidiaries for the purpose of this Section.

If any Software includes programming language, compiler, development library, or other development-related Software (“Development-Related Software”), Supplier grants to Sprint a [ * ], non-exclusive, [ * ], non-transferable right and license to install, execute, use, copy, test, display, perform, distribute and license any application program created by Sprint with such Development-Related Software, including those Supplier modules and libraries of the Software necessary for execution of Sprint’s application program. Notwithstanding the foregoing, Sprint may transfer its rights under this paragraph to its Controlled subsidiaries. The modules are only for use in conjunction with Sprint’s application program. Sprint retains all right, interest in and title to the Sprint-developed application programs created with the Development-Related Software. Licensor retains all right, interest in and title to all modules and libraries of the Development-Related Software necessary for the execution of Sprint’s application program.

Sprint will use commercially reasonable efforts, which will be no less stringent than those efforts Sprint uses to protect its own software or other similar property, to prevent the Software from being used in any manner that would enable any other person to use the Software in violation of this Agreement. Except as otherwise provided above or in Section 12.2, Sprint is not authorized to modify, adapt, translate, or create derivative works based in whole or in part any Software, or to reverse compile or disassemble the Software.

12.2 Scope of Use

12.2.1 Right to Make Copies

Sprint may, at no cost and without notice to Supplier, make a reasonable number of copies of the Software for archival, testing or backup purposes. Sprint will cause all copies to contain the same copyright, trademark, or proprietary legends that appear on the original.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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12.2.2 Testing Copies

Sprint may, at no cost and without notice to Supplier, make a reasonable number copies of any of the Software in order to and install, execute, use, test, display and perform for testing purposes including, without limitation (a) testing for date arithmetic functions; (b) testing of disaster recovery plan procedures and effectiveness and (c) testing to validate the Software before placing it on application development and production processors or placing it in a production environment, provided that the Software will only reside on the applicable System or computer for a duration reasonably necessary to conduct such testing.

12.2.3 Documentation Copies

Supplier will provide to Sprint, at no cost, [ * ] copies of the Documentation for any Product in a mutually agreeable format and medium. Sprint may make, or have made on its behalf, a reasonable number of copies of the Documentation to the extent necessary for Sprint’s internal business purposes. Sprint will cause all copies to contain the same copyright, trademark, or proprietary legends that appear on the original.

12.2.4 Spares Licensing Requirement

Sprint is not required to purchase a separate Software license for Sprint-owned spares provided that such spares are only used to replace a failed board that is covered under a valid Software license. Any use of a Sprint-owned spare other than to replace a failed board is a violation of the Software license.

12.3 Title to Software

This Agreement does not grant Sprint title to, or rights of ownership in, the Software. All Software furnished by Supplier, and all copies made by or on behalf of Sprint, including any translations, compilations, and partial copies, are and will remain the property of Supplier.

13.0 SOURCE CODE ESCROWS

13.1 Deposit of Software Product

Upon Sprint’s request at any time during the term of this Agreement, Licensor will, at [ * ] sole expense, deposit a sealed package containing the source code of the Software Product with a mutually acceptable independent escrow agent under a written escrow agreement (“Escrow Agreement”) that is substantially consistent with the terms of this of this Section and signed by Sprint and Licensor. Neither party will unreasonably withhold its consent in selecting an independent escrow agent.

Additionally, provided that the Software is covered under warranty or Sprint has a fully paid Software Warranty Services agreement therefore, [ * ]. The escrow agent will give Sprint written notice of any deposit by Licensor. The source code delivered to the escrow agent will be in a form suitable for reproduction by Sprint. Each source code deposit will comprise: [ * ].

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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13.2 Release of Deposit

The Escrow Agreement described in this Section 13.0 will provide that if all of the following events occur, the escrow agent will promptly deliver to Sprint all deposited Software Product source code and related escrowed materials if Escrow agent receives from Sprint written notice that:

(i) there has been the occurrence of one of the following escrow release events:

(1) any action by Supplier under any federal or state insolvency or similar law for the purpose of its bankruptcy, reorganization or liquidation and the unwillingness or inability of Supplier to provide support for the licensed software; or

(2) after receiving at least [ * ] days’ notice from the Licensee, provided that Licensee has followed the escalation procedure set out in Section 27 prior to giving such notice, [ * ]; or

(3) [ * ];

(ii) evidence satisfactory to escrow agent that Sprint has previously notified Supplier of such [ * ] in writing;

(iii) a written demand that the deposit materials be released and delivered to Sprint;

(iv) a written undertaking from the Sprint that the deposit materials being supplied to Sprint will be used only as permitted under the terms of the Agreement; and,

(v) specific instructions from Sprint for this delivery.

13.3 Objection Period

If the provisions of 13.2 are met, Escrow Agent shall, within [ * ] business days after receipt of all the documents specified in paragraph 13.2, send by certified mail to Supplier a copy of all such documents.

Supplier shall have [ * ] days from the date on which Supplier receives such documents (“Objection Period”) to notify Escrow Agent of its objection (“Objection Notice”) to the release of the deposit materials to Sprint and to request that the issue of Sprint’s entitlement to a copy of the deposit materials be submitted to dispute resolution in accordance with Section 0.

If, at the end of the Objection Period, Escrow Agent has not received an Objection Notice from Supplier, then Escrow Agent shall reasonably promptly deliver the deposit materials to Sprint. Both Supplier and Sprint agree that Escrow Agent shall not be required to deliver such deposit materials until all such fees then due Escrow Agent have been paid.

13.4 Specific Rights after Rejection or Termination in Bankruptcy

If Licensor or its successors or representatives, including any bankruptcy trustee, rejects or terminates this Agreement under Title 11, § 365 of the United States Code (or any

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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replacement provision), Sprint may elect to retain its rights under the License Agreement and this Agreement as provided in the Bankruptcy Code and any supplementary agreement including, but not limited to, the Escrow Agreement. Upon written request of Sprint to Supplier or the Bankruptcy Trustee, Supplier or such Bankruptcy Trustee shall not interfere with the rights of Sprint as provided in the License Agreement and this Agreement and any supplementary agreement including, but not limited to, the Escrow Agreement, including the right to obtain the Deposit Material from Escrow Agent.

13.5 Specific Rights Before Rejection in Bankruptcy

If Licensor or its successors files or becomes the subject of an involuntary petition in bankruptcy, then unless and until Licensor (or its trustee in bankruptcy, if one has been appointed) rejects this Agreement, Licensor (or its trustee in bankruptcy) will: (i) perform all obligations of Licensor under this Agreement; (ii) provide Sprint with all current and/or deposited Software Product source code and related materials (whether or not such Software Product source code has been delivered to the escrow agent); and (iii) not interfere with the release of the deposited Software Product source code and related escrowed materials by the escrow agent to Sprint.

14.0 WARRANTIES

14.1 General Product and System Warranty

Supplier warrants to Sprint that any Product and any System:

(a) is new (except for Equipment listed in Schedule P);

(b) conforms with the applicable Purchase Order that has been accepted by Supplier. This item relates to the quantity and model number designations on a Purchase Order and is not meant to impact technical performance-related issues;

(c) complies with the Specifications;

(d) with respect to Software, [ * ];

(e) with respect to Equipment that is not Software, is free from defects in materials and workmanship;

(f) with respect to any Software or part thereof that has been licensed to Supplier by a third party, [ * ];

(g) will perform and process date arithmetic and date/time data in a consistent and accurate manner, accepting and responding to two-digit year-date input, correcting or supplementing as necessary, and in a manner that is unambiguous as to century; and

(h) is free from any lien or other encumbrance.

14.1.1 Warranty Length

Supplier’s warranty under this Section will be as follows:

• [ * ] months return to factory repair for any Equipment

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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The allegedly defective Equipment must be returned by Sprint to Supplier in accordance with Supplier’s Return to Factory repair procedures. Except where Supplier provides an advance replacement, Supplier will ship repaired or replacement FRUs and chassis to Sprint within [ * ] business days of receipt of the defective FRU.

• [ * ] for any Software

Supplier shall provide, in accordance with Schedule G, Software Upgrades as reasonably determined by Supplier. The provision of Software Feature Enhancements is not included in this Software warranty.

• Services - Workmanship is warranted for [ * ] days from date of performance

The applicable warranty will begin upon shipment. If there is a breach of a warranty, Sprint may, in the following order, return the Products to Supplier, at Supplier’s expense for: (i) correction; or (ii) replacement.

[ * ]

Supplier shall incur no liability under this warranty if Supplier’s tests disclose that the alleged defect is due to causes not within Supplier’s reasonable control, including unlawful use or abuse of the goods. Unless such Supplier’s tests are inconclusive, so long as Supplier can demonstrate to Sprint’s reasonable satisfaction that a Product is determined not to be defective or to have a defect due to causes not within Supplier’s reasonable control, Sprint agrees to pay for such repair at the repair price as listed in Supplier’s then current U.S. price list.

14.1.2 Supplier is not obligated under this warranty if Sprint fails to provide Supplier with notice of the alleged defect during the applicable warranty period.

14.2 Specifications Compliance

The Supplier fully complies with the Specifications documents outlined in the Technical Annex unless otherwise explicitly stated.

14.2.1 Specifications Definitions:

The following definitions will apply to the technical requirements sections of the Technical Annex:

[ * ]

14.2.2 [ * ]

14.2.3 [ * ]

14.2.4 [ * ]

14.3 Interoperability Warranty

Supplier warrants that it will use commercially reasonable efforts to ensure that any System and any Product will Interoperate [ * ].

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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14.4 Backwards Compatibility Warranty

Supplier warrants that any System or Product will be compatible with any Software Feature Enhancements or Equipment Feature Enhancements so that no changes are required to obtain the full functionality and compliance with the Specifications that existed:

[ * ]

before the installation of the Software Feature Enhancements or the Equipment Feature Enhancements.

Supplier also warrants that any Software Feature Enhancements or Equipment Feature Enhancements will be [ * ].

14.5 Media Warranty

Supplier warrants that all tapes, diskettes, or other media delivered to Sprint under this Agreement will be free of defects in materials and workmanship under normal use for a period of [ * ] from date of shipment. During the [ * ] period, as its sole and exclusive remedy, Sprint may return the defective media to Supplier, and Supplier will, at its expense, promptly replace the defective media with functionally equivalent new media.

14.6 Non-Infringement Warranty

Supplier warrants that it has the full power and authority to grant the Software licenses granted under this Agreement.

14.7 [ * ]

The Supplier warrants that all delivered Products or Systems, except third party personal computers and/or work stations, [ * ]. Supplier will pass on the original manufacturer’s warranty for 3^rd party supplier personal computers and work stations to the extent of its ability to do so.

14.7.1 [ * ]

Once the Supplier has warranted that all delivered Products or Systems are “certified” free of computer [ * ], Sprint may request that the Supplier provide Documentation that demonstrates that the applicable Product or System has been [ * ].

14.7.3 [ * ]

Once the Supplier has warranted that all delivered Product or Systems are “certified” free of any [ * ], Sprint may request that the Supplier provide Documentation that demonstrates [ * ].

14.7.3 [ * ]

Sprint may request from time to time that the Supplier provide Documentation that demonstrates that each delivered Product or System has been scanned [ * ].

14.7.4 Remedies

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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14.8 Replacement Deliverables

Replacement or corrected Products or Systems are covered under all warranty provisions in this Agreement. The length of the warranty is governed by the date the original Product or System was shipped to Sprint. By example, if a Product or System is returned after [ * ] years, the repaired or replaced Product or System will have [ * ] months left on a [ * ] warranty.

14.9 Services Warranty

Supplier warrants that the Services will conform to the applicable schedules attached to this Agreement or in a separate statement of work, and will be provided in a workmanlike manner and that, Supplier’s employees, subcontractors, or agents assigned to provide Services under this Agreement have the proper expertise, skills, training, and professional education to perform the Services in a professional manner and consistent with applicable industry standards.

If there is a breach of a warranty of Section 14.9, Supplier will promptly correct or re-perform the Services at Supplier’s cost.

14.10  Supplier Personnel Warranty

Supplier warrants that neither Supplier nor, to the best of its knowledge, its personnel performing Services has any existing obligation that would violate or infringe upon the rights of third parties, including property, contractual, employment, trademark, trade secrets, copyright, patent, confidential information and non-disclosure rights, that materially affect Supplier’s ability to fulfill its obligations under this Agreement.

14.12  Exclusions

Warranty Disclaimer. EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, SUPPLIER MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO ANY DELIVERABLE, AND SUPPLIER DISCLAIMS ANY AND ALL IMPLIED WARRANTIES RELATING THERETO, INCLUDING, BUT NOT LIMITED TO, ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY INTENDED OR PARTICULAR PURPOSE.

15.0 [ * ]

15.1 [ * ]

15.2 [ * ]

15.3 [ * ]

15.4 [ * ]

16.0 [ * ]

16.1 Product

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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16.2 Replacement Parts

[ * ]

17.0 [ * ]

18.0 TERM; TERMINATION AND DEFAULT

18.1 Term

The initial term of this Agreement begins on the Effective Date and ends [ * ] years thereafter. Following expiration of the initial term, this Agreement renews automatically on an [ * ] basis unless either party gives [ * ] days prior notice of its intention not to renew the Agreement. The terms of this Agreement remain in effect for any Purchase Order that has been accepted by Sycamore that is outstanding at the time of termination of the Agreement.

18.2 Termination for Cause and Replacement Deliverables

If a party materially breaches this Agreement, the other party shall give the breaching party a material breach notice, identifying the action or inaction that is the basis of the breach. Unless otherwise provided, the party that gave the breach notice may terminate this Agreement if the breaching party has not cured the breach within [ * ] days after the date of receipt of the material breach notice. The termination is effective [ * ] days after the date of the notice, unless cured or extended. In the event of a termination due to a Supplier breach, Sprint will be entitled, from Supplier, to reasonable costs incurred by Sprint resulting from the breach. The amount to be paid by Supplier pursuant to this Section will survive termination of this Agreement.

18.3 Termination for Change of Control

Either party may provide a notice of termination of this Agreement or any Purchase Order or both (the “Terminating Party”) to the other party if either (a) a party to this Agreement [ * ], or (b) if any person or group (as such term is defined in the Securities Exchange Act of 1934, as amended), comes to own or acquire [ * ] percent [ * ] or more of a party’s voting equity interests (any such entity, person or group will be referred to as a “Succeeding Entity”). The Terminating Party may terminate this Agreement based solely upon (i) [ * ]; (ii) [ * ]; (iii) [ * ]; or (iv) [ * ]. A Terminating Party must give notice within [ * ] days after the date in which it first learned of the change in Control of the other party, otherwise the Terminating Party may not terminate this Agreement. Unless otherwise provided in the notice, the termination is effective [ * ] days after the date of the notice.

18.5 Effect of Termination

Unless otherwise provided in this Agreement, 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.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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19.0 GENERAL REPRESENTATIONS AND WARRANTIES

19.1 Formation; Authorization; Litigation

Each party represents and warrants that:

(a) it is validly existing and in good standing, and is qualified to do business in each jurisdiction that it will conduct business under this Agreement, unless the failure to do so will not have a material adverse effect on its ability to perform under this Agreement;

(b) the signing, delivery and performance of this Agreement by the party has been properly authorized; and

(c) there are no claims, actions or proceedings pending or, to the knowledge of the party, threatened against or affecting the party that may, if adversely determined, reasonably be expected to have a material adverse effect on the party’s ability to perform.

19.2 No Violations; Approvals

Each party represents and warrants to the other party that neither the execution, delivery or performance of this Agreement:

(a) will violate any existing law, regulation, order, determination or award of any governmental authority or arbitrator, applicable to the party;

(b) will violate or cause a breach of the terms of the party’s governing documents or of any material agreement that binds the party;

(c) will require approval or filing with any governmental authority; or

(d) will require any license to use the intellectual property of a third party, other than any licenses held by a party with the good faith belief that the licenses will endure or are renewable and will be renewed by the party for the Agreement term.

19.3 Litigation

There are no claims, actions, suits or proceedings pending or, to the knowledge of the party, threatened against or affecting the party which could, if adversely determined, reasonably be expected to have a material adverse effect on the party’s ability to perform its obligations under this Agreement.

20.0 MISCELLANEOUS OTHER COVENANTS

20.1 Compliance with Laws

Each party will comply with all applicable material laws, orders, codes, and regulations in the performance of this Agreement. Supplier will obtain all applicable permits relating to its ability to perform its obligations under this Agreement.

20.2 Public Software

[ * ]

20.3 Safety

Supplier must immediately notify Sprint by telephone or email, followed by written confirmation, within [ * ], of any Product which fails to comply with any applicable safety

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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rules or standards of any government agency or which contains a defect that could present a substantial risk to the public health or the environment.

20.4 Use of Subcontractors

Supplier may use any subcontractors listed in Schedule M to perform all or a portion of its rights, duties and obligations under this Agreement. For any subcontractor not listed in Schedule M Supplier will run the appropriate background checks in Section 11.4 and provide written notice to Sprint. Supplier will remain fully liable for the work performed and for the acts or omissions of any of its subcontractor(s). Supplier will require its subcontractors to comply with the applicable terms of this Agreement.

21.0 CONFIDENTIAL INFORMATION

21.1 General

Each party acknowledges that while performing its obligations under this Agreement it may have access to the Confidential Information of the other party. A party receiving the Confidential Information has a duty to protect the Confidential Information for [ * ] years from the first date that the Confidential Information was received. Confidential Information identified as being “trade secret” by Supplier shall have a protection period of [ * ] years upon the date of receipt of such Confidential Information. At receiving party’s discretion, at any time prior to the end of the protection period of any Confidential Information exchanged under this Agreement, the receiving party may either (i) return to the disclosing party all such copies of Confidential Information or (ii) destroy all copies of Confidential Information and certify to the destruction of all known copies of such. Confidential Information disclosed under this Agreement remains the property of the disclosing party. The receiving party must return all Confidential Information owned by the disclosing party upon request, or upon the termination or expiration of this Agreement, whichever is earlier. Confidential Information may only be used in connection with the receiving party’s performance of its obligations under this Agreement.

21.2 Confidentiality

Each party will keep the Confidential Information of the other confidential and will only use such the Confidential Information to perform their respective obligations under this Agreement. Each party must protect the Confidential Information of the other from both unauthorized use and unauthorized disclosure by exercising the same degree of care that is used with respect to information of its own of a similar nature, except that the receiving party must at least use reasonable care. Upon cessation of work, or upon written request, each party will return or destroy all the Confidential Information of the other.

21.3 Exceptions

Confidential Information does not include information that:

(a.) is rightfully known to the recipient prior to negotiations leading up to this Agreement without any obligation of confidentiality prior to receiving it from the disclosing party;

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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(b.) is independently developed by the recipient without any reference to Confidential Information and such independent development can be shown by documentary evidence;

(c.) is or later becomes part of the public domain without breach of this Agreement by the receiving party, or is lawfully obtained by the recipient from a third party not under an obligation of confidentiality; or

(d.) is required to be disclosed pursuant to an order of a court or governmental agency, so long as the recipient shall first notify the disclosing party of such order and afford the disclosing party the opportunity to seek a protective order relating to such disclosure.

21.4 Interoperability

[ * ]

21.5 Third Party Confidential Information

Neither party will disclose to the other any Confidential Information of a third party without the consent of the third party.

21.6 No Publicity

Neither party will, without prior written consent of the other, make any news release, public announcement, denial or confirmation of this Agreement, its value, or its terms and conditions, or in any other manner advertise or publish this Agreement, its value, or its terms and conditions. Nothing in this Agreement is intended to imply that Sprint will agree to any publicity whatsoever, and Sprint may, in its sole discretion, withhold its consent to any publicity. This Section shall not apply to (a) 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 21, or (b) 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. The exclusions in (a) and (b) above apply as long as the disclosing party (1) discloses only the minimum necessary to meet such legal or regulatory obligation, and (2) such party provides prior written notice of such disclosure [ * ] days in advance of such disclosure.

21.7 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 for the breach or threatened breach of this Section, in addition to any other remedies in law or equity.

21.8 SEC Compliance

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).

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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22.0 OWNERSHIP

22.1 Sprint-Owned Property

All tangible items provided by Sprint under this Agreement remain the property of Sprint (“Sprint-Owned”). Supplier must return all Sprint-Owned property that it received under this Agreement to the Sprint upon request, or upon the termination or expiration of this Agreement, whichever is earlier. The Supplier is responsible and must account for all Sprint-Owned property, and bears the risk of loss while the property is in its possession. Sprint-Owned property may only be used in connection with the Supplier’s performance of its obligations under this Agreement.

22.2 Developed Property

[ * ]

23.0 RIGHT OF AUDIT

23.1 Records Maintenance

Supplier will maintain all billing records, reports and documents pertaining to this Agreement for at least [ * ] years [ * ]. Sprint may audit, copy and inspect the records at reasonable times.

23.2 Procedures

Sprint will provide Supplier with at least [ * ] business days’ prior written notice of an audit. Supplier 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. [ * ]

24.0 INSURANCE

24.1 Insurance Requirements

Supplier will obtain and keep in force during the term not less than the following insurance, on an occurrence basis:

(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 as additional insured.

(b) Worker’s compensation as provided for in any jurisdiction where work is performed by Supplier personnel who are engaged in the performance of services under this Agreement. The Employer’s liability limit will not be less than [ * ] for bodily injury by accident or disease.

(c) Supplier will maintain umbrella excess liability coverage with a limit of not less than [ * ] for bodily injury and property damage liability.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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(d) Business auto liability insurance covering owned, non-owned, and hired autos with limits of not less than [ * ] combined single limit per accident for bodily injury and property damage liability, naming Sprint as additional insured.

24.2 Certificates of Insurance

All required insurance policies must be taken out with financially reputable insurers licensed to do business in all jurisdictions where Services are provided under this Agreement. Supplier will provide Sprint, upon request, with a certificate of insurance, reasonably 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 [ * ] days’ prior written notice.

24.3 No Liability Limit

Nothing contained in this Section limits Supplier’s liability to Sprint to the limits of insurance certified or carried.

25.0 LIMITATION OF LIABILITY

25.1 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:

(a) [ * ];

(b) [ * ].

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.

25.2 LIMITATION OF DAMAGES

Except as noted in the following sentence, each party’s aggregate amount of liability to the other party for direct damages incurred under this Agreement will not exceed the greater of: (1) [ * ]; or (2) [ * ].

26.0 INDEMNITY

26.1 Supplier’s General Third Party Indemnity

Supplier will indemnify and defend Sprint, the Sprint Affiliates, and their respective directors, mutually approved agents and officers, 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 [ * ].

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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26.2 Sprint’s General Third Party Indemnity

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

26.3 Supplier’s Intellectual Property Indemnification

Supplier will indemnify and defend the Sprint Indemnitees from and against all Damages arising out of any claim that the Deliverables and any resulting [ * ] any Deliverables constitutes an infringement of any patent, trademark or copyright enforceable in the United States [ * ], excluding (i) any claims relating to any designs, specifications or modifications originating with or requested by Sprint which is not otherwise made generally available to customers of Supplier, or (ii) the combination of any Product with equipment, software or products not supplied by Supplier which was not reasonably intended by the Supplier if such infringement or misappropriation would not have occurred but for such combination, or (iii) Sprint’s failure to install an update provided at no additional charge where the update would have avoided the infringement claim. Subject to the foregoing, if Sprint’s right to use the Deliverables is enjoined, Supplier must, at Supplier’s expense and in the following order of precedence:

(1) attempt to procure for Sprint the right to use the Deliverables;

(2) if Supplier is unable to procure the right to use Deliverables, Supplier will replace the Deliverables with substantially equivalent non-infringing Deliverables;

(3) if Supplier is unable to replace the Deliverables, Supplier will modify the Deliverables so they become non-infringing; or

(4) if Supplier is unable to modify the Deliverables so they become non-infringing, Supplier will remove the Deliverables and refund the price paid by Sprint for the Deliverables.

26.4 Indemnification Procedures

(a) Upon becoming aware of any matter which is subject to the provisions of Sections 26.1, 26.2, and 26.3 (a “Claim”), the party seeking indemnification (the “Indemnified Party”) must give prompt written notice of the Claim to the other party (the “Indemnifying Party”), accompanied by a copy of any written documentation regarding the Claim received by the Indemnified Party.

(b) The Indemnifying Party will retain the right, at its option, to 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; but the Indemnifying Party will have the right to control the settlement or defense. Except with respect to a settlement involving monetary damages which will be satisfied by the Indemnifying Party, 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 which shall not be unreasonably withheld. The Indemnified Party will cooperate in the settlement or defense as reasonably requested by the Indemnifying Party, including but not limited to providing access to all relevant information.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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(c) If the Indemnifying Party within [ * ] days after receipt of a notice of a Claim (i) fails to notify the Indemnified Party of the Indemnifying Party’s intent to take any action or (ii) fails to proceed with the resolution or defense 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.

(d) Neither party is obligated to indemnify and defend the other with respect to a Claim (or portions of a Claim):

(i) if 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

(ii) if, and only to the extent that, that failure materially prejudices the Indemnifying Party’s ability to satisfactorily defend or settle the Claim.

27.0 DISPUTE RESOLUTION

27.1 Option to Negotiate Disputes

The parties may, but are not obligated to, resolve any issue, dispute, or controversy arising out of or relating to this Agreement, except as outlined in Schedule G, using the following procedures. Any party may give the other party notice of any dispute not resolved in the normal course of business. Within [ * ] 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:

Table 1

	Sprint (Title)	Supplier (Title)
Within [ * ] days	[ * ]	[ * ]
Within [ * ] days	[ * ]	[ * ]
Within [ * ] days	[ * ]	[ * ]

If a party intends to be accompanied at a meeting by an attorney, the other party will be given at least [ * ] business days’ notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Section 27 are confidential and will be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and State Rules of Evidence.

27.2 Forum Selection

Except to the extent necessary for Sprint to enforce indemnity or defense obligations under this Agreement, any court proceeding brought by either party must be brought, as appropriate, in the United States District Court in the [ * ]. Each party agrees to personal jurisdiction in such court.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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27.3 [ * ]

27.4 Continuing Performance

Both parties will continue performance during the pendency of any dispute, unless the Agreement is terminated under Section 0, except that Sprint will not be obligated to pay for that portion of the Products or Services that are the subject of Section 27.1.

28.0 GENERAL PROVISIONS

28.1 Notices

Unless otherwise provided, notices provided under this Agreement must be in writing and delivered by certified mail, return receipt requested, hand delivered, faxed with receipt of a “Transmission OK” acknowledgment (followed by a copy of the notice being delivered by a means provided in this Agreement other than by telecopy), or delivery by a reputable overnight carrier service. The notice will be deemed given on the day the notice is received. In the case of notice by facsimile, the notice is deemed received at the local time of the receiving machine, and if not received, then the date the follow-up copy is received. Notices must be delivered to the following addresses or at such other addresses as may be later designated by notice:

Sprint:	Supplier:
Group Manager SCM – Strategic Sourcing Network Transmission 6580 Sprint Parkway; Earhart-B Overland Park, KS 66251 KSOPHW0212-2A400 Voice: (913) 794-8762 Fax: (913) 523-8328	Araldo Menegon Worldwide Sales Vice President Sycamore Networks, Inc. 220 Mill Road Chelmsford, MA 01824 Fax: (978) 250-2994
With copies to: Sprint Law Department Attn: Ellen S. Martin, General Attorney 6450 Sprint Parkway Overland Park, KS 66251 Mailstop: KSOPHN0312-3A321 Fax: (913) 523-9848 -And- Sprint/United Management Company Director, SCM 6580 Sprint Parkway; Earhart-B Overland Park, KS 66251 KSOPHW0212-2A153 Fax: (913) 523-2683	With a copy to: Michael Reardon Corporate Counsel Sycamore Networks, Inc. 220 Mill Road Chelmsford, MA 01851 Fax: 978-244-1097

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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28.2 Material/Mechanic’s Lien

Supplier will promptly pay for all services, materials, and labor used under this Agreement, and will keep Sprint’s property free of claims or liens related thereto.

28.3 Business Conduct Code

Supplier 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 Supplier acknowledges has been provided to Supplier as a reference.

28.4 Assignment

Neither party may assign any of its rights or this Agreement or delegate any of its obligations without the prior written consent of the other party, such consent not to be unreasonably withheld. Either party may, however, assign this Agreement in the event of a merger or a sale of all or substantially all of such party’s assets or stock, to which assignment both parties consent now. This Agreement is binding upon and enforceable by each party’s permitted successors and assignees. Any assignment in violation of this Section is null and void.

28.5 Independent Contractor

Supplier and Supplier’s personnel are independent contractors for all purposes and at all times. Supplier has the responsibility for, and control over, the methods and details of performing Services. Supplier will provide all tools, materials, training, hiring, supervision, work policies and procedures, and be responsible for the compensation, discipline and termination of Supplier’s personnel. Supplier is responsible for the payment of all Supplier’s Personnel Compensation. Neither Supplier nor Supplier’s personnel have any authority to act on behalf of, or to bind Sprint to any obligation.

28.6 Governing Law

This Agreement and the rights and obligations of the parties are governed by the laws of the state of Kansas, without regard to any conflict of laws principles.

This Agreement will not be governed by any law based on the Uniform Computer Information Transactions Act (UCITA), even if adopted in Kansas.

28.7 Waiver

The waiver of a breach of any term or condition of this Agreement will not constitute the waiver of any other breach of the same or any other term.

28.8 Severability

If any provision of this Agreement is held to be unenforceable, the remaining provisions will remain in effect and the parties will negotiate in good faith a substantively comparable enforceable provision to replace the unenforceable provision.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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28.9 Survival

In addition to any other provisions that by its content are intended to survive the expiration or termination of this Agreement, Sections 12.1, 13.0, 14.0 (excluding 14.2.2, 14.2.3 and 14.2.4), 16.0, 18.0, 21.0, 22.0, 23.0, 25.0, 26.0, 28.6, 28.9, 28.10 will survive the expiration or termination of this Agreement.

28.10  Sprint Marks

Nothing in this Agreement grants Supplier the right to use any trademarks, tradenames or logos proprietary to Sprint. If Supplier is granted a right to use such marks, Supplier will do so only in strict compliance with Sprint guidelines provided by Sprint.

28.11  Federal Acquisition Regulations

If [ * ] determines that a Purchase Order supports specific requirements included in a contract or subcontract between Sprint and the federal government, [ * ] may agree to be subject to certain federal acquisition regulations, such as requirements related to equal opportunity and affirmative action for Vietnam era veterans. [ * ]

28.12  Diversity

Sprint’s supplier diversity policy requires that small enterprises and enterprises owned, operated, or controlled by minorities, women, or disabled veterans should have the maximum practicable opportunity to participate in providing Products to Sprint as described in Schedule I. [ * ] Supplier shall work with Sprint to implement a mutually-agreed [ * ] under terms and conditions substantially similar to those contained in Schedule I within [ * ] months, [ * ].

28.13  Construction

This Agreement will not be construed against either party due to authorship. Except for the indemnification rights and obligations in Section 26.0, nothing in this Agreement gives anyone, other than the parties and any permitted assignees, any rights or remedies under this Agreement.

28.14  [ * ]

28.15  Force Majeure

Neither party shall be held responsible for any delays or failure in performance caused in whole or in part by fires, floods, embargoes, industry wide component shortages, acts of sabotage, riots, delays of carriers, acts of God or by public enemy, or any other causes beyond such party’s reasonable control (“Force Majeure”). Failure of Supplier Personnel to perform is not a Force Majeure, unless the failure is due to a Force Majeure. The defaulting party will promptly notify the other party of the particular Force Majeure event and will use commercially reasonable efforts to prevent or limit any delay of failure in performance attributable to the Force Majeure event. The obligations and rights or the defaulting party will be extended on a day-to-day basis for the duration of the delaying cause. The non-defaulting party may terminate this Agreement immediately if the defaulting party is still unable to perform due to the Force Majeure [ * ] days after receipt of the original Force Majeure notice.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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28.16  [ * ]

28.17  Entire Agreement; Modifications; Inconsistencies

This Agreement and the Purchase Orders constitute the entire agreement of the parties as to the Deliverables. This Agreement supersedes all agreements, proposals, inquiries, commitments, discussions and correspondence, whether written or oral, prior to or contemporaneous with the Effective Date relating to the Deliverables. This Agreement may not be amended or modified except in writing signed by a duly authorized representative of each party. If there is a conflict or inconsistency between the terms of this Agreement and the terms of any Purchase Order, the terms of this Agreement will control.

SIGNED:
SPRINT/UNITED MANAGEMENT	SYCAMORE NETWORKS, INC.
COMPANY
(Signature)	(Signature)
(Print Name)	(Print Name)
(Title)	(Title)
(Date)	(Date)
(Signature)
(Print Name)
(Title)
(Date)

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule A

TECHNICAL ANNEX

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule B

ELECTRONIC TRANSACTIONS

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule C

ACCEPTANCE FORMS

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule D

PRODUCT ACCEPTANCE

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule E

TRAINING SERVICES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule F

INSTALLATION SERVICES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule G

WARRANTY SERVICES AND SOFTWARE SUPPORT PLAN

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule H

SPRINT ROUTING GUIDE

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule I

UTILIZATION OF MINORITY, WOMEN AND DISABLED VETERAN BUSINESS

ENTERPRISES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE J

PRICING

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE K

SPRINT AFFILIATES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule L

HOMOLOGATED COUNTRIES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE M

SUBCONTRACTORS

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE N

DOCUMENTATION AND REPORTS

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE O

FULL PROTECTION SERVICES

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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SCHEDULE P

TITLE TRANSFER OF TRIAL EQIUPMENT

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Amendment No. 1

to the

Master Purchase Agreement for Technical Equipment and Related Services between

Sprint/United Management Company

and

Sycamore Networks, Inc.

This is Amendment No. 1 (the “Amendment”), dated as of June 29, 2004 (the “Effective Date”), to the Master Purchase Agreement for Technical Equipment and Related Services (MPAT041407) dated April 22, 2004 (the “Agreement”), and is by and between Sycamore Networks, Inc., a Delaware corporation (“Sycamore”) and Sprint/United Management Company, a Kansas corporation (“Sprint”). Sycamore and Sprint are collectively referred to hereinafter as the “Parties”.

WHEREAS, Section 28.14 of the Agreement provided that Sycamore would transfer title to certain Equipment previously provided to Sprint under an Evaluation Agreement (and listed on Schedule P to the Agreement) after Sprint had given notice of Acceptance of the Equipment to Sycamore;

WHEREAS, the Parties wish to amend the Agreement to allow Sycamore to transfer title to the Equipment without regard to Acceptance;

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree to modify the Agreement as follows:

1. Capitalized terms used herein and not otherwise defined herein shall have such meaning as set forth in the Agreement.

2. Section 28.14 of the Agreement is deleted in its entirety and replaced with the following:

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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3. In the event of a conflict between the terms and conditions of this Amendment and the Agreement, this Amendment shall prevail. Except as expressly modified in this Amendment, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be executed in duplicate by their respective, duly authorized representatives:

SYCAMORE NETWORKS, INC.	SPRINT/UNITED MANAGEMENT COMPANY
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Amendment No. 2 to the

Master Purchase Agreement for Technical Equipment and Related Services between

Sprint/United Management Company

and

Sycamore Networks, Inc.

This is Amendment No. 2 (the “Amendment”), effective as of July 19, 2004 (the “Effective Date”), to the Master Purchase Agreement for Technical Equipment and Related Services (MPAT041407) dated April 22, 2004 as previously amended (the “Agreement”), and is by and between Sycamore Networks, Inc., a Delaware corporation (“Sycamore”) and Sprint/United Management Company, a Kansas corporation (“Sprint”). Sycamore and Sprint are collectively referred to hereinafter as the “Parties”.

WHEREAS, The Parties entered into the Agreement on April 22, 2004;

WHEREAS, the Parties now wish to amend the Agreement in accordance with its terms.

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree to modify the Agreement as follows:

1. Capitalized terms used herein and not otherwise defined herein shall have such meaning as set forth in the Agreement.

2. Schedule P of the Agreement is deleted in its entirety and replaced with the document entitled “Schedule P - Final Mutually Verified Version” attached to this Amendment.

3. Section 5.1 of the Agreement is hereby modified by deleting the phrase “(iii) the signature of the Sprint employee or agent who possesses the authority to place the order” and

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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inserting “(iii) reserved” in its place. In addition the following is hereby added at the end of Section 5.1:

Purchase Orders may be faxed to Supplier at 978-256-5372 or 978-250-7464. The parties agree not to contest the validity or enforceability of Purchase Orders under the provisions of any applicable law relating to whether certain agreements are to be in writing or signed by the party to be bound. Printed copies of Purchase Orders, if introduced as evidence in any judicial proceeding, arbitration, mediation, or administrative proceeding, will be legally binding and admissible to the same extent and under the same conditions as other business records originated and maintained in documentary form. Neither party shall contest the admissibility of Purchase Orders under either the business records exception to the hearsay rule or the best evidence rule on the basis that the Purchase Orders were not originated or maintained in documentary form or signed by an employee or agent of Sprint.

4. In the event of a conflict between the terms and conditions of this Amendment and the Agreement, this Amendment shall prevail. Except as expressly modified in this Amendment, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be executed in duplicate by their respective, duly authorized representatives:

SYCAMORE NETWORKS, INC.	SPRINT/UNITED MANAGEMENT COMPANY
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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Schedule P - Final Mutually Verified Version

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

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EX-10.16

Exhibit 10.16

Amendment No. 1

to the

MANUFACTURING SERVICES AGREEMENT

between

Sycamore Networks, Inc. and Plexus Services Corporation

This is Amendment No. 1 (the “Amendment”), dated as of July 26, 2004 (the “Effective Date”), to the Manufacturing Services Agreement dated the 20th day of March, 2003 (the “Agreement”), and is by and between Sycamore Networks, Inc., with principal offices at 220 Mill Road, Chelmsford, MA (hereinafter referred to as “Sycamore”) and Plexus Services Corp. (“Supplier”), with offices at 55 Jewelers Park Drive, Neenah, Wisconsin 54957. Sycamore and Supplier are collectively referred to hereinafter as the “Parties”.

WHEREAS, the Parties entered into the Agreement on or about March 20, 2003;

WHEREAS, the Parties now wish to amend the Agreement in accordance with its terms.

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree to modify the Agreement as follows:

1. Capitalized terms used herein and not otherwise defined herein shall have such meaning as set forth in the Agreement.

2. Delete Schedule 1 [ * ] in its entirety and replace it with the Schedule 1 attached hereto.

3. Section 6.3 of the Agreement shall be deleted in its entirety and replaced with the following:

“6.3 [ * ] associated with Products manufactured by Supplier for Sycamore hereunder shall be determined as set forth in Schedule 1 hereto.”

4. In the event of a conflict between the terms and conditions of this Amendment No. 1 and the Agreement, this Amendment No.1 shall prevail. This Amendment No. 1 shall be binding on the parties as of the Effective Date first set forth above. Notwithstanding the foregoing, the parties acknowledge and agree that the pricing methodology set forth in this Amendment No. 1 has been implemented by the parties for Sycamore’s fourth quarter of its fiscal year 2004 and, therefore, there shall be no further adjustment to pricing following the Effective Date hereof for any purchase orders for that quarter. Except as expressly modified in this Amendment No. 1, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be executed in duplicate by their respective, duly authorized representatives.

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

1

SYCAMORE NETWORKS, INC.	PLEXUS SERVICES CORP.
By:	By:
Name:	Name:
Title:	Title:
Date:	Date:

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

2

Schedule 1

to the

MANUFACTURING SERVICES AGREEMENT

between

Sycamore Networks, Inc. and Plexus Services Corporation

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

3

Schedule A-1

to the

MANUFACTURING SERVICES AGREEMENT

Between

Sycamore Networks, Inc. and Plexus Services Corporation

[ * ]

* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions. Asterisks within brackets denote omission.

4

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF SYCAMORE NETWORKS, INC.

Sycamore Networks Asia Inc.

Delaware

Sycamore Networks Europe Inc.

Delaware

Sycamore Networks Americas Inc.

Delaware

Sycamore Securities Corporation

Massachusetts

Sirocco Systems, Inc.

Delaware

Sycamore Networks de Mexico, S.A.

Mexico

Sycamore Networks International BV

Amsterdam, The Netherlands

Sycamore Networks Japan K.K.

Japan

Sycamore Networks Sweden AB

Sweden

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-45502, 333-90839, 333-51486, 333-52562 and 333-104353) of Sycamore Networks, Inc. of our report dated August 18, 2004, relating to the financial statements which appear in this Form 10-K.

/s/    PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

August 20, 2004

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel E. Smith, certify that:

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

2. Based on my knowledge, this 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: August 23, 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 annual report on Form 10-K 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: August 23, 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 Annual Report of Sycamore Networks, Inc. (the “Company”) on Form 10-K for the period ending July 31, 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

August 23, 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 Annual Report of Sycamore Networks, Inc. (the “Company”) on Form 10-K for the period ending July 31, 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

August 23, 2004