CORVIS CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

for fiscal year ended December 29, 2001

OR

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

for the transition period from __________ to __________

Commission file number: 0-30989

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CORVIS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 52-2041343
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)

7015 Albert Einstein 21046-9400
Drive, Columbia, Maryland
(Address of principal (Zip code)
executive offices)

Registrant's telephone number, including area code: (443) 259-4000

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Securities registered pursuant to Section 12(b) of the Act

None

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

Common Stock, $.01 par value per share

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

Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of this chapter) 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. [_]

As of March 13, 2002, the aggregate market value of the Common Stock held by
non-affiliates was $392,551,492.

As of March 13, 2002, there were 365,087,277 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report on Form 10-K incorporates by reference information
from the registrant's definitive Proxy Statement which will be furnished to
stockholders in connection with the Annual Meeting of Stockholders of the
registrant scheduled to be held on May 10, 2002.

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TABLE OF CONTENTS

Page
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PART I

Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 14
Item 3. Legal Proceedings......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................... 15

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 18
Item 6. Selected Financial Data................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 41
Item 8. Financial Statements and Supplementary Data............................... F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. F-25

PART III
Item 10. Directors and Executive Officers of the Registrant........................ F-25
Item 11. Executive Compensation.................................................... F-25
Item 12. Security Ownership of Certain Beneficial Owners and Management............ F-25
Item 13. Certain Relationships and Related Transactions............................ F-25

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... F-26
SIGNATURES......................................................................... S-1
EXHIBIT INDEX......................................................................

PART I

Our prospects are subject to uncertainties and risks. This Annual Report on
Form 10-K contains forward-looking statements under the headings "Item 1.
Business," "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere, within the meaning of the federal
securities laws that also involve substantial uncertainties and risks. Our
future results may differ materially from our historical results and actual
results could differ materially from those projected in the forward-looking
statements as a result of various risk factors. Readers should pay particular
attention to the considerations described under the heading "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors that May Affect Future Results." Readers should also
carefully review the risk factors described in the other documents that we file
from time to time with the Securities and Exchange Commission.

Item 1. Business.

We were incorporated under the laws of the State of Delaware on June 2, 1997
under the name NOVA Telecommunications, Inc. On February 5, 1999, we changed
our name to Corvis Corporation. From inception through July 2000, we were a
development stage company. During that time, our operations consisted primarily
of research and development, product design, manufacturing and testing.
Additionally, we recruited and retained our administrative, financial,
marketing and customer support organizations, and we established a direct sales
force. We completed our initial public offering on July 27, 2000. Our principal
executive offices are located at 7015 Albert Einstein Drive, Columbia, Maryland
21046; and our telephone number is (443) 259-4000.

Overview

We design, manufacture and sell high performance all-optical and
electrical/optical communications systems that we believe accelerate carrier
revenue opportunities and lower the overall cost of network ownership for
carriers. Our optical products enable a fundamental shift in network design and
efficiency by allowing for the transmission, switching and management of
communications traffic entirely in the optical domain. These products include
ultra-long distance optical signal transmission, reception and amplification
equipment, all-optical and electrical/optical switching equipment and software
that enable the creation of optical backbone networks. By deploying our
products, carriers eliminate the need for expensive and bandwidth-limiting
electrical regeneration and switching equipment, significantly reducing costs,
increasing network capacity and allowing them to more quickly and efficiently
provide new services. Our products also open new market opportunities for
carriers by enabling a flexible, in-service migration path from existing
point-to-point and ring electrical/optical networks to all-optical mesh
networks. Our point-to-point regional and repeaterless products allow carriers
to use their existing networks more efficiently, enabling the transmission of
optical signals in greater capacity over longer distances than existing
technology.

On January 29, 2002, we announced that we had signed an agreement and plan
of merger to acquire Dorsal Networks, Inc., a privately held provider of
next-generation transoceanic and regional undersea optical network solutions.
Subject to the satisfaction of various closing conditions, including the
approval of our shareholders and the shareholders of Dorsal, we will acquire
Dorsal in a stock transaction for approximately 40,923,500 shares of common
stock. Shareholder meetings are expected to take place in the first half of
2002. The acquisition will be accounted for under the "purchase" method of
accounting. Under the purchase method, the purchase price of Dorsal will be
allocated to identifiable assets and liabilities acquired from Dorsal, with the
excess being treated as goodwill. Certain officers of Corvis own, directly or
indirectly, approximately 31 percent of the outstanding stock of Dorsal.

Leading telecommunications carriers increasingly operate on a global scale.
We believe Dorsal's next-generation transoceanic and regional undersea
solutions complement our leading edge terrestrial dense wavelength division
multiplexing transmission and switching equipment and our repeaterless festoon
systems, which will allow us to better address these carriers' needs.

1

Industry Background

Increase in Data Traffic on Carrier Networks

Over the past decade, the volume of data traffic across communications
networks has grown rapidly and now exceeds the volume of voice traffic. Even in
today's economic environment, data traffic is expected to increase.
Data-intensive applications such as electronic commerce, Internet access,
e-mail, streaming audio and video, remote access, data storage and other new
applications place significant strains on the capacity of existing network
infrastructures.

To handle the increasing volume of data traffic, carriers continue to build
networks and add capacity to existing networks, which employ electrical/optical
transmission and electrical switching equipment. The electrical/optical
transmission equipment provides higher capacity and greater network reliability
than older electrical transmission equipment.

During 2001, however, domestic and international economic conditions had a
negative impact on carriers. Capital markets available to carriers have shrunk
considerably. Without access to necessary capital, many carriers have reduced
planned expansion and some emerging carriers have failed. We believe during
these times, carriers must find cost-effective ways to meet network capacity
demands while controlling operating expenses. To do this, we believe that
carriers will look to new products and technologies, specifically optical
networking equipment, to help them more efficiently scale and manage their
networks to handle the increasing traffic requirements of a global economy. Our
equipment enables carriers to grow their networks more efficiently while
lowering their initial capital costs and ongoing operational expenses.

The Existing Network Infrastructure

Backbone networks are the long distance, or national and/or regional,
transport networks that connect local, or metro networks. The existing backbone
network infrastructure is based on an electrically interconnected network of
optical fibers.

As an optical signal travels along an optical fiber, the signal strength and
quality degrade. Optical amplifiers typically are placed at 60 to 120 kilometer
intervals to strengthen the signal. Despite this amplification, the signal
quality continues to degrade as it travels along the optical fiber. In existing
backbone networks, the signal must be regenerated every 400 to 600 kilometers
in order for the signal to be successfully received at its destination. At each
regeneration point, the signal quality is restored through the use of
transmission equipment consisting of a receiver and a transmitter. The receiver
converts the optical signal to an electrical signal which is then regenerated.
The transmitter then converts the regenerated electrical signal back into an
optical signal and transmits it along the optical fiber.

At network intersections, traffic can enter, exit or continue along the
network. At each network intersection, all traffic must be converted from an
optical signal into an electrical signal and processed by electrical switching
equipment. The traffic that does not exit the network must then be converted
back into an optical signal and transmitted further along the optical fiber. At
a network intersection, a receiver is required for each optical signal entering
the intersection and a transmitter is required for each optical signal
continuing along the backbone as well as for new signals entering the backbone.
Depending on the number and type of signals, one or more electrical switches is
required.

Today's existing networks are comprised of electrical network intersections
linked together with optical fiber to form a series of interconnected rings.
Long distance routes spanning substantial geographic lengths are established by
linking several rings together. Each ring carries traffic around the ring and
between connected rings. The ring architecture provides two independent fiber
paths between any two points on a ring. A working path carries traffic while a
protection path provides a redundant route in the event of failure along the
working

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path. To establish full working and protection path capacity, each ring must be
provisioned with sufficient transmission and switching equipment to handle all
traffic on the working and protection paths around and between rings.

Limitations of the Existing Network Infrastructure

Existing network infrastructures limit carriers' ability to cost-effectively
and efficiently meet increasing capacity and service demands. The limitations
result from substantial expenditures and complexities associated with
installing equipment, performing multiple optical-to-electrical-to-optical
conversions, transporting, switching and regenerating traffic, adding network
capacity, maintaining unused capacity for network protection and managing the
network to provision new services.

. Significant capital expenditures. At every network intersection and
regeneration point in the existing network, all of the optical signals,
regardless of their ultimate destination, must undergo costly and
time-consuming optical-to-electrical-to-optical conversions. As a result,
costly transmission equipment must currently be placed every 400 to 600
kilometers to perform optical-to-electrical-to-optical conversions to
regenerate degraded optical signals. Additionally, at each network
intersection various types of electrical switching equipment and
transmission equipment must be installed to switch all signals on every
fiber as well as perform optical-to-electrical-to-optical conversions. The
amount of the equipment along with the associated network management
infrastructure increases the capital costs and complexity of the network.
The transmission equipment required merely to pass signals to the same
fiber at electrical switching sites can be in excess of 50% of total
transmission equipment at each network intersection.

. Slow and costly to deploy and increase capacity. Equipment installation
in today's network is time-consuming, manually intensive and typically
requires multiple "truck rolls". This process involves dispatching teams
of technicians to deploy equipment at every network intersection and
regeneration point across a network. Furthermore, the installation process
results in a configuration specifically tailored to provision services
between two points. Increasing network capacity in existing networks
requires that the truck roll installation process be repeated, which can
take several months and presents an obstacle to the carriers' ability to
deploy new services.

. Slow and costly to provision services. Carriers have attempted to reduce
the length of time and number of truck rolls required to provision new
services in the existing network by installing excess transmission and
switching equipment. The installation of excessive equipment, or
pre-provisioning, requires carriers to accurately project when, where, how
much and what type of capacity will be needed in their networks. Today's
network architecture lacks the flexibility to re-configure capacity after
deployment and requires significant manual intervention. If capacity
demands vary from the projections, unused transmission and switching
equipment must be removed and deployed elsewhere in the network by
performing another truck roll or else the equipment will be stranded in
the network. As a result, carriers may be limited in their ability to
respond to new and changing demands for services.

. Significant operating expenses. The complexities of existing network
infrastructures require carriers to incur substantial operating expenses.
The extensive amount of equipment in existing networks must be maintained,
spare equipment must be stocked and electrical power and facilities must
be sufficient to accommodate all of the installed equipment. Management of
existing networks requires an experienced team of operators to provision
services. These operating expenses will continue to increase as capacity
is added to existing network infrastructures.

As a result of the limitations and the high costs associated with the
technologies and equipment utilized in existing backbone networks, a
significant market opportunity exists for more cost-effective backbone
solutions.

The Corvis Solution

We design, manufacture and market high performance all-optical and
electrical/optical communications systems that lower the overall cost of
network ownership for carriers. These products meet or exceed a wide

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range of carriers' networking requirements, from opaque electrical/optical and
SONET/SDH based infrastructures to all-optical networks and are available now.
We differentiate ourselves from competitors as the only vendor in the world to
deploy an all-optical switch in a commercial all-optical network. We embrace
electrical/optical solutions where they make sense, but also allow carriers to
migrate to more efficient architectures as their capacity needs increase. Our
all-optical products enable a fundamental shift in the design and efficiency of
networks by allowing for the transmission, switching and management of
communications traffic entirely in the optical domain. Our products enable the
creation of, and migration to, long distance, all-optical transmission paths by
eliminating expensive and bandwidth-limiting electrical regeneration and
switching equipment in the network. Additionally, our products offer a flexible
migration path from existing electrical/optical networks to all-optical
networks. Our products integrate key technologies that enable the effective
deployment of all-optical networks: long haul, extended long haul and
ultra-long haul optical transmission, all-optical and electrical/optical
switching and integrated network management. We believe our products offer
carriers several key competitive advantages and benefits, including the
following:

Reduced Capital Expenditures

By deploying our products in their networks, carriers are able to
dramatically reduce their capital expenditures. Our Optical Convergence Switch
provides dedicated electrical and optical switching that scales as network
requirements evolve. It is a fully redundant system, designed to scale easily
from single shelf to multi-shelf, multi-rack configurations to help our
customers pay as they grow. Our extended long haul and ultra-long haul
transport products eliminate the need for costly electrical regeneration and
switching equipment in the backbone network, reducing the amount of equipment
required for network deployment and expansion. Our ultra-long haul products
support transmission of optical signals without electrical regeneration up to
3,200 kilometers, and have transmitted signals as long as 6,400 kilometers,
compared to 400 to 600 kilometers for traditional equipment. This reach
capability reduces the number of transmitters and receivers and associated
equipment by up to a factor of eight, resulting in reduced capital and
operating expenditures. Our long-haul regional products and repeaterless
products (no in-line amplifiers) reduce capital expenditures by enabling
transmission over longer distances with greater capacity using less equipment.
These new repeaterless products currently enable carriers to transmit up to 400
gigabits per second in each direction, upgradeable to 800 gigabits per second
in each direction in the near future, for distances up to 350 kilometers. This
significantly reduces the initial expense of installing these products as well
as costs associated with upgrading and monitoring the network.

Our all-optical switches enable optical signals to pass through a network
intersection without optical-to-electrical-to-optical conversions, eliminating
the need for one transmitter and one receiver for each signal passing through a
network intersection, potentially eliminating hundreds of transmitters and
receivers. It also eliminates the need for dedicated switches at the network
intersection for these signals.

Our products enable all-optical mesh architectures, which allow for
transmission between any two points using any path in the network without
electrical conversions. The mesh architecture eliminates the need for multiple
rings and the deployment of costly electrical transmission and switching
equipment required to support redundant capacity in each of those rings.

Compatibility with Existing Networks

Our products include standard hardware and software interfaces, which
provide compatibility with existing electrical/optical network equipment and
enables the migration path to an all-optical network. This addresses carriers'
needs to enhance their transport and switching capacity, while introducing new
levels of network and service management. As a carrier's network evolves,
Corvis products allow carriers to migrate their backbone network to an
all-optical mesh network, while increasing the efficiency of their existing
networks.

4

Speed to Deploy and Increase Capacity

Carriers can deploy and increase capacity in a network more rapidly using
our equipment than with existing network equipment. Networks constructed using
our products require significantly less equipment than used in existing
networks, reducing network complexity as well as the number of tasks that must
be performed to install our products. Our regional and repeaterless products
also require significantly less equipment due to their long reach and high
capacity transmission capabilities.

Once installed, our optical network products simplify and accelerate network
expansion, enabling carriers to respond quickly to unpredictable demand for
services and to take advantage of revenue opportunities. Additional
transmission capacity can be added to our all-optical network products simply
by inserting transmitters and receivers at the end points of a desired
transmission path of up to 3,200 kilometers. No additional equipment is
required along a transmission path, eliminating the need for truck rolls and
the coordination of tasks at intermediate network sites. The resulting cost and
time savings give carriers a distinct advantage in responding to capacity
demands.

Rapid Delivery of Services

Using our products, carriers can respond to changing demands and
opportunities and rapidly and cost-effectively deliver services to their
customers. The delivery of services along a transmission path can be performed
in hours from a carrier's network operations center using our network
management software, eliminating the months and expense required for carrier
personnel to manually install and/or modify electrical transmission and
switching equipment along a transmission path.

Reduced Operating Expenses

Our products reduce operating expenses by dramatically reducing the amount
of equipment in backbone networks, costs associated with maintaining equipment
and spare parts inventory and electrical power and facilities required to
operate and house the equipment. Our all-optical networking products can reduce
the number of transmitters and receivers and associated equipment in a
carrier's network by as much as a factor of eight and the cost associated with
this equipment in the network. Our regional products eliminate the need for
regenerators in regional networks and our repeaterless products eliminate the
need for in-line amplifiers in terrestrial and festoon network links. This
results in a more efficient, less complex network with fewer parts to track,
control, maintain and manage. Our end-to-end network management system, which
is used across the entire Corvis product line also serves to reduce operational
costs.

Corvis Strategy

Our goal is to be the leading provider of optical network products. Our
strategy centers on a value proposition, we call Optical Optimization. The
optically optimized network is one in which breakthrough optical technologies
are strategically deployed where they offer the greatest return on investment
and lowest cost of ownership. Key elements of our strategy include the
following:

Develop and Introduce Leading Optical Network Products

We develop and provide products that enable carriers to deploy faster, more
flexible and more cost-effective networks than can be achieved using other
equipment. Our products enable carriers to significantly reduce equipment
purchases and operating expenses and simplify network management. Our optical
network products also offer a flexible migration path from existing networks to
next generation all-optical networks. We believe this flexibility provides a
distinct advantage because carriers will increasingly turn to optical
technologies as they look to new solutions for capacity, cost and reliability
requirements.

5

Maintain and Extend Technology Leadership

We believe that we are currently the leader in developing optical network
technology. We intend to maintain and extend our technological advantage by
continuing to define next-generation optical networks. To further this
objective, we will continue investing in research and development efforts
focusing on innovative optical and networking technology. We will also continue
to recruit and retain talented engineers for our research and development
activities.

Penetrate and Expand Customer Base

We market and sell our products to established and emerging carriers. We
work closely with prospective customers, analyzing their existing networks and
developing customized plans for increasing their network capacity and
functionality. To further develop and expand our customer base, we leverage our
sales force and customer support capabilities to address both domestic and
international carriers. We intend to increase our visibility as a leader in
developing optical network products and services and believe this increased
visibility will generate additional revenues. We believe that providing ongoing
support is critical to successful long-term relationships with, and follow-on
sales to, our customers. In this regard, we are committed to providing our
customers with the highest levels of support and service.

Optimize Manufacturing Capabilities

Our internal manufacturing capabilities allow us to avoid risks related to
fully-outsourced manufacturing, including increased access by third parties to
our technology and decreased quality control. We develop our manufacturing
processes concurrently with the design and development of our optical network
products, to ensure that the resulting product design can be manufactured more
efficiently and cost effectively. We seek to outsource manufacturing whenever
it is cost-effective to do so and there is minimal risk of compromising our
proprietary technologies and processes. Over time, we intend to continue our
use of contract manufacturers to reduce cost and increase manufacturing
capacity, flexibility and speed to market.

Pursue Strategic Relationships and Acquisitions

We intend to pursue strategic relationships and acquisitions with companies
that have innovative technologies. We believe that through acquisitions and
business development agreements, we will be able to gain access to new
technologies and additional skilled employees. For example, we acquired Algety,
a company that develops and markets high-capacity, high-speed optical
transmission equipment, and Baylight, a designer of optical access systems and
subsystems. We have also recently signed an agreement and plan of merger to
acquire Dorsal, a provider of next-generation transoceanic and regional
undersea optical networking solutions. These acquisitions have enabled us to
further develop leading optical network technologies and products. We have also
made investments in certain of our vendors as well as other technology-leading
companies enabling mutually beneficial strategic relationships and providing us
with continued access to emerging technologies.

Corvis Technology and Products

We leverage our industry leading technology to implement innovative optical
transport and switching solutions to fulfill carrier networking requirements.
Our product lines include electrical/optical and all-optical switching
products, ultra long-haul and point-to-point optical transport systems and
network management software that enables seamless end-to-end network
management. This range of product lines enable us to provide carriers solutions
for their SONET/SDH ring networks, as well as their electrical/optical and
all-optical mesh networks. Another key advantage of our solution is our
in-service migration strategy that enables carriers to migrate their current
network infrastructure from point-to-point links to a more efficient
all-optical mesh infrastructure. The ability to migrate their network
infrastructure enables carriers to maximize profitability by matching transport
network infrastructure with service requirements and deployment strategies.

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Optical Switching, We provide both dedicated optical-electrical-optical
(OEO) and optical-optical-optical (OOO) switching and integrated all-optical
switching solutions with the Optical Convergence Switch (OCS) and Optical
Network switching products that enable carriers to manage and deploy services
across the optical network. With the combination of these optical switching
offerings, we provide carriers with efficient solutions to meet requirements
for supporting existing SONET/SDH services and new emerging wavelength based
services.

Optical Transport. Our dense wavelength division multiplexing transport
systems enable carriers to increase capacity and reduce cost in the network and
can be integrated fully with our all-optical switching products. Our ultra-long
haul technology enables optical signals to travel up to 3,200 km without
electrical regeneration, practically eliminating this costly and time consuming
process from the network. This significant reduction in electrical regeneration
equipment lowers the capital cost required to implement the network and reduces
the complexity of the deployed network and service provisioning times.

Network Management. Our suite of software tools provides carriers with
fault detection and administration and configuration at the service, element,
and network levels in addition to network planning capabilities. Our software
tools are designed to accelerate the planning and implementation of services
across the optical network as well as to facilitate network monitoring,
maintenance, and troubleshooting. This results in an end-to-end point-and-click
management solution that helps carriers increase the speed of service delivery
and revenue generating opportunities while reducing costs.

For 2002, we are significantly expanding the capabilities of our product
offerings to provide additional networking flexibility, capacity and reduce
deployment costs by:

. Integrating technology across product lines to provide cost-effective
point-to-point transport solutions

. Improving network capacity and efficiency with the introduction of
additional optimized transport interfaces to address long-haul, extended
long-haul, and ultra long-haul traffic requirements on a unified network
platform

. Introducing the OCS to support sub-wavelength SONET/SDH services

. Providing an OC-768/STM-256 "ready" transport infrastructure

. Enhancing network management and control capabilities through the Corvis
Network Management System

Corvis ON

The Corvis Optical Network (ON) is an innovative dense wavelength division
multiplexing transport and switching system that utilizes industry leading
technology to deliver optical networking solutions to meet carrier networking
requirements for supporting current SONET/SDH networks and delivering new
emerging wavelength-based services. Our integration of these technologies
allows carriers to build higher capacity, more flexible and more cost-effective
networks. The Corvis ON product is commercially available and provides the
following advantages:

. Lowers capital and operational expenses required to install and operate a
telecommunications network

. Provides interfaces to support multi-vendor compatibility within existing
network infrastructures, in compliance with industry standards

. Enables rapid service provisioning through a transparent optical network
infrastructure that significantly reduces the number of unnecessary
electrical regeneration points required when compared to existing networks

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. Utilizes dense wavelength division multiplexing technology to deliver 800
gigabits of line capacity. Designed for in-service growth; scalable to 2.8
terabits of line capacity in the future.

. Incorporates ultra-long haul optical transmission technology capable of
transmitting signals up to 3,200km without electrical regeneration.

. Offers the industry's first and only truly transparent all-optical
switching system capable of switching up to 4.8 terabits of traffic in the
optical domain. Designed for in-service growth; scalable to 16.8 terabits
of traffic in the optical domain in the future

. Provides a cost effective migration path from point-to-point dense
wavelength division multiplexing network configurations to transparent
optical mesh configurations by utilizing in-service network element
upgrades

Corvis OCS

The Corvis Optical Convergence Switch (OCS) is a dedicated
optical-electrical-optical (OEO) switching system providing standard
point-to-point, ring and mesh networking functionality enabling carriers to
deliver current SONET/SDH services. The Corvis OCS is scheduled for commercial
availability in the first half of 2002 and provides the following advantages:

. Lowers expenditures to install and operate a telecommunications network by
providing enhanced density, scalability and flexibility when compared to
current legacy network devices.

. Provides open interfaces to support multi-vendor compatibility with
existing network equipment, in compliance with industry standards

. Provides for efficient management, grooming, and aggregation of up to 240
gigabits of STS-1 traffic in a single shelf

. Allows for in-service expansion on an incremental basis to provide
"pay-as-you-grow" support for up to 720 gigabits of STS-1 traffic in a
single rack in the future

. Designed to support fully non-blocking switching capacity up to 11.5
terabits of STS-1 traffic in a single network element in the future

. Provides grooming and switching down to the STS-1/VC-4 level

. Supports an optical-optical (OO) switching fabric for wavelength switching
and traffic management in the future

. Facilitates rapid service provisioning of sub-wavelength and wavelength
services across the optical transport infrastructure

. Provides for protection and restoration of services across the optical
transport infrastructure

Corvis XL/XF

The Corvis XL/XF is a point-to-point dense wavelength division multiplexing
system for high capacity, long distance repeaterless regenerated links for
terrestrial and undersea festooning applications. The Corvis XL/XF product is
commercially available and provides the following advantages:

. Utilizes dense wavelength division multiplexing technology to deliver 800
gigabits of line capacity

. Incorporates optical transmission technology capable of transmitting
signals up to 350km without in-line amplification

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Corvis OP

The Corvis Optical Protector (OP) is an optical protection switching system
that enables carriers to rapidly restore protected services in the event of
fiber cuts and/or equipment failures. The OP is commercially available and
provides the following advantages:

. Designed to enable carriers to meet Service Level Agreements for service
availability

. Utilizes fast optical switching technology to restore service within 50
milliseconds

Corvis Software Tools

Corvis Software Tools provide for comprehensive service, element, network
level control, management, and planning functionality. Corvis Software Tools
are commercially available and provide the following advantages:

. Facilitates rapid service delivery across the Corvis ON network with the
Corvis Provisioning Tool

. Provides for element level configuration, management, and control with the
Corvis Element Interface

. Enables network fault, configuration, administration and provisioning of
our suite of optical networking products with the Corvis Network Management

. Provides carriers with a tool for modeling and planning network deployment
and service delivery scenarios via the Corvis Wave Planner

Research and Development

Our future success depends on our ability to increase the performance of our
products, to develop and introduce new products and product enhancements and to
respond effectively to our customers' changing needs. Our research and
development team is primarily responsible for, and is currently working on,
meeting these objectives. Our efforts are also focused on reducing the cost of
our products, while maintaining our technological advantages. We believe that
we can enhance our technologies to provide greater efficiency in current
backbone networks, as well as extend these technologies into other parts of a
carrier's current network. We have made, and will continue to make, a
substantial investment in research and development. Research and development
expenses were $41.6 million for the year ended January 1, 2000 (excluding $0.1
million of equity-based compensation expense), $88.9 million for the year ended
December 30, 2000 (excluding $28.1 million of equity-based compensation expense
and purchased in-process research and development of $42.2 million) and $149.9
million for the year ended December 29, 2001 (excluding $45.4 million of
equity-based expenses).

To help meet the challenge of rapidly increasing network traffic demands, we
plan to continue to develop optical transport and switching products which
provide for more flexible and higher performance networks. We also plan to
develop additional protection and performance features for our network
management system that further accelerate our customers' ability to deliver
revenue generating services using our transport and switching products. We have
assembled a team of highly-skilled hardware and software engineers with
extensive experience in telecommunications, dense wavelength division
multiplexing and other optical technologies and network management systems. As
of March 15, 2002, we had 382 employees involved in research and development.

Customers

We expect that substantially all of our revenue will be generated from a
limited number of customers. We currently have five customers, consisting of
the following:

Broadwing Communications, Inc., has agreed to purchase a minimum of $200
million of certain products and services over a multi-year period and to date
Broadwing has purchased approximately $183.1 million towards the commitment. We
have agreed to make available by specified dates, versions of our equipment with

9

increased capacity. In addition, we provide training for a limited number of
Broadwing employees at no charge. The procurement agreement can be terminated
by us or by Broadwing as a result of the other's bankruptcy, material breach of
the terms of the agreement, or attempted transfer or assignment of the
agreement to creditors or similar transfers, unless cured within 30 days.

Williams Communications, LLC agreed to purchase $300 million of our products
and services over a multi-year period, the first $85 million of which must be
purchased prior to December 31, 2003. Sales to Williams to date have totaled
$74.2 million. We have also agreed that by specified dates, we will offer for
sale equipment that will be capable of increased capacity. In addition, we
provide training for a limited number of Williams employees at no additional
charge, which number can be increased based on Williams' purchases. We will
contribute 3% of the purchase price of our products purchased by Williams to a
joint marketing program for use by Williams in advertising that mentions us, as
well as to subsidize certain additional training programs for Williams'
employees. The agreement can be terminated by us or by Williams as a result of
the other's bankruptcy, material breach of the terms of the agreement, or
attempted transfer or assignment of the agreement to creditors or similar
transfers, unless cured within 30 days. Williams may also terminate the
agreement because of chronic late delivery of products ordered by Williams.
Williams has recently announced that it is considering restructuring options,
which may include filing a Chapter 11 bankruptcy case. As of February 23, 2002,
Williams owes us approximately $25.1 million. If Williams files for bankruptcy
protection under Chapter 11, we cannot be certain when we will receive these
outstanding payments, and if we do, how much actually will be received. In
addition, there may be other provisions under bankruptcy laws that would impact
our ability to collect these amounts and that may affect some payments that we
have already received. Bankruptcy laws may also allow Williams, under certain
circumstances to reject this agreement. We cannot give any assurance or make
any predictions as to whether Williams will file for bankruptcy and what effect
that, or any other decisions that they make, will have our business.

Qwest Communications Corporation agreed to purchase $150 million of our
products, some of which are currently under development, over a two year period
beginning on the date that the products meet agreed technical requirements.
Qwest's purchase obligations are also subject to our products being priced
competitively. Although our agreement with Qwest anticipated technical
acceptance by December 31, 2001, Qwest's testing of our equipment in its labs
is ongoing. Recently, Qwest terminated a $110.0 million purchase order that it
had issued to us in April 2001 under this agreement. We expect to continue with
further testing and product enhancements to meet Qwest's unique specifications
for its network. We are currently in discussions with Qwest to modify the terms
of the agreement to permit ongoing testing and further product development.
These discussions are also likely to involve modifications to the agreement
regarding network deployment schedules and purchase level obligations. We
cannot be certain that we will be able to successfully agree to modified terms,
or if we do, whether the new terms will include minimum purchase obligations.
If we are able to agree on these modifications, it is likely that the agreement
would provide Qwest with the ability to terminate if, among other
circumstances, Corvis' products do not meet the new technical requirements. We
expect that any new terms will be agreed to by March 31, 2002 and if new terms
are not agreed to by that date, it is likely that the agreement will terminate.

We have entered into contracts with Spanish operator Telefonica and another
global carrier to purchase our CorWave XF product, subject to meeting certain
product acceptance criteria. These contracts are in earlier stages with limited
purchase obligations, however, we hope to develop these arrangements into
long-term business opportunities.

We are in various stages of the sales cycle with other global and national
carriers, including active lab trials.

10

Sales, Marketing and Customer Support

Sales

Our sales strategy is to work closely with prospective customers to analyze
their existing networks and provide a customized plan for increasing their
network capacity and functionality. Our sales approach generally begins with a
senior sales executive contacting and establishing a relationship with a
carrier. We then assign an account manager to coordinate our efforts and focus
our resources on developing the relationship. This account manager aligns our
engineering teams and managers with their counterparts in the carrier's
organization to provide highly responsive technical and operational support. We
analyze the carrier's network layout and traffic patterns and propose a network
architecture and product configuration tailored to these traffic patterns. We
also invite the carrier to observe product demonstrations and perform testing
of our products at our on-site laboratories. At the carrier's request, we
provide it with products for additional testing in its laboratories. Following
these tests, the carrier generally will undertake field trials of our products
prior to commercial deployment in its network. The carrier will accept the
products installed in its network upon successful completion of the field
trials and continue commercial deployment of additional products. Our sales
cycle, from initial contact with a carrier through the signing of a purchase
agreement, is long, often taking more than one year from initial introductions
to contractual agreements. If our products become broadly deployed, carriers
may not require laboratory or field tests prior to purchasing our products,
which could shorten our sales cycle.

Marketing

We intend to market our products to established and emerging carriers. The
value proposition that will be brought to market will expand our focus beyond
our core portfolio to highlight additional advantages of doing business with
us. This includes the capabilities of our business partners, consulting
services and cooperative marketing agreements. Optical optimization of a
carrier's network is realized by lowering their overall cost of ownership while
maximizing their revenue generating potential. We intend to broaden our brand
reputation to engage a larger addressable market through business development
partners and continuing to enhance our product portfolio. This will allow us to
address a wide range of customer opportunities.

We intend to increase our visibility as a leader in developing all-optical
network products and believe our increased visibility will generate additional
sales. As part of our marketing strategy, we:

. participate in industry trade shows, technical conferences and technology
seminars;

. communicate with market research firms and various industry organizations;

. publish technical articles in industry magazines and related marketing
materials; and

. communicate and promote in traditional trade and business publications as
well as on the Internet.

Through these activities, we are building market awareness of our company
and our products.

Customer Service and Support

We market and sell high performance, technically complex products to
sophisticated customers. These products and customers require a high level of
customer service and support. We believe that providing ongoing support is
critical to successful long term relationships with our customers and we are
committed to providing our customers with the highest levels of service and
support. We provide engineering, installation, testing and commissioning
services. Our customer service and systems engineering teams provide extensive
pre- and post-sale support, including consultation, network design, in-depth
training and 24 hours a day, seven days a week technical assistance and
expedited repair and replacement of equipment. We believe that we have a good
reputation for our customer service and support, which we intend to leverage as
distinguishing factors in our efforts to enhance and maintain our market
position. To further develop and expand our customer base, we intend to
increase the size of our customer service force to focus on both domestic and
international carriers.

11

Competition

We compete in a rapidly evolving and highly competitive market. The market
for our products has historically been dominated by companies such as Alcatel,
Ciena, Cisco, Lucent and Nortel. We expect to continue to compete with these
and other established and new market entrants. We believe that the principal
competitive factors in our market include:

. product performance, including high-capacity transmission over long
distances without regeneration;

. speed and cost of deployment;

. speed and cost of service provisioning;

. ability to reconfigure or increase network capacity;

. integrated network management under software control;

. compatibility with existing equipment;

. ongoing customer service and support; and

. willingness to offer product financing.

Many of our competitors have longer operating histories, greater name
recognition, larger customer bases and greater financial, technical and sales
and marketing resources than we do and may be able to undertake more extensive
marketing efforts, adopt more aggressive pricing policies and provide more
vendor financing than we can. To remain competitive, we must continue to
develop our products, continually improve our manufacturing capabilities and
adjust our customer support organization to address customers' evolving
expectations and current market conditions.

Manufacturing

We manufacture most of our products and conduct all final assembly and final
component, module and system tests at our manufacturing facilities. We have
invested substantial resources in developing efficient and automated production
capabilities and manufacturing processes. We expect to further enhance our
manufacturing capabilities with additional production process controls,
enhanced yields and increased use of contract manufacturers where appropriate
and cost-effective.

We focus our manufacturing efforts to produce uniformly high-quality
products that perform according to their design specifications. Prior to
shipment, our products undergo a comprehensive testing process designed to
verify their performance capabilities. Where appropriate and cost effective, we
selectively use contract manufacturers to increase our manufacturing capacity
and speed to market, reduce costs and increase flexibility. We are currently
manufacturing our products in limited quantities and have limited manufacturing
experience. In the optical equipment industry there are limited sources for
many key components; nonetheless, we purchase less than 5% of our optical,
electrical and mechanical components from single source suppliers. In an effort
to reduce the impact on our business of disruptions in the delivery of products
from these suppliers, we carry excess inventory of components from these single
source suppliers and we also make strategic investments in component
manufacturers to ensure the continued supply of key components. As the number
of manufacturers of the remaining products increases, we intend to seek
additional suppliers for these components. The loss of any single source
supplier could have a material adverse affect on our business.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We require our employees and consultants to execute non-disclosure and
proprietary rights agreements at the beginning of employment or consulting
arrangements with us. These agreements acknowledge our exclusive ownership of
all intellectual property developed by the

12

individual during the course of his or her work with us and require that all
proprietary information disclosed to the individual remain confidential. We
intend to enforce vigorously our intellectual property rights if infringement
or misappropriation occurs. However, we do not expect that our proprietary
rights in our technology will prevent competitors from developing competitive
technologies.

Given the technological complexity of our products, we can give no assurance
that claims of infringement will not be asserted against us or against our
customers in connection with their use of our systems and products, nor can
there be any assurance as to the outcome of any such claims. On July 19, 2000,
Ciena filed a lawsuit alleging that we are willfully infringing three of
Ciena's patents relating to optical networking systems and related dense
wavelength division multiplexing communications systems technologies. On March
5, 2001, a motion was granted allowing Ciena to amend its complaint to include
allegations that we are willfully infringing two additional patents. We are
currently in the pre-trial phase of the litigation and a trial date has been
set for April 1, 2002; however, recently it has been postponed by the court. We
believe that we will prevail in this litigation, however, there can be no
assurance that we will be successful in the defense of this litigation. See
"Item 3--Legal Proceedings."

We license certain patents covering components, which require us to pay
royalties. Each of these patent licenses expires on the earlier of the date the
last licensed patent expires or is abandoned by the licensor. We also license
certain software components for our network management software. These software
licenses are perpetual but will generally terminate if we breach the agreement
and do not cure the breach in a timely manner.

Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices
or trade secret misappropriation. We have received claims of this kind in the
past and we cannot assure you that we will not receive claims of this kind in
the future as we seek to hire qualified personnel or that those claims will not
result in material litigation. In March 1999, we filed suit against Ciena
asking the court to invalidate noncompete agreements between Ciena and six
former Ciena technicians and assemblers now working for us. Ciena filed a
counterclaim against us, the former employees and Dr. David Huber, also a
former employee of Ciena, seeking injunctive relief and unspecified monetary
damages for various alleged activities, including conspiracy, breach of
contract, unfair competition and theft of intellectual property. Although we
believed Ciena's counterclaims to be unfounded, we ultimately settled the
litigation without prejudice to either party. If Ciena were to refile this
suit, or any other party were to file a similar suit, an adverse judgment could
result in monetary damages or an injunction that could materially affect our
business. In addition, as with any suit, regardless of the suit's merits we
could incur substantial costs defending ourselves and/or our employees. Also,
defending ourselves from such claims could divert the attention of our
management away from our operations.

Employees

As of March 15, 2002, we employed 863 persons, of whom 166 were primarily
engaged in manufacturing, 382 in research and development activities and 315 in
sales, marketing, customer service and support and general administration
services. On March 13, 2002, we reduced our employee headcount by approximately
12%. None of our employees are currently represented by a labor union. We
consider our relations with our employees to be good.

13

Item 2. Properties.

The following table shows as of December 29, 2001 each of our facilities,
its function, location and size and the term of the lease for the facility.
Lease termination dates are the earliest dates that Corvis can terminate the
lease without penalty and do not give effect to any renewal rights that Corvis
may have.

Square
Function Location Feet Expiration
- ------------------------------------- ------------------ ------- -------------------------

Manufacturing Columbia, Maryland 167,083 Expiring between March
2002 and October 2007
Research and Development Columbia, Maryland 207,645 Expiring between October
2002 and November 2010
Sales, Marketing and Customer Service Columbia, Maryland 42,280 Expiring between March
2002 and November 2002
General and Administrative Columbia, Maryland 42,949 Expiring between May
2009 and May 2010
Sales and Customer Support Europe 23,400 Expiring between February
2002 and August 2007
Research and Development Lannion and Paris, 62,333 Expiring between June
France 2002 and August 2007

In association with fiscal year 2001 restructuring plans, we plan to exit
several facilities across research and development, manufacturing, and sales
functions in the next six months. Total square footage of planned exited
facilities is approximately 202,000. We believe that our retained facilities
are adequate for the purposes for which they are presently used and that
replacement facilities are available at comparable cost, should the need arise.

Item 3. Legal Proceedings.

By letter dated July 10, 2000, Ciena Corporation ("Ciena") informed us of
its belief that there is significant correspondence between products that we
offer and several U.S. patents held by Ciena relating to optical networking
systems and related dense wavelength division multiplexing communications
systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, monetary damages including treble damages, as well as costs of the
lawsuit, including attorneys' fees. On September 8, 2000, we filed an answer to
the complaint, as well as counter-claims alleging, among other things,
invalidity and/or unenforceability of the three patents in question. On March
5, 2001, a motion was granted, allowing Ciena to amend its complaint to include
allegations that we are willfully infringing two additional patents. We are
currently in the pre-trial phase of the litigation. A trial date had originally
been set for April 1, 2002; however, it has recently been postponed by the
court.

We have designed our products in an effort to respect the intellectual
property rights of others. We intend to defend ourselves vigorously against
these claims and we believe that we will prevail in this litigation. However,
there can be no assurance that we will be successful in the defense of the
litigation, and an adverse determination in the litigation could result from a
finding of infringement of only one claim of a single patent. We may consider
settlement due to the costs and uncertainties associated with litigation in
general, and patent infringement litigation in particular, and due to the fact
that an adverse determination in the litigation could preclude us from
producing some of our products until we were able to implement a non-infringing
alternative design to any portion of our products to which such a determination
applied. Even if we consider settlement, there can be no assurance that we will
be able to reach a settlement with Ciena. An adverse determination in, or
settlement of, the Ciena litigation could involve the payment of significant
amounts by us, or could include terms in addition to payments, such as a
redesign of some of our products, which could have a material adverse effect on
our business, financial condition and results of operations.

14

We believe that defense of the lawsuit may be costly and may divert the time
and attention of some members of our management. Further, Ciena and other
competitors may use the existence of the Ciena lawsuit to raise questions in
customers' and potential customers' minds as to our ability to manufacture and
deliver our products. There can be no assurance that questions raised by Ciena
and others will not disrupt our existing and prospective customer relationships.

Between May 7, 2001 and June 15, 2001, nine putative class action lawsuits
were filed in the United States District Court for the Southern District of New
York relating to our initial public offering on behalf of all persons who
purchased our stock between July 28, 2000 and the filing of the complaints.
Each of the complaints names as defendants: Corvis, our directors and officers
who signed the registration statement in connection with our initial public
offering, and certain of the underwriters that participated in our initial
public offering. The complaints allege that the registration statement and
prospectus relating to our initial public offering contained material
misrepresentations and/or omissions in that those documents did not disclose
(1) that certain of the underwriters had solicited and received undisclosed
fees and commissions and other economic benefits from some investors in
connection with the distribution of our common stock in the initial public
offering and (2) that certain of the underwriters had entered into arrangements
with some investors that were designed to distort and/or inflate the market
price for our common stock in the aftermarket following the initial public
offering. The complaints ask the court to award to members of the class the
right to rescind their purchases of Corvis common stock (or to be awarded
rescissory damages if the class member has sold its Corvis stock) and
prejudgment and post-judgment interest, reasonable attorneys' and experts
witness' fees and other costs.

Plaintiffs have moved to appoint lead plaintiff and lead counsel. By order
dated October 12, 2001, the court appointed an executive committee of six
plaintiffs' law firms to coordinate their claims and function as lead counsel.
The motion to appoint lead plaintiff is pending.

On October 17, 2001, a group of underwriter defendants moved for Judge
Scheindlin's recusal. Judge Scheindlin denied that application. On December 13,
2001, the moving underwriter defendants filed a petition for writ of mandamus
seeking the disqualification of Judge Scheindlin in the United States Court of
Appeals for the Second Circuit. The petition is currently pending before the
Second Circuit. Judge Scheindlin issued a short order, stating that the court
will continue to hold case management conferences, and will continue to handle
other administrative and procedural matters. However, the court will refrain
from making any substantive rulings pending the Second Circuit's decision on
the mandamus petition.

Dispositive motions have not yet been filed. No discovery has occurred. The
court has ordered plaintiffs to file consolidated amended complaints in each
consolidated action at the end of March 2002. We intend to vigorously defend
ourselves and our officers and directors.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

15

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES OF THE REGISTRANT

Listed below are our executive officers, directors and key employees as of
March 15, 2002, their ages as of that date and position with us. Officers are
elected by the Board of Directors to serve for a period ending with the next
meeting of the Board of Directors held after the Annual Meeting of Stockholders.

Name Age Title
---- --- ------------------------------------------------------------

Executive Officers and Directors:
David R. Huber, Ph.D............. 51 Chairman of the Board, President and Chief Executive Officer
Terence F. Unter, Ph.D........... 49 Chief Operating Officer
Lynn D. Anderson................. 42 Senior Vice President, Chief Financial Officer and Treasurer
Kim D. Larsen.................... 44 Senior Vice President, Business Development, General
Counsel and Secretary
Frank M. Drendel................. 57 Director
Joseph R. Hardiman............... 64 Director
David S. Oros.................... 42 Director

David R. Huber, Ph.D., is the founder of Corvis. He has served as a Director
and Chairman of our Board, President and Chief Executive Officer since June
1997. Dr. Huber has 19 years of experience in the development of optical
communications systems. From 1992 through April 1997, Dr. Huber served first as
Chief Technology Officer and later as Chief Scientist of Ciena Corporation, a
company he founded in 1992. From 1989 through 1992, Dr. Huber managed the
Lightwave Research and Development Program for General Instrument Corporation.
Prior to 1989, Dr. Huber held positions in optical communications development
at Rockwell International Corporation, Optelecom, Inc. and ITT Industries,
Inc., formerly International Telephone & Telegraph Corporation. Dr. Huber holds
41 U.S. patents in optics technology and has numerous additional patents
pending. He earned a Ph.D. in electrical engineering from Brigham Young
University and a B.S. in physics from Eastern Oregon State University. Dr.
Huber is the brother-in-law of Mr. Larsen.

Terence F. Unter, Ph.D., has served as our Chief Operating Officer since
September 1998. From July 1997 through September 1998, Dr. Unter was Vice
President of Global Optoelectronics for AMP Incorporated. From August 1991
through June 1997, he was responsible for the creation and development of
Alcatel Optronics S.A., a subsidiary of Alcatel (formerly Alcatel Alsthom), a
leading supplier of optoelectronic components for dense wave division
multiplexing. He served as Managing Director of Alcatel Optronics from May 1994
and as Chairman and Chief Executive Officer from June 1996. Dr. Unter earned a
Ph.D. in silicon microelectronics and an Honors B.Sc. (Engineering) from the
University of Southampton in England.

Lynn D. Anderson has been our Senior Vice President, Chief Financial Officer
and Treasurer since January 2002. From May 2001 to December 2002, Mr. Andersen
served has chief Financial Officer of Optical Capital Group, LLC, a specialized
technology investment firm focused on optical equipment related communications
technology. From December 2000 to April 2001, Mr. Anderson was self-employed
providing financial and strategic consulting services to companies in the
technology, media and energy sectors. From February 2000 to November 2000, Mr.
Anderson served as Chief Operating Officer and Chief Financial Officer of
Zillacast, an Internet broadcasting company. From 1981 to 2000, Mr. Anderson
held several financial positions with various divisions of General Electric
Company and GE Capital Corporation. Mr. Anderson earned his B.A. from Kansas
State University and his M.B.A. from the University of Texas.

Kim D. Larsen has served as our General Counsel and Secretary since
September 1998, a Senior Vice President since June 2000 and was given
responsibility for Business Development in February 2002. From October 1994
through September 1998, Mr. Larsen was a partner with the law firm of Mayer,
Brown & Platt and served as partner-in-charge of its Cologne, Germany office,
where he specialized in corporate mergers and acquisitions in the international
telecommunications sector. Mr. Larsen earned his law degree from Columbia
University and a B.S. in economics and political science from Brigham Young
University. Mr. Larsen was a founding director of Ciena Corporation. Mr. Larsen
is the brother-in-law of Dr. Huber.

16

Frank M. Drendel has served as a Director since July 2000. Mr. Drendel has
served as chairman and chief executive officer of CommScope, Inc. since its
spin off from General Instrument Corporation in 1997. Mr. Drendel previously
served as president and chairman of CommScope, Inc. from 1986 to 1997 and chief
executive officer of that company since 1976. He was a director of General
Instrument Corporation until its merger with Motorola in January 2000. He is
currently a director of Nextel Communications, Inc. and the National Cable
Television Association. Mr. Drendel graduated from Northern Illinois University
with a B.S. in marketing. Mr. Drendel has informed us that he intends to resign
from our Board of Directors after the annual meeting because he also serves as
an officer and a director of CommScope, which recently obtained an equity
interest in one of our largest suppliers, and he believes that continued
service on our Board could represent a potential conflict of interest with his
duties and responsibilities to CommScope.

Joseph R. Hardiman has served as a Director since July 2000. Mr. Hardiman
served as the president and chief executive officer of the National Association
of Securities Dealers, Inc. and its wholly owned subsidiary, The Nasdaq Stock
Market, Inc., from September 1987 through January 1997. From 1975 through
September 1987, Mr. Hardiman held various positions at Alex. Brown & Sons,
including managing director and chief operating officer. Mr. Hardiman earned
B.A. and LLB degrees from the University of Maryland. Mr. Hardiman serves on
the boards of Intellectual Development Systems, Inc., the Flag Investors Funds,
the ISI Funds, the Nevis Fund, the Brown Investment Advisory Trust Company, the
Soundview Technology Group, Inc., the University of Maryland Foundation, the
University of Maryland School of Law and The Nasdaq Stock Market Education
Foundation. Previously, he served on the boards of the Depository Trust
Company, the Securities Industry Foundation for Economic Education, the
Securities Regulation Institution and the Center for the Study of the
Presidency and as a member of the American Business Conference.

David S. Oros served as a Director since January 2001. Mr. Oros has been
chairman and chief executive officer of Aether Systems, Inc., a provider of
wireless data services, systems and software since he founded Aether in 1996.
From 1994 until 1996, Mr. Oros was president of NexGen Technologies, L.L.C., a
wireless software development company that contributed all of its assets to
Aether. From 1992 until 1994, he was president of the Wireless Data Group at
Westinghouse Electric. Prior to that, Mr. Oros spent from 1982 until 1992 at
Westinghouse Electric directing internal research and managing large programs
in advanced airborne radar design and development. He currently serves on the
board of OmniSky Corporation. Mr. Oros received a B.S. in mathematics and
physics from the University of Maryland.

In addition, Corvis has determined that it will appoint James M. Bannantine,
age 45, currently President and Chief Executive Officer of Dorsal, as President
of Corvis effective upon and subject to the closing of the proposed merger of
Corvis and Dorsal. Mr. Bannantine has served as President and Chief Executive
Officer of Dorsal since January 2001. From January 2001 until September 2001,
he was president of Acumen Capital LLC, a private equity firm focused on
international energy assets. For eleven years prior to January 2001,
Mr. Bannantine served in various positions at Enron Corporation, most recently
as Chief Executive Officer of Enron South America. Mr. Bannantine graduated
from West Point and received an MBA from The Wharton Graduate School of
Business.

17

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Our common stock has been traded on the Nasdaq National Market under the
symbol "CORV" since July 27, 2000. The following table sets forth, for the
periods indicated, the high and low bid information as reported on the Nasdaq
National Market for our common stock.

High Low
------- ------

Fiscal 2000
Third Quarter (July 27, 2000 through September 30, 2000) $114.75 $60.81
Fourth Quarter (ending December 30, 2000)...............
$ 71.75 $17.00
Fiscal 2001
First Quarter (ending March 31, 2001)................... $ 30.00 $ 6.28
Second Quarter (ending June 30, 2001)................... $ 10.77 $ 3.00
Third Quarter (ending September 29, 2001)............... $ 4.63 $ 1.19
Fourth Quarter (ending December 29, 2001)............... $ 3.90 $ 1.30

As of January 31, 2002, there were 1309 holders of record of our Common
Stock.

Dividend Policy

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

Item 6. Selected Financial Data.

You should read the following selected consolidated financial data along
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
to those statements included elsewhere in "Item 8. Financial Statements and
Supplementary Data." Operating results for historical periods are not
necessarily indicative of the results that may be expected for future periods.
During 1999, we changed our accounting reporting cycle from a calendar year-end
to a manufacturing 52- or 53-week fiscal year-end, ending on the Saturday
closest to December 31 in each year.

18

Period from Year Ended
June 2, 1997 ------------------------------------------------
(inception) to December 31, January 1, December 30, December 29,
December 31, 1997 1998 2000 2000 2001
----------------- ------------ ---------- ------------ ------------

(in thousands except per share data)
Statement of Operations Data:
Revenue.................................. $ -- $ -- $ -- $ 68,898 $ 188,450
Costs of revenue:
Product sales......................... -- -- -- 42,943 116,952
Inventory write-downs, contract
losses and other.................... -- -- -- -- 216,535
------- -------- -------- --------- -----------
Gross profit (loss)...................... -- -- -- 25,955 (145,037)
------- -------- -------- --------- -----------
Operating expenses:
Research and development, exclusive
of equity-based expense............. 249 15,746 41,565 88,874 149,882
Sales and marketing, exclusive of
equity-based expense................ -- 167 3,422 30,871 56,002
General and administrative, exclusive
of equity-based expense............. 288 3,190 18,993 31,127 34,344
Equity-based expense:
Research and development.......... -- -- 126 28,050 45,409
Sales and marketing............... -- -- 4,845 52,417 17,756
General and administrative........ -- -- -- 17,891 35,642
Amortization of intangible assets........ -- -- 173 46,746 125,940
Purchased in-process research and
development............................ -- -- -- 42,230 --
Restructuring, impairment, and other
charges................................ -- -- -- -- 789,242
------- -------- -------- --------- -----------
Total operating expenses................. 537 19,103 69,124 338,206 1,254,217
------- -------- -------- --------- -----------
Operating loss........................... (537) (19,103) (69,124) (312,251) (1,399,254)
Interest income (expense), net........... 43 (357) (2,146) 28,640 21,161
------- -------- -------- --------- -----------
Net loss................................. $ (494) $(19,460) $(71,270) $(283,611) $(1,378,093)
======= ======== ======== ========= ===========
Basic and diluted net loss per common
share.................................. $ (0.02) $ (0.86) $ (2.33) $ (1.80) $ (3.94)
Weighted average number of common
shares outstanding..................... 21,600 22,638 30,599 157,349 349,652

December 31, December 31, January 1, December 30, December 29,
1997 1998 2000 2000 2001
------------ ------------ -------------- ------------ ------------
(in thousands)

Balance Sheet Data:
Cash and cash equivalents............ $1,620 $ 4,041 $244,597 $1,024,758 $638,872
Short-term investments............... -- -- -- -- 21,907
Working capital...................... 1,552 (1,474) 236,839 1,172,040 726,505
Total assets......................... 2,652 8,488 307,279 2,381,836 978,825
Notes payable and capital lease
obligations, net of current portion -- 5,800 38,771 45,909 4,702
Redeemable stock..................... -- -- -- 30,000 --
Total stockholders'equity (deficit).. 2,506 (2,968) 239,625 2,186,593 888,853

19

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

You should read the following discussion and analysis along with our
consolidated financial statements and the notes to those statements included
elsewhere in this report. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors including the risks discussed in "Factors That May Affect
Out Future Results" below and elsewhere in this report.

Overview

We design, manufacture and sell high performance all-optical and
electrical/optical communications systems that we believe accelerate carrier
revenue opportunities and lower the overall cost of network ownership for
carriers. Our optical products have enabled a fundamental shift in network
design and efficiency by allowing for the transmission, switching and
management of communications traffic entirely in the optical domain. By
deploying our products, carriers eliminate the need for expensive and
bandwidth-limiting electrical regeneration and switching equipment,
significantly reducing costs, increasing network capacity and allowing them to
more quickly and efficiently provide new services. Our products also open new
market opportunities for carriers by enabling a flexible, in-service migration
path from existing point-to-point and ring electrical/optical networks to
all-optical mesh networks.

We currently have five customers, including Broadwing Communications, Inc.,
Williams Communications, Inc., Qwest Communications Corporation, Telefonica de
Espana S.A.U., and an unnamed major global carrier. During the first half of
2000, we shipped, installed and activated laboratory trial systems and field
trial systems for both Broadwing and Williams to allow for customer testing and
inspection. In July 2000, we successfully completed the Broadwing field trial
and Broadwing agreed to purchase $200 million of our products and services as
part of a multi-year purchase agreement. Throughout the remainder of 2000, we
began the deployment of both transmission and switching equipment to Broadwing
and built-up finished goods inventory necessary to support customer orders
throughout 2001. Shipments of equipment to Broadwing continued throughout the
year. Sales to Broadwing through December 29, 2001 have totaled $183.2 million.

In 2001, the field trial system provided to Williams was accepted and
Williams agreed to purchase up to $300 million of our products and services in
a multi-year purchase agreement, $85 million of which must be purchased prior
to December 31, 2003. Sales to Williams through December 29, 2001 have totaled
$74.2 million. Shipment of commercial equipment to Williams began late in the
first quarter of 2001 and continues to date. In late February 2002, Williams
announced that it is considering restructuring options, which may include
filing a Chapter 11 bankruptcy case. At December 29, 2001, we were not aware of
any factors that would indicate that Williams would be unable to meet its
obligations to us.

Qwest agreed to purchase $150 million of our products, some of which are
currently under development, over a two-year period beginning on the date that
the products meet agreed technical requirements. Qwest's purchase obligations
are also subject to our products being priced competitively. Although our
agreement with Qwest anticipated technical acceptance by December 31, 2001,
Qwest's testing of our equipment in its labs is ongoing. Recently, Qwest
terminated a $110 million purchase order that it had issued to us under this
agreement in April 2001. We expect to continue with further testing and product
enhancements to meet Qwest's unique specifications for its network. We are
currently in discussions with Qwest to modify the terms of the agreement to
permit ongoing testing and further product development. These discussions are
also likely to involve modifications to the agreement regarding network
deployment schedules and purchase level obligations. We cannot be certain that
we will be able to successfully agree to modified terms, or if we do, whether
the new terms will include minimum purchase obligations. If we are able to
agree on these modifications, it is likely that the agreement would provide
Qwest with the ability to terminate if, among other circumstances, Corvis'
products do not meet the new technical requirements. We expect that any new
terms will be agreed to by March 31, 2002 and if new terms are not agreed to by
that date, it is likely that the agreement will terminate.

20

In the second quarter 2001, the Company entered into a contract with an
unnamed major global carrier and reached agreement with Spanish operator
Telefonica for the delivery of our next generation optical products. These
contracts are in early stages and do not include significant purchase
commitment levels; however, we hope to develop these arrangements into
long-term business relationships.

We have also entered into agreements and discussions regarding laboratory
and field trials with other carriers. Upon successful completion of these
trials, we hope to enter into agreements for commercial deployment with new
carriers.

Recently, economic conditions have resulted in reduced capital expenditures
by telecommunications carriers. In response to these conditions, we implemented
restructuring plans, approved by our Board of Directors, designed to decrease
our business expenses and to align resources for long-term growth
opportunities. Additionally, we evaluated the carrying value of our inventory
and long-term assets.

In the second quarter of 2001, our Board of Directors approved a plan for
the reduction of operations. As a result of the restructuring plan and our
evaluation of the recoverability of long-lived asset carrying values, we
recorded charges of approximately $714.6 million. These charges were comprised
of $99.2 million in cost of revenue charges associated with the inventory
write-downs and losses on open purchase commitment cancellations; $9.4 million
associated with workforce reduction; $9.0 million associated with consolidation
of excess facilities and write-downs of idle equipment; $588.3 million
associated with the write-down of goodwill generated in the acquisition of
Algety Telecom S.A.; and $8.7 million associated with the permanent impairment
charges on strategic equity investments carried at cost.

In the fourth quarter of 2001, after continued unfavorable economic
conditions and the lack of expected contract wins and product sales, our Board
of Directors approved an additional plan for further reductions in operations,
including the closure of our operations in Canada. As a result of this
restructuring plan and evaluation of our inventory and recoverability of
long-lived assets carrying value in light of the continued decrease in customer
activity, we recorded charges of approximately $303.4 million. These charges
were comprised of $117.4 million in cost of revenue charges associated with
inventory write-downs and losses on open purchase commitments and an
unprofitable contract; $15.0 million associated with workforce reductions;
$44.2 million associated with consolidation of excess facilities and
write-downs of idle equipment; $123.2 million associated with write-down of
goodwill principally generated in the acquisition of Algety; and $3.6 million
associated with permanent impairment charges on strategic equity investments
carried at cost.

We continue to monitor our financial position and will make strategic
decisions as necessary to position the Company for long-term success.

Critical Accounting Policies

We have identified the following critical accounting policies that affect
the more significant judgements and estimates used in the preparation of our
consolidated financial statements. The preparation of our financial statements
in conformity with accounting principles generally accepted in the United
States of America requires us to make estimates and judgments that affect our
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to asset impairment, revenue
recognition, product warranty liabilities, allowance for doubtful accounts, and
contingencies and litigation. We state these accounting policies in the notes
to the consolidated financial statements and at relevant sections in this
discussion and analysis. These estimates are based on the information that is
currently available to us and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results could vary from those
estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

21

Revenue. Revenue from product sales is recognized upon execution of a
contract and the completion of all delivery obligations provided that there are
no uncertainties regarding customer acceptance and collectibility is deemed
probable. Customer contracts generally include extensive lab and field trial
testing and some include other acceptance criteria. To the extent customer
contracts include acceptance criteria, to date the Company has deferred revenue
until customer acceptance criteria have been met.

Our products can be installed by our customers, third party service
providers or by us. Revenue from installation services is recognized as the
services are performed unless the terms of the supply contract combine product
acceptance with installation, in which case revenues for installation services
are recognized when the terms of acceptance are satisfied and installation is
completed. To the extent customer contracts include both product sales and
installation services, revenues are recognized on their respective fair values.
Revenues from installation service fixed price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred
to date compared to estimated total costs for each installation contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in our consolidated balance sheet.

Costs of Revenue. Costs of revenue include the costs of manufacturing our
products and other costs associated with warranty and other contractual
obligations, inventory obsolescence costs and overhead related to our
manufacturing, engineering, finishing and installation operations. Warranty
reserves are determined based upon actual warranty cost experience, estimates
of component failure rates and management's industry experience. Inventory
obsolescence costs are estimated using certain assumptions, including projected
sales and sales mix. Actual results may differ from those estimates. We
continually monitor component failures, technical changes, and levels of
on-hand inventory and adjust our estimates accordingly. If, however, actual
results vary significantly from our estimates, we will adjust the assumptions
utilized in our methodologies and reduce or provide for additional accruals as
appropriate.

Allowance for Bad Debt. During 2001, we have relied on two customers for
all of our revenues. We expect that a significant portion of our future revenue
will continue to be generated by a limited number of customers. We monitor the
financial conditions of these customers closely and concluded that no allowance
for bad debt was appropriate as of December 29, 2001.

At December 29, 2001, $29.0 million or 86 percent of our trade accounts
receivable are due from Williams, with the balance due from Broadwing.
Subsequent to the end of fiscal year 2001, Williams has paid us approximately
$4 million of the December 29, 2001 accounts receivable as it became due. At
December 29, 2001, all amounts due from Williams were current and, based on our
historical collections from Williams and all publicly available financial
information, we determined that no allowance for uncollectible amounts was
necessary. Subsequent to year end, Williams has disclosed certain recent events
that may potentially adversely affect its financial condition. Based on these
events, in late February 2002, Williams announced that it is considering
restructuring options, which may include filing a petition for Chapter 11
bankruptcy protection. If a customer files for bankruptcy protection under
Chapter 11, we cannot be certain when we will receive outstanding payments, and
if we do, how much will actually be received. In addition, there may be other
provisions under bankruptcy laws that would impact our ability to collect any
amounts owed and may affect some payments that we have already received.
Bankruptcy laws may also allow Williams, under certain circumstances, to reject
the purchase agreement. We continue to evaluate the need for allowances for
accounts receivable and can give no assurances we will not be required to
write-off some or all these outstanding amounts.

Restructuring and Other Charges. During 2001, after continued unfavorable
economic conditions and continued lack of expected customer wins and product
sales, our Board of Directors approved plans for the reduction of operations
including the consolidation of facilities, reduction of employees and the
discontinuation of certain product lines. In addition, we evaluated the
recoverability of the carrying value of our inventory and long-lived assets. As
a result, we recorded charges associated with estimated excess inventory and
open purchase commitments based on projected sales volumes, facility
consolidation costs based on assumed exit costs and time tables, disposal of
property and equipment based on estimated salvage values and goodwill
impairment charges

22

based on estimated discounted future cash flows. If actual results differ
significantly from our estimates and assumptions, we will adjust our reserves
and allowances accordingly.

Goodwill and Other Intangible Assets. We have recorded goodwill and
intangibles resulting from our acquisitions. Through December 29, 2001,
goodwill and intangibles have been amortized on a straight-line basis over
their respective lives of between 3 and 5 years. Upon the adoption of SFAS No.
142 on January 1, 2002, we will cease amortizing goodwill and will perform an
annual impairment analysis to assess the recoverability of the goodwill, in
accordance with the provisions of SFAS No. 142. If we are required to record an
impairment charge in the future, it would have an adverse impact on our results
of operations.

Litigation. In July 2000, Ciena Corporation ("Ciena") informed us of its
belief that there is significant correspondence between products that we offer
and several U.S. patents held by Ciena relating to optical networking systems
and related dense wavelength division multiplexing communications systems
technologies. On July 19, 2000, Ciena filed a lawsuit in the United States
District Court for the District of Delaware alleging that we are willfully
infringing three of Ciena's patents. Ciena is seeking injunctive relief,
monetary damages including treble damages, as well as costs of the lawsuit,
including attorneys' fees. On September 8, 2000, we filed an answer to the
complaint, as well as counter-claims alleging, among other things, invalidity
and/or unenforceability of the three patents in question. On March 5, 2001, a
motion was granted, allowing Ciena to amend its complaint to include
allegations that we are willfully infringing two additional patents. A trial
date had originally been set for April 1, 2002; however, it has recently been
postponed by the court. The litigation is currently in the pre-trial phase.

Between May 7, 2001 and June 15, 2001, nine putative class action lawsuits
were filed in the United States District Court for the Southern District of New
York relating to our initial public offering on behalf of all persons who
purchased our stock between July 28, 2000 and the filing of the complaints.
Each of the complaints names as defendants: Corvis, our directors and officers
who signed the registration statement in connection with our initial public
offering, and certain of the underwriters that participated in our initial
public offering. The complaints allege that the registration statement and
prospectus relating to our initial public offering contained material
misrepresentations and/or omissions in that those documents did not disclose
(1) that certain of the underwriters had solicited and received undisclosed
fees and commissions and other economic benefits from some investors in
connection with the distribution of our common stock in the initial public
offering and (2) that certain of the underwriters had entered into arrangements
with some investors that were designed to distort and/or inflate the market
price for our common stock in the aftermarket following the initial public
offering. The complaints ask the court to award to members of the class the
right to rescind their purchases of Corvis common stock (or to be awarded
rescissory damages if the class member has sold its Corvis stock) and
prejudgment and post-judgment interest, reasonable attorneys' and experts
witness' fees and other costs.

Plaintiffs have move to appoint lead plaintiff and lead counsel. By order
October 12, 2001, the court appointed an executive committee of six plaintiffs'
law firms to coordinate their claims and function as lead counsel. The motion
to appoint lead plaintiff is pending.

On October 17, 2001, a group of underwriter defendants moved for Judge
Scheindlin's recusal. Judge Scheindlin denied that application. On December 13,
2001, the moving underwriter defendants filed a petition for writ of mandamus
seeking the disqualification of Judge Scheindlin in the United States Court of
Appeals for the Second Circuit. The petition is currently pending before the
Second Circuit. Judge Scheindlin issued a short order, stating that the court
will continue to hold case management conferences, and will continue to handle
other administrative and procedural matters. However, the court will refrain
from making any substantive rulings pending the Second Circuit's decision on
the mandamus petition.

Dispositive motions have not yet been filed. No discovery has occurred. The
court has ordered plaintiffs to file consolidated amended complaints in each
consolidated action at the end of March 2002.

23

Based on the status of the litigation, we cannot reasonably predict the
likelihood of any potential outcome. We continue to monitor the status of the
litigation, however we can give no assurances that an unfavorable outcome will
not result in future charges.

Results of Operations

Year ended December 29, 2001 compared to year ended December 30, 2000

Revenue. Revenue increased to $188.5 million for the fiscal year ended
December 29, 2001 from $68.9 million for the fiscal year ended December 30,
2000. The increase in revenue is attributable to the increased sales of our
products for commercial use. Revenue for the year ended 2001 and 2000 is
attributable to two customers and one customer, respectively. During 2001, our
quarterly revenues have decreased from a high of $84.1 million in the first
quarter of 2001 to a low of $15.2 million in the fourth quarter. We expect
revenue for the first quarter of 2002 to be at or below fourth quarter levels.

Gross Profit (loss). Costs of revenue consists of component costs, direct
compensation costs, warranty and other contractual obligations, inventory
obsolescence costs and overhead related to our manufacturing and engineering,
finishing and installation operations. In association with discontinued product
lines under our restructuring plans and excessive inventories due to reduced
capital expenditures by telecommunication carriers, during 2001 we recorded
cost of revenue charges totaling $216.5 million comprised of inventory
write-downs of $174.0 million and losses from open purchase commitments and
loss contracts of approximately $42.5 million.

Gross profit (loss) decreased to $(145.0) million for the fiscal year ended
December 29, 2001 from $26.0 million for the year ended December 30, 2000.
Gross margin as a percentage of revenue decreased to (77.0)% for the fiscal
year ended December 29, 2001 from 37.7% for the fiscal year ended December 30,
2000. Excluding inventory write-downs and other charges of $216.5 million for
the fiscal year ended December 29, 2001, gross profit and gross margin were
$71.5 million and 37.9%, respectively. Due to current competitive and economic
pressures on our prices, we expect that gross margin, excluding inventory
write-downs and other charges, may decrease in the coming quarters.

Research and Development, Excluding Equity-Based Expense. Research and
development, excluding equity-based expense consists primarily of salaries and
related personnel costs, test and prototype expenses related to the design of
our hardware and software products, laboratory costs and facilities costs. All
costs related to product development, both hardware and software, are recorded
as expenses in the period in which they are incurred. Due to the timing and
nature of the expenses associated with research and development, significant
quarterly fluctuations may result. We believe that research and development is
critical in achieving current and future strategic product objectives.

Research and development expenses, excluding equity-based expense, increased
to $149.9 million for the year ended December 29, 2001 from $88.9 million for
the year ended December 30, 2000. The increase in expenses was primarily
attributable to increases in headcount and increased expenses associated with
prototype development and laboratory materials.

Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing,
excluding equity-based expense consists primarily of salaries and related
personnel costs, laboratory trial systems provided to customers, trade shows,
other marketing programs and travel expenses.

Sales and marketing expenses, excluding equity-based expense, increased to
$56.0 million for the year ended December 29, 2001 from $30.9 million for the
year ended December 30, 2000. The increase in expenses was primarily
attributable to increases in headcount, increases in promotional and trade show
activities and expenses related to laboratory systems provided to current and
potential customers.

24

General and Administrative, Excluding Equity-Based Expense. General and
administrative, excluding equity-based expense consists primarily of salaries
and related personnel costs, information systems support, recruitment expenses
and facility demands associated with establishing the proper infrastructure to
support our organization. This infrastructure consists of executive, financial,
legal, information systems and other administrative responsibilities.

General and administrative expenses increased to $34.3 million for the year
needed December 29, 2001 from $31.1 million for the year ended December 30,
2000. The increase in expenses was primarily attributable to increases in
salaries and related benefits due to the hiring of additional personnel.

Equity-based Expense. Equity-based expenses consists primarily of charges
associated with employee options granted at below fair market value prior to
our initial public offering.

Equity-based expense related to research and development, sales and
marketing and general and administrative functions for the year ended December
29, 2001 increased to $98.8 million from $98.4 million for the year ended
December 30, 2000. The increase in equity-based compensation resulted from
options granted with exercise prices below fair value at the date of grant
related primarily to pre-IPO grants.

Amortization of Intangible Assets. Amortization of goodwill and other
intangible assets primarily relates to the amortization of goodwill associated
with the acquisition of Algety Telecom S.A. As a result of the issuance of SFAS
No. 142, we will no longer record amortization of goodwill on a straight-line
basis, rather goodwill will be tested at least annually for impairment. There
may be more volatility in reported income (loss) than previous standards
because impairment losses are likely to occur irregularly and in varying
amounts. Intangible assets that are separate and have finite useful lives, such
as acquired patent rights and intellectual property licenses, will continue to
be amortized over their useful lives. As a result, amortization expense
associated with goodwill should decrease in future periods.

Amortization of intangible assets expenses increased to $125.9 million for
the year ended December 29, 2001 from $46.7 million for the year ended December
30, 2000. The increase was primarily attributable to the amortization of
intangibles resulting from the acquisition of Algety Telecom S.A., which
resulted in approximately $876.7 million in goodwill, excluding the impacts of
the impairment charges described above, that is amortized over five years.

Interest Income (Expense), Net. Interest income, net of interest expense,
decreased to $21.2 million for the year ended December 29, 2001 from $28.6
million of net interest income for the year ended December 30, 2000. The
decrease was primarily attributable to lower average invested cash balances
from the proceeds of the initial public offering and other private placements
and lower average returns on investments, offset in part by interest incurred
under various credit facilities.

Year ended December 30, 2000 compared to year ended January 1, 2000

Revenue. Revenue increased to $68.9 million for the fiscal year ended
December 30, 2000 from zero for the fiscal year ended January 1, 2000. The
increase in revenue is attributable to the acceptance of a field trial system
and the subsequent sale of network hardware and software to Broadwing under a
$200 million two-year purchase agreement.

Gross Profit. Costs of revenue consists of component costs, direct
compensation costs, warranty and other contractual obligations, inventory
obsolescence costs and overhead related to our manufacturing and engineering,
finishing and installation operations. Gross profit was $26.0 million for the
year ended December 30, 2000. Gross margin as a percentage of revenues was
37.7%.

Research and Development, Excluding Equity-Based Expense. Research and
development, excluding equity-based expense consists primarily of salaries and
related personnel costs, test and prototype expenses

25

related to the design of our hardware and software products, laboratory costs
and facilities costs. All costs related to product development, both hardware
and software, are recorded as expenses in the period in which they are
incurred. Due to the timing and nature of the expenses associated with research
and development, significant quarterly fluctuations may result. We believe that
research and development is critical in achieving current and future strategic
product objectives.

Research and development expenses, excluding equity-based expense, increased
to $88.9 million for the year ended December 30, 2000 from $41.6 million for
the year ended January 1, 2000. The increase in expenses was primarily
attributable to increases in headcount and increased expenses associated with
prototype development and laboratory materials.

Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing,
excluding equity-based expense consists primarily of salaries and related
personnel costs, laboratory trial systems provided to customers, trade shows,
other marketing programs and travel expenses.

Sales and marketing expenses, excluding equity-based expense, increased to
$30.9 million for the year ended December 30, 2000 from $3.4 million for the
year ended January 1, 2000. The increase in expenses was primarily attributable
to increases in headcount, increases in promotional and trade show activities
and expenses related to laboratory systems provided to current and potential
customers.

General and Administrative, Excluding Equity-Based Expense. General and
administrative, excluding equity-based expense consists primarily of salaries
and related personnel costs, information systems support, recruitment expenses
and facility demands associated with establishing the proper infrastructure to
support our organization. This infrastructure consists of executive, financial,
legal, information systems and other administrative responsibilities.

General and administrative expenses increased to $31.1 million for the year
ended December 30, 2000 from $19.0 million for the year ended January 1, 2000.
The increase in expenses was primarily attributable to increases in salaries
and related benefits due to the hiring of additional personnel and increased
expenses incurred during the development of manufacturing processes.

Equity-based Expense. Equity-based expenses consists primarily of charges
associated with employee options granted at below fair market value prior to
our initial public offering.

Equity-based expense related to research and development, sales and
marketing and general and administrative functions for the year ended December
30, 2000 increased to $98.4 million from $5.0 million for the year ended
January 1, 2000. The increase in equity-based compensation resulted from
options granted with exercise prices below fair value at the date of grant, as
well as expenses recognized upon the waiving of certain forfeiture provisions
contained in warrants granted to certain customers.

Amortization of Intangible Assets. Amortization of goodwill and other
intangible assets primarily relates to the amortization of goodwill associated
with the acquisition of Algety Telecom S.A. As a result of the issuance of SFAS
No. 142, we will no longer record amortization of goodwill on a straight-line
basis, rather goodwill will be tested at least annually for impairment. There
may be more volatility in reported income (loss) than previous standards
because impairment losses are likely to occur irregularly and in varying
amounts. Intangible assets that have finite useful lives, such as acquired
patent rights and intellectual property licenses, will continue to be amortized
over their useful lives. As a result, amortization expense associated with
goodwill should decrease in future periods.

Amortization of intangible assets expenses increased to $46.7 million for
the year ended December 30, 2000 from $0.2 million for the year ended January
1, 2000. The increase was primarily attributable to the amortization of
intangibles resulting from our acquisition of Algety Telecom S.A., which
resulted in approximately

26

$876.7 million in goodwill, before considering the impairment charges described
above, that is amortized over five years.

Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $28.6 million for the year ended December 30, 2000 from $2.1
million of net interest expense for the year ended January 1, 2000. The
increase was primarily attributable to average higher invested cash balances
from the proceeds of the initial public offering and other private placements,
offset in part by interest incurred under various credit facilities.

Liquidity and Capital Resources

Since inception through December 29, 2001, we have financed our operations,
capital expenditures and working capital primarily through public and private
sales of our capital stock, borrowings under credit and lease facilities and
cash generated from operations. At December 29, 2001, our cash and cash
equivalents and short-term investments totaled $660.8 million.

Net cash used in operating activities was $255.5 million, $230.8 million and
$71.8 million for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000, respectively. Cash used in operating activities for the year
ended December 29, 2001 was primarily attributable to a net loss of $1,378.1
million, $35.1 million of inventory increases, and a decrease in accounts
payable of $76.5 million, partially offset by an increase in other current
liabilities payable of $38.8 million and non-cash expense items approximating
$1,208.8 million including restructuring, goodwill impairment and other charges
of $942.7 million, depreciation and amortization of $155.0 million equity-based
expense of $98.8 million, and asset impairment and other charges of $12.3
million.

Net cash used in investing activities for the years ended December 29, 2001,
December 30, 2000 and January 1, 2000 was $131.5 million, $72.4 million and
$14.0 million, respectively. The increase in net cash used in investing
activities for the year ended December 29, 2001 was primarily attributable to
purchases of manufacturing and test equipment, information systems equipment
and office equipment and purchases of short-term investments.

Net cash provided by financing activities for the year ended December 29,
2001 was $1.5 million, primarily attributable to the sale of investments
associated with restricted cash, partially offset by the repayment of principal
on notes and capital leases. Net cash provided by financing activities for the
year ended December 30, 2000 was $1,084.3 million, primarily attributable to
proceeds from our initial public offering and other private placements, and the
issuance of notes payable, offset in part by the payment of debt and an
increase in restricted cash. Net cash provided by financing activities for the
year ended January 1, 2000 was $326.3 million, primarily attributable to
private placements and the proceeds from the issuance of notes payable.

As of December 29, 2001, long-term restricted cash totaled $2.4 million
associated with outstanding irrevocable letters of credit relating to lease
obligations for various manufacturing and office facilities and other business
arrangements. These letters of credit are collateralized by funds in our
operating account. Various portions of the letters of credit expire at the end
of each respective lease term or agreement term.

Due to competitive economic conditions, we have and may be required to sell
our product to future customers at lower margins or be required to provide
customers with financing which could result in reduced gross margins, extended
payment terms or delayed revenue recognition, all of which could have a
negative impact on our liquidity, capital resources and results of operations.

Our liquidity will also be dependent on our ability to manufacture and sell
our products. Changes in the timing and extent of the sale of our products will
affect our liquidity, capital resources and results of operations. We currently
have a limited number of customers that could provide substantially all of our
revenues for the near future and these customers are operating in a troubled
economic environment. The loss of any of these

27

customers, any substantial reduction in current or anticipated orders or an
inability to attract new customers, could materially adversely affect our
liquidity and results of operations. We plan to diversify our customer base by
seeking new customers both domestically and internationally.

At December 29, 2001, $29.0 million or 86 percent of our trade accounts
receivable are due from Williams with the difference due from Broadwing. In
February 2002, Williams announced that it is considering restructuring options,
which may include filing a Chapter 11 bankruptcy case. As of February 23, 2002,
Williams owes us approximately $25.1 million. If Williams files for bankruptcy
protection under Chapter 11, we cannot be certain when we will receive these
outstanding payments, and if we do, how much will actually be received. In
addition, there may be other provisions under bankruptcy laws that would impact
our ability to collect these amounts and that may affect some payments that we
have already received. Bankruptcy laws may also allow Williams under certain
circumstances, to reject the purchase agreement. We cannot give any assurances
or make any predictions as to whether Williams will file for bankruptcy and
what effect that, or any other decisions that they make, will have on our
business.

We believe that our current cash and cash equivalents and cash generated
from operations will satisfy our expected working capital, capital expenditure
and investment requirements through at least the next twelve months.

If cash on hand and cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. To the extent that we raise additional capital through the
sale of equity or debt securities, the issuance of such securities could result
in dilution to our existing shareholders. If additional funds are raised
through the issuance of debt securities, the terms of such debt could impose
additional restrictions on our operations. Additional capital, if required, may
not be available on acceptable terms, or at all. If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operati