TELLIUM INC, S-1/A, 2000-11-07

TELLIUM INC
S-1/A, 2000-11-07
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

As filed with the Securities and Exchange Commission on November 7, 2000

Registration No. 333-46362

Amendment No. 2 To
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
TELLIUM, INC.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3661 22-3509099
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial identification No.)
incorporation or classification code
organization) number)
---------------
2 Crescent Place
Oceanport, New Jersey 07757-0901
(732) 923-4100
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------------
Harry J. Carr
Chief Executive Officer
Tellium, Inc.
2 Crescent Place
Oceanport, New Jersey 07757-0901
(732) 923-4100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
Richard A. Steinwurtzel, Esq. Alexander D. Lynch, Esq.
Vasiliki B. Tsaganos, Esq. Babak Yaghmaie, Esq.
Fried, Frank, Harris, Shriver & Gunderson Dettmer Stough Villeneuve
Jacobson Franklin & Hachigian, LLP
1001 Pennsylvania Avenue, N.W. 733 Third Avenue, Suite 220
Suite 800 New York, NY 10017
Washington, D.C. 20004
(202) 639-7000 (646) 213-3000
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.
---------------
CALCULATION OF REGISTRATION FEE

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Maximum Proposed
Offering Maximum
Price Aggregate
Title Of Each Class Amount to Per Offering Amount of
Of Securities To Be Registered be Registered Share(1) Price(1) Registration Fee
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share........................... 17,500,000 15.00 $262,500,000.00 $69,300.00(2)
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended. The
proposed maximum offering price includes amounts attributable to shares
that may be purchased by the underwriters to cover over-allotments, if any.

(2) The Registrant previously paid $66,000.00 of the registration fee.

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion. Dated November 7, 2000.

[Logo of Tellium, Inc.]

17,500,000 Shares

Tellium, Inc.

Common Stock

-----------

This is an initial public offering of shares of common stock of Tellium, Inc.
All of the 17,500,000 shares of common stock are being sold by Tellium.

Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price will be
between $13.00 and $15.00 per share. Application has been made for the
quotation of the common stock on the Nasdaq National Market under the symbol
"TELM".

See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.

-----------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Tellium........................... $ $
</TABLE>

To the extent that the underwriters sell more than 17,500,000 shares, the
underwriters have the option to purchase up to an additional shares from
Tellium at the initial public offering price, less the underwriting discount.

-----------

The underwriters expect to deliver the shares in New York, New York on
, 2000.

Thomas Weisel Partners LLC
Goldman, Sachs & Co.

J.P. Morgan & Co.

CIBC World Markets

Wit SoundView

-----------

Prospectus dated , 2000.
<PAGE>

[INSIDE FRONT COVER ARTWORK:

"Today's Public Network" is written in the upper left hand corner. Below is
a drawing labeled "SONET/SDH Rings." The drawing has three separate circles,
representing active paths, each with an outer circle, representing an idle
protection path. The circles have groups of boxes on them which represent
traditional SONET/SDH equipment. Each of the three large circles is connected
by an octagon representing traditional equipment for managing voice traffic.
Rectangles representing voice and data networking equipment are located at the
four corners.

Next appear the words "The Tellium Solution" above a second drawing labeled
"Mesh Architecture." This drawing has various intersecting lines representing
shared active and protection paths. Where the lines intersect, there are
diamonds representing Tellium optical switches. Rectangles representing voice
and data networking equipment are located at the four corners.

Below the pictures, on the left hand side of the page, are the words
"Benefits: Improved network design, Simplified delivery of new services, Fast
provisioning, Easy network expansion, Cost effectiveness, Compatibility with
existing networks, Flexible products." In the lower right corner are the words
"Aurora 32TM: First in-service optical switch; Star/Net Operating SystemTM:
Services delivery and restoration software; Aurora Optical SwitchTM: High
Capacity optical switch; Wavelength Management SystemTM: Network Management
Software; Aurora Full-SpectrumTM: 3rd generation intelligent all-optical
switch; PlaNetTM: Network planning software.

At the very bottom of the page is "Tellium . . . Smarter, Faster Optical
NetworksTM."]
<PAGE>

PROSPECTUS SUMMARY

The following summary highlights information we present more fully
elsewhere in this prospectus. This summary does not contain all of the
information you should consider before buying shares in the offering. You
should read the prospectus carefully before deciding whether to invest in our
common stock.

Tellium, Inc.

We design, develop and market high-speed, high-capacity, intelligent
optical switches that enable telecommunications service providers to quickly
and cost-effectively deliver new high-speed services. Intelligent optical
switches are products that are installed in telecommunications networks to
manage the flow of optical signals, which are beams of light transmitted over
fiber optic cables. Our target customer base includes emerging and established
service providers, which include long-distance carriers, wholesale service
providers, competitive local exchange carriers, Internet service providers and
cable operators. We believe that the network equipment that service providers
are currently using does not offer sufficient flexibility to improve data
service offerings and does not allow service providers to upgrade their
networks in a timely and cost-effective manner.

Our products are designed to efficiently meet the demand for increased
network capacity. They are based on highly reliable hardware combined with
feature-rich software, both of which can be easily expanded, enabling service
providers to grow and manage their networks quickly and efficiently. This
capability allows our customers to keep pace with the dynamic requirements of
data services. Since the second quarter of 1999, we have focused on the
development of optical switches. In September 1999, we shipped our first
generation Aurora 32 optical switch and, in the third quarter of 2000, we
shipped our second generation Aurora Optical Switch. We currently market and
sell both of these products.

We currently have commitment contracts with three customers: Cable &
Wireless Global Networks Limited, Dynegy Connect, L.P., a subsidiary of Dynegy,
Inc., and Qwest Communications Corporation, although we have not yet recognized
any revenue from Cable & Wireless or Qwest.

We were founded in April 1997 by a group of individuals from Bell
Communications Research, Inc., or Bellcore. Prior to 1999, we were principally
engaged in research and development. We have limited meaningful historical
financial data upon which to base projected revenues and have incurred
significant losses to date. We have derived almost all of our revenue from our
contract with Extant, Inc., which was recently transferred to Dynegy Connect.
This contract accounted for 99% of our revenue for the six months ended June
30, 2000. As of June 30, 2000, we had an accumulated deficit of $65.0 million.
We expect to have large fixed expenses and to incur increasing marketing,
sales, research, manufacturing and administrative expenses, and we expect to
incur net losses in the future.

Our optical switches and software provide the following key benefits to
service providers:

. Improved network design. Our optical switches are designed to enable
service providers to reduce their costs by making it simpler to operate,
administer and maintain their networks.

. Simplified delivery of new services. Our optical switches help service
providers create flexible optical networks, enabling reliable, fast,
cost-effective delivery of new and existing optical data services. We
accomplish this by simplifying the network over which the services are
delivered and automating the service delivery functions.

1
<PAGE>

. Fast provisioning of new services. Our optical switches allow service
providers to provision, or set up, services across their networks in a
matter of minutes, replacing a process which can often take up to several
months.

. Easy network expansion. Our optical switches help service providers
expand their networks automatically, eliminating the need for manual
changes to the network. This enables our customers to provide new
revenue-generating services that meet their customers' needs.

. Cost-effectiveness. Our optical switches are modular, allowing our
customers to retain their investments as they expand capacity, automate
operations and eliminate costly equipment while retaining the features
that they expect.

. Compatibility with existing networks. Our optical switches can be
deployed quickly in networks today because they operate within existing
networks.

. Flexible products. Our optical switches are easy to upgrade because all
of our products share common hardware and software.

In September 2000, we completed a private placement of 7,274,413 shares of
our Series E preferred stock to a number of investors for an aggregate purchase
price of approximately $218.0 million. Upon completion of this offering, the
shares of Series E preferred stock will automatically convert into common stock
based on the initial public offering price.

Corporate Information

We were incorporated in Delaware on April 21, 1997 as MWD, Inc. and began
business operations on May 8, 1997. We changed our name to Tellium, Inc. on
June 3, 1997. Our principal executive offices are located at 2 Crescent Place,
Oceanport, New Jersey 07757-0901, and our telephone number is (732) 923-4100.
Our World Wide Web site address is www.tellium.com. Information contained in
our Web site is not incorporated by reference into this prospectus, and you
should not consider information contained in our Web site as part of this
prospectus.

2
<PAGE>

The Offering

<TABLE>
<C> <S>
Shares offered.................................. 17,500,000 shares
Shares to be outstanding after this offering.... 203,575,238 shares
Proposed Nasdaq National Market symbol.......... TELM
Use of proceeds................................. For general corporate
purposes, including working
capital, and potential
acquisitions of complementary
businesses, technologies or
products.
</TABLE>

At the request of Tellium, the underwriters are reserving up to shares
of common stock at the initial offering price for sale to individuals and
entities designated by Tellium.

Except as otherwise indicated, the number of shares outstanding after this
offering includes:

. 45,930,696 shares of common stock outstanding at June 30, 2000;

. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 113,389,848 shares of common stock
upon the completion of this offering based on a one-to-six conversion
ratio;

. the automatic conversion of our Series E preferred stock into 15,588,028
shares of common stock upon the completion of this offering, assuming an
initial public offering price of $14.00 per share, the mid-point of the
range shown on the cover page of this prospectus;

. the issuance of 3,000,000 shares of common stock to AT&T Corp. in
connection with our license of intellectual property from AT&T;

. the issuance of 7,500,000 shares of common stock to the former
stockholders of Astarte Fiber Networks, Inc.; and

. the issuance of 666,666 shares of common stock to officers and affiliates
of Qwest.

This information excludes, as of June 30, 2000:

. 31,993,056 shares of common stock subject to options outstanding under
our stock option plan with a weighted average exercise price of $0.95 per
share;

. 5,518,320 shares of common stock reserved for future issuance under our
stock option plan;

. 150,000 shares of common stock subject to options that were issued
outside of our stock option plan;

. 10,452,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $1.53 per share;

. 177,054 shares of common stock subject to outstanding warrants to
purchase Series C preferred stock at an exercise price of $1.53 per
share;

. 4,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $15.00 per share; and

. shares of common stock to be issued according to the over-allotment
option.

In addition, from July 1, 2000 through October 31, 2000, we granted options
to purchase 6,914,158 shares of our common stock under our stock option plan
with a weighted average exercise price of $1.16 per share and 400,000 shares of
our common stock outside of our stock option plan at an exercise price of $1.55
per share.

Except as otherwise indicated, information in this prospectus:

. reflects a three-for-one stock split of our common stock effective on
August 11, 2000 and a two-for-one stock split of our common stock
effective on November 6, 2000; and

. assumes no exercise of the over-allotment option to purchase additional
shares of common stock granted to the underwriters.

3
<PAGE>

Summary Financial Data
(in thousands, except share and per share data)

The following tables contain financial data that should be read together
with our financial statements and the notes relating to those statements and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing elsewhere in this prospectus. The acquisition pro
forma information below reflects the acquisition of Astarte through the
issuance of 7,500,000 shares of common stock and the issuance of 3,000,000
shares of common stock in connection with our license of intellectual property
from AT&T.

<TABLE>
<CAPTION>
Period from Year Ended Six Months Ended
Inception December 31, June 30,
(May 8, 1997) ----------------------------- ----------------------------
through Acquisition Acquisition
December 31, Pro forma Pro forma
1997 1998 1999 1999 1999 2000 2000
------------- ------- ------- ----------- ------ ------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue................. $ 55 $ 1,364 $ 5,227 $7,137 $1,063 $ 7,585 $8,269
Non-cash charges related
to equity issuances.... -- -- 559 559 -- 371 371
Revenue, net of non-cash
charges related to
equity issuances....... 55 1,364 4,668 6,578 1,063 7,214 7,898
Gross profit............ 43 104 786 909 152 2,153 2,332
Total operating
expenses............... 6,413 20,887 20,423 54,938 9,429 23,225 41,339
Operating loss.......... 6,370 20,783 19,637 54,029 9,277 21,072 39,007
Net loss................ 5,265 20,510 19,799 54,244 9,428 19,445 37,565
Basic and diluted net
loss per share......... (1.69) (4.83) (3.71) (3.43) (1.78) (1.00) (1.25)
Weighted average shares
used in computing basic
and diluted net loss
per share.............. 3,108 4,245 5,335 15,835 5,285 19,453 29,953
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.18) $ (0.15)
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share
(unaudited)............ 109,894 132,843
</TABLE>

The pro forma summary balance sheet data as of June 30, 2000 reflects:

. the issuance of 3,000,000 shares of common stock to AT&T in connection
with our license of intellectual property from AT&T;

. the issuance of 7,500,000 shares of common stock to the former
stockholders of Astarte; and

4
<PAGE>

. the issuance of 666,666 shares of common stock to officers and affiliates
of Qwest.

The pro forma as adjusted summary balance sheet data as of June 30, 2000
reflects the sale of 17,500,000 shares of common stock in this offering at an
assumed initial public offering price of $14.00 per share, the mid-point of the
range shown on the cover page of this prospectus, after deducting the estimated
underwriting discount and offering expenses.

<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------
Pro Forma As
Actual Pro Forma Adjusted
------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Balance sheet data:
Cash and cash
equivalents............ $30,228 $253,199 $478,049
Working capital......... 34,628 254,921 479,771
Total assets............ 53,412 436,770 661,620
Long-term portion of
capital lease
obligations............ 1,080 1,116 1,116
Long-term obligations,
less current portion... 913 913 913
Total stockholders'
equity................. 39,686 419,857 644,707
</TABLE>
--------

See note 2 of the notes to our financial statements for a description of
the method that we used to compute our pro forma basic and diluted net loss per
share.

5
<PAGE>

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should
carefully consider the risks described below and all other information
contained in this prospectus, including our financial statements and the
related notes, before you purchase any shares of our common stock.

Risks Related to Our Business and Financial Results

We have incurred significant losses to date and expect to continue to incur
losses in the future, which may cause our stock price to decline.

We have not recognized meaningful revenue and have incurred significant
losses to date. We expect to continue to incur losses in the future. We had net
losses of $19.8 million for the year ended December 31, 1999 and $19.4 million
for the six months ended June 30, 2000. As of June 30, 2000, we had an
accumulated deficit of $65.0 million. We have large fixed expenses and expect
to continue to incur significant manufacturing, research and development, sales
and marketing, administrative and other expenses in connection with the ongoing
development and expansion of our business. We expect these operating expenses
to increase significantly as we increase our spending in order to develop and
grow our business. In order to become profitable, we will need to generate and
sustain higher revenue. If we do not generate sufficient revenues to achieve or
sustain profitability, our stock price will likely decline.

Our limited operating history makes forecasting our future revenues and
operating results difficult, which may impair our ability to manage our
business and your ability to assess our prospects.

We began our business operations in May 1997 and shipped our first product
in January 1999. We have limited meaningful historical financial and
operational data upon which we can base projected revenues and planned
operating expenses and upon which you may evaluate us and our prospects. As a
young company in the new and rapidly evolving optical switching industry, we
face risks relating to our ability to implement our business plan, including
our ability to continue to develop and upgrade our technology and our ability
to maintain and develop customer and supplier relationships. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in our industry.

We expect that substantially all of our revenues will be generated from a
limited number of customers, including Cable & Wireless, Dynegy Connect and
Qwest. The termination or deterioration of our relationship with these
customers will have a significant negative impact on our revenue and cause us
to continue to incur substantial operating losses.

For the six months ended June 30, 2000, we have derived virtually all of
our revenue from sales under our contract with Extant, which was recently
transferred to Dynegy Connect. We anticipate that substantially all of our
revenues for the foreseeable future will be derived from Cable & Wireless,
Dynegy Connect and Qwest.

Dynegy has announced that it plans to proceed with Extant's planned network
build-out. Dynegy may, however, change its plans at any time and determine not
to proceed with the build-out on a timely basis or at all. If Dynegy Connect
were to stop or delay purchasing products or services from us, or reduce the
amount of products or services that it obtains from us, our revenues would be
reduced.

In addition, although Dynegy Connect has agreed to purchase its full
requirements for optical switches from us for the first three years of the
contract, Dynegy Connect is not contractually obligated to purchase future
products or services from us and may discontinue doing so at any time. Dynegy
Connect is permitted to terminate the agreement for, among other things, a
breach of our material obligations under the contract.

6
<PAGE>

Under our agreement with Cable & Wireless, Cable & Wireless has made a
commitment to purchase a minimum of $350 million of our optical switches over
the next five years. Our agreement with Cable & Wireless gives Cable & Wireless
the right to reduce its minimum purchase commitment from $350 million to $200
million if we do not maintain a technological edge so that there exists in the
marketplace superior technology that we have not matched. Our agreement with
Cable & Wireless also permits Cable & Wireless to terminate the agreement upon
breach of a variety of our obligations under the contract.

Under our agreement with Qwest, Qwest has made a commitment to purchase a
minimum of $300 million of our optical switches over the next three years. Our
agreement with Qwest allows Qwest, through binding arbitration, to terminate
the agreement upon breach of a variety of our obligations under the contract.

If any of our current customers elect to terminate their contracts with us
or if they fail to purchase our products for any reason, we would lose
significant revenue and incur substantial operating losses, which would
seriously harm our ability to build a successful business.

If we do not attract new customers, our revenue may not increase.

We are currently very dependent on a limited number of customers. We must
expand our customer base in order to succeed. If we are not able to attract new
customers who are willing to make significant commitments to purchase our
products and services for any reason, including if there is a downturn in their
businesses, our business will not grow and our revenues will not increase. Our
customer base and revenues will not grow if:

. customers are unwilling or slow to utilize our products;

. we experience delays or difficulties in completing the development and
introduction of our planned products or product enhancements;

. our competitors introduce new products that are superior to our
products;

. our products do not perform as expected; or

. we do not meet our customers' delivery requirements.

If our line of optical switches is not accepted by our target market and is not
a commercial success, our future revenues will not grow.

We began to focus on the marketing and the selling of optical switches in
the second quarter of 1999. No service provider has fully deployed our optical
switches in a large, complex network. Our future revenue growth depends on the
commercial success and adoption of our optical switches.

We are developing new products and enhancements to existing products. We
may not be able to develop new products or product enhancements in a timely
manner, or at all. Any failure to develop new products or product enhancements
will substantially decrease market acceptance and sales of our present and
future products. Any failure to develop new products or product enhancements
could also delay purchases by our customers under their contracts, or, in some
cases, could cause us to be in breach under our contracts with our customers.
Even if we are able to develop and commercially introduce new products and
enhancements, these new products or enhancements may not achieve widespread
market acceptance and may not be satisfactory to our customers. Any failure of
our future products to achieve market acceptance or be satisfactory to our
customers could slow or eliminate our revenue growth.

7
<PAGE>

Due to the long and variable sales cycles for our products, our revenues and
operating results may vary significantly from quarter to quarter. As a result,
our quarterly results may be below the expectations of market analysts and
investors, causing the price of our common stock to decline.

Our sales cycle is lengthy because a customer's decision to purchase our
products involves a significant commitment of its resources and a lengthy
evaluation, testing and product qualification process. We may incur substantial
expenses and devote senior management attention to potential relationships that
may never materialize, in which event our investments will largely be lost and
we may miss other opportunities. In addition, after we enter into a contract
with a customer, the timing of deployment of our products may vary widely and
will depend on a number of factors, many of which are beyond our control,
including:

. specific network deployment plans of the customer;

. installation skills of the customer;

. size of the network deployment;

. complexity of the customer's network; and

. degree of hardware and software changes required.

For example, customers with significant or complex networks usually expand
their networks in large increments on a periodic basis. Accordingly, we may
receive purchase orders for significant dollar amounts on an irregular and
unpredictable basis. The long sales cycles, as well as the placement of large
orders with short lead times on an irregular and unpredictable basis, may cause
our revenues and operating results to vary significantly and unexpectedly from
quarter to quarter. As a result, it is likely that in some future quarters our
operating results may be below the expectations of market analysts and
investors, which could cause the trading price of our common stock to decline.

We expect the average selling prices of our products to decline, which may
reduce revenues and gross margins.

Our industry has experienced a rapid erosion of average product selling
prices. Consistent with this general trend, we anticipate that the average
selling prices of our products will decline in response to a number of factors,
including:

. competitive pressures;

. increased sales discounts; and

. new product introductions by our competitors.

If we are unable to achieve sufficient cost reductions and increases in
sales volumes, this decline in average selling prices of our products will
reduce our revenues and gross margins.

We will be required to record significant non-cash charges as a result of
warrants, options and other equity issuances. These non-cash charges will
adversely affect our future operating results and investors may consider this
impact material, in which case the price of our common stock could decline.

The warrants held by affiliates of Dynegy Connect allow them to purchase
10,452,000 shares of our common stock at $1.53 per share. When we granted the
warrant, the majority of shares subject to the warrants were scheduled to
become exercisable as Dynegy Connect met specified milestones during the term
of our contract. We recorded non-cash charges of approximately $2.0 million
related

8
<PAGE>

to the warrant through June 30, 2000. A non-cash charge of approximately $1.1
million was recorded to sales and marketing expense to reflect the fair market
value of the shares vested subject to the warrant at the grant date. Charges of
$559,000 and $371,000 have been recorded as an offset to revenue for the year
ended December 31,1999 and the six-month period ending June 30, 2000,
respectively, to reflect the fair value of the shares subject to the warrant
earned by Dynegy Global Communications based upon purchases through that date.
As of November 2, 2000, we amended the warrant agreement to immediately vest
all of the remaining shares subject to the warrant. The revised agreement
provides that the warrant becomes exercisable based on the schedule of
milestones previously contained in the warrant. If the milestones are not
reached by March 31, 2005, the remaining unexercised shares subject to the
warrant shall then become exercisable. In connection with the execution of this
amendment, we expect to incur a non-cash charge of approximately $90.6 million.
This charge will be recorded as a reduction of revenue as we realize revenue
from this contract. The amount of the charge was calculated using the Black-
Scholes option pricing model.

As part of our agreement with Qwest, we issued two warrants to a wholly-
owned subsidiary of Qwest to purchase 4,000,000 shares of our common stock at
an exercise price of $15.00 per share. The 4,000,000 shares subject to the
warrants were vested when we issued the warrants. One of the warrants is
exercisable as to 2,000,000 shares. The other warrant becomes exercisable with
respect to the remaining 2,000,000 shares at the earlier of Qwest meeting
specified milestones during the term of our procurement contract or five years
from the date of the agreement. The fair market value of the issued warrants,
approximately $34.5 million, will be recorded as a reduction of revenue related
to the Qwest procurement contract.

We incurred significant additional non-cash charges associated with our
acquisition of Astarte and our acquisition of an intellectual property license
from AT&T. The goodwill and intangible assets associated with the Astarte
acquisition were approximately $115.0 million. The intangible asset associated
with the acquisition of the AT&T license is approximately $45.0 million.

In addition, we have recorded deferred compensation expense and have begun
to amortize non-cash charges to earnings as a result of options and other
equity awards granted to employees at prices deemed to be below fair market
value on the dates of grant. Our future operating results will reflect the
continued amortization of those charges over the vesting period of these
options and awards.

All of the non-cash charges referred to above will negatively impact future
operating results. It is possible that some investors might consider the impact
on operating results to be material, which could result in a decline in the
price of our common stock.

Risks Related to Our Products

Our products may have errors or defects that we find only after full
deployment, or problems may arise from the use of our products in conjunction
with other vendors' products, which could, among other things, make us lose
customers and revenues.

Our products are complex and are designed to be deployed in large and
complex networks. Our products can only be fully tested when completely
deployed in these networks, with high amounts of traffic. To date, no service
provider has fully deployed our optical switches in a large, complex network.
Networking products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. Our customers may
discover errors or defects in our software or hardware, or our products may not
operate as expected after they have been fully deployed. In addition, service
providers typically use our products in conjunction with products from other
vendors. As a result, if problems occur, it may be difficult to identify the
source of the problem.

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If we are unable to fix any defects or errors or other problems arise, we
could:

. lose revenues;

. lose existing customers;

. fail to attract new customers and achieve market acceptance;

. divert development resources;

. increase service and repair, warranty and insurance costs; and

. be subjected to legal actions for damages by our customers.

If our products do not operate within our customers' networks, installations
will be delayed or cancelled, reducing our revenues, or we may have to modify
some of our product designs. Product modifications could increase our expenses
and reduce the margins on our products.

Our customers require that our products be designed to operate within their
existing networks, each of which may have different specifications. Our
customers' networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. If our products do
not operate within our customers' networks, installations could be delayed and
orders for our products could be cancelled, causing our revenues to decline.
The requirement that we modify product designs in order to achieve a sale may
result in a longer sales cycle, increased research and development expense and
reduced margins on our products.

If our products do not meet industry standards that may emerge, or if some
industry standards are not ultimately adopted, we will not gain market
acceptance and our revenues will not grow.

Our success depends, in part, on both the adoption of industry standards
for new technologies in our market, and our products' compliance with industry
standards. To date, no industry standards have been adopted related to some
functions of our products. The absence of an industry standard may prevent
market acceptance of our products if potential customers delay purchases of new
equipment until standards are adopted. In addition, in developing our products,
we have made, and will continue to make, assumptions about the industry
standards that may be adopted by our competitors and existing and potential
customers. If the standards adopted are different from those which we have
chosen to support, customers may not choose our products, and our sales and
related revenues will be significantly reduced.

If we do not establish and increase our market share in the intensively
competitive optical networking market, we will experience, among other things,
reduced revenues and gross margins.

Due to the lengthy sales cycles, testing and deployment process and
manufacturing constraints associated with large-scale deployments of our
products, we may lose any advantage that we might have by being the first to
market with an optical switch prior to achieving significant market
penetration. If we do not compete successfully in the intensely competitive
market for public telecommunications network equipment, we will:

. not be able to obtain or retain customers;

. experience price reductions for our products;

. experience order cancellations;

. experience increased expenses; and

. experience reduced gross margins.

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Many of our competitors, in comparison to us, have:

. longer operating histories;

. greater name recognition;

. larger customer bases; and

. significantly greater financial, technical, sales, marketing,
manufacturing and other resources.

These competitors may be able to reduce our market share by adopting more
aggressive pricing policies than we can or by developing products that gain
wider market acceptance than our products.

Risks Related to the Expansion of Our Business

If the optical switching market does not develop as we expect, our operating
results will be negatively affected and our stock price could decline.

The market for optical switching is extremely new and rapidly evolving.
Optical switching may not be widely adopted as a method by which service
providers address their data capacity requirements. In addition, most service
providers have made substantial investments in their current network and are
typically reluctant to adopt new and unproven technologies. They may elect to
remain with their current network design or to adopt a new design, like ours,
in limited stages or over extended periods of time. A decision by a customer to
purchase our product involves a significant capital investment. We will need to
convince service providers of the benefits of our products for future network
upgrades. As a result, a viable market for our products may not develop or be
sustainable. If the market for optical switching does not develop, or develops
more slowly than we expect, our operating results will be below our
expectations and the price of our common stock could decline.

If we do not respond rapidly to technological changes and anticipate evolving
customer requirements, customers will not buy our products and we could lose
revenues.

We may be unable to anticipate or respond quickly or effectively to rapid
technological changes. Also, we may experience design, manufacturing, marketing
and other difficulties that could delay or prevent our development and
introduction of new products and enhancements. In addition, if our competitors
introduce products based on new or alternative technologies, our existing and
future products could become obsolete and our sales could decrease.

Our customers may require product features and capabilities that our
current products do not have. If we fail to develop or enhance our products or
offer services that satisfy evolving customer demands, we will not be able to
satisfy our existing customers' requirements or increase demand for our
products. If this happens, we will lose customers, our operating results will
be negatively impacted and the price of our common stock could decline.

If we do not expand our sales, marketing and distribution channels, we may be
unable to increase market awareness and sales of our products, which may
prevent us from increasing our sales and achieving and maintaining
profitability.

Our products require a sophisticated sales and marketing effort targeted
towards a limited number of key individuals within our current and prospective
customers' organizations. Our success will depend, in part, on our ability to
develop and manage these relationships. We are in the process of building our
direct sales and marketing force and plan to hire additional sales and
marketing personnel and consulting engineers. Competition for these individuals
is intense because there is a limited number of

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people available with the necessary technical skills and understanding of the
optical switching market. In addition, we believe that our success will depend
on our ability to establish successful relationships with various distribution
partners. If we are unable to expand our sales, marketing and distribution
operations, we may not be able to effectively market and sell our products,
which may prevent us from increasing our sales and achieving and maintaining
profitability.

If we do not expand our customer service and support organization, we may be
unable to increase our sales.

We currently have a small customer service and support organization and
will need to increase our staff to support new and existing customers. Our
products are complex and our customers need highly-trained customer service and
support personnel to be available at all hours. We are likely to have
difficulty hiring customer service and support personnel because of the limited
number of people available with the necessary technical skills. If we are
unable to expand our customer service and support organization and rapidly
train these personnel, we may not be able to increase our sales, which could
cause the price of our stock to decline.

Our failure to manage our growth, improve existing processes and implement new
systems could result in lost sales or disruptions to our business.

We have expanded our operations rapidly since our inception in May 1997.
Our growth has placed, and we anticipate that our growth will continue to
place, a significant strain on our management systems and resources. Our
ability to successfully sell our products and implement our business plan in a
rapidly evolving market requires an effective planning and management process.
From June 30, 1999 to June 30, 2000, the number of our employees increased from
85 to 234. We expect that we will need to continue to refine and expand our
financial, managerial and manufacturing controls and reporting systems. If we
are unable to implement adequate control systems in an efficient and timely
manner, our operations could be adversely affected and our growth could be
impaired, which could cause the price of our stock to decline.

If we are not able to hire and retain qualified personnel, or if we lose key
personnel, we may be unable to compete or grow our business.

We believe our future success will also depend, in large part, on our
ability to identify, attract and retain sufficient numbers of highly-skilled
employees, particularly qualified sales and engineering personnel. We may not
succeed in identifying, attracting and retaining these personnel. Further,
competitors and other entities may attempt to recruit our employees. If we are
unable to hire and retain adequate staffing levels, we may not be able to
increase sales of our products, which could cause the price of our stock to
decline.

Our future success depends to a significant degree on the skills and
efforts of Harry J. Carr, our Chief Executive Officer and Chairman of the
Board, Krishna Bala, our Chief Technology Officer, and other key executive
officers and members of our senior management. These employees have critical
industry experience and relationships that we rely on to implement our business
plan. We currently do not have "key person" life insurance policies covering
any of our employees. If we lose the services of Mr. Carr, Dr. Bala or one or
more of our other key executive officers and senior management members, we may
not be able to grow our business as we expect, and our ability to compete could
be harmed, causing our stock price to decline.

If we become subject to unfair hiring claims, we could incur substantial costs
in defending ourselves.

We may become subject to claims from companies in our industry whose
employees accept positions with us that we have engaged in unfair hiring
practices or inappropriately taken or benefited from confidential or
proprietary information. These claims may result in material litigation or

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<PAGE>

judgments against us. We could incur substantial costs in defending ourselves
or our employees against these claims, regardless of the merits of the claims.
In addition, defending ourselves from these claims could divert the attention
of our management away from our core business, which could cause our financial
performance to suffer.

We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenues.

We plan to expand the marketing and sales of our products internationally.
This expansion will require significant management attention and financial
resources to successfully develop international sales and support channels. We
will face risks and challenges that we do not have to address in our U.S.
operations, including:

. currency fluctuations and exchange control regulations;

. changes in regulatory requirements in international markets;

. expenses associated with developing and customizing our products for
foreign countries;

. reduced protection for intellectual property rights; and

. compliance with international technical and regulatory standards that
differ from domestic standards.

If we do not successfully overcome these risks and challenges, our
international business will not achieve the revenue or profits that we expect.

We may not be able to obtain additional capital to fund our existing and future
operations.

At June 30, 2000, we had approximately $30.2 million in cash, cash
equivalents and marketable securities. In September 2000, we raised
approximately $212.7 million in connection with the sale of our Series E
preferred stock. We believe that our available cash, including the proceeds
from our recent private placement of Series E preferred stock, combined with
net proceeds from this offering, our line of credit facilities and cash
anticipated to be available from future operations, will enable us to meet our
working capital requirements for the next 12 months. The development and
marketing of new products, however, and the expansion of our direct sales
operation and associated customer support organization, will require a
significant commitment of resources. As a result, we may need to raise
substantial additional capital. We may not be able to obtain additional capital
at all, or upon acceptable terms. If we are unable to obtain additional capital
on acceptable terms, we may be required to reduce the scope of our planned
product development and marketing and sales efforts. To the extent that we
raise additional capital through the sale of equity or convertible debt
securities, the issuance of additional securities could result in dilution to
our existing stockholders. If additional funds are raised through the issuance
of debt securities, their terms could impose additional restrictions on our
operations.

If we make acquisitions, our stockholders could be diluted and we could assume
additional contingent liabilities. In addition, if we fail to successfully
integrate or manage the acquisitions we make, our business would be disrupted
and we could lose sales.

We may, as we did recently with the Astarte acquisition, consider
investments in complementary businesses, products or technologies. In the event
of any future acquisitions, we could:

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

. incur debt that will give rise to interest charges and may impose
material restrictions on the manner in which we operate our business;

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. assume liabilities;

. incur amortization expenses related to goodwill and other intangible
assets; or

. incur large and immediate write-offs.

We also face numerous risks, including the following, in operating and
integrating any acquired business, including Astarte:

. problems combining the acquired operations, technologies or products;

. diversion of management's time and attention from our core business;

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

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

. potential loss of key employees, particularly those of acquired
companies.

We may not be able to successfully integrate businesses, products,
technologies or personnel that we might acquire in the future. If we fail to do
so, we could experience lost sales or disruptions to our business.

The communications industry is subject to government regulations. These
regulations could negatively affect our growth and reduce our revenues.

Our products and our customers' products are subject to Federal
Communications Commission rules and regulations. Current and future Federal
Communications Commission rules and regulations affecting communications
services or our customers' businesses or products could negatively affect our
business. In addition, international regulatory standards could impair our
ability to develop products for international service providers in the future.
We may not obtain or maintain all of the regulatory approvals that may, in the
future, be required to operate our business. Our inability to obtain these
approvals, as well as any delays caused by our compliance and our customers'
compliance with regulatory requirements could result in postponements or
cancellations of our product orders, which would significantly reduce our
revenues.

Risks Related to Our Product Manufacturing

One of our suppliers, Lucent Technologies, Inc., is both an important source
for our key components and a major competitor. If Lucent stops supplying us
with components, we may experience manufacturing delays, which could harm our
customer relationships.

We currently contract with Lucent Technologies, Inc. to supply us with
optical transceivers. We recently terminated a reseller relationship with
Lucent which had resulted in no revenue to either party. Lucent is an important
supplier of optical transceivers, which are a critical component of our optical
networking switches. Lucent is also one of our major competitors since it
develops and markets products similar to ours. If Lucent determines not to
supply us with optical transceivers, we will have to rely on other sources, and
may experience difficulties and delays in manufacturing our products, which
could damage our customer relationships.

If we fail to predict our manufacturing and component requirements accurately,
we could incur additional costs or experience manufacturing delays, which could
harm our customer relationships.

We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. In addition, lead times for materials and components that we
order are long and depend on factors such as the procedures of,

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<PAGE>

or contract terms with, a specific supplier and demand for each component at a
given time. If we overestimate our requirements, we may have excess inventory,
which could increase our costs and harm our relationship with our contract
manufacturers and component vendors due to unexpectedly reduced future orders.
If we underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies, which could interrupt manufacturing of our
products, result in delays in shipments to our customers and damage our
customer relationships.

Some of the optical components used in our products are in short supply. This
shortage could inhibit our ability to manufacture our products and we could
lose revenue and market share.

There is currently an industry-wide shortage of some optical components due
to rapidly increasing demand. For some of these components, there can be
waiting periods of six months or more between placement of an order and receipt
of the components. In the case of some optical components in short supply,
component suppliers have imposed strict allocations that limit the number of
these components they will supply to a given customer in a specified time
period. These suppliers may choose to increase allocations to larger, more
established companies, which could reduce our allocations and harm our ability
to manufacture our products. If we are not able to manufacture and ship our
products on a timely basis, we could lose revenue, our reputation could be
harmed and customers may find our competitors' products more attractive.

Any disruption in our manufacturing relationships may cause us to fail to meet
our customers' demands, damage our customer relationships and cause us to lose
revenue.

We rely on a small number of contract manufacturers to manufacture our
products in accordance with our specifications and to fill orders on a timely
basis. We recently entered into an agreement to subcontract the manufacturing
of a substantial portion of our products to Solectron Corporation, an
independent manufacturer. The agreement has a one-year term, is renewable
annually and can be terminated with 90 days notice by either party. Solectron
or our other contract manufacturers may not always have sufficient quantities
of inventory available to fill our orders or may not allocate their internal
resources to fill these orders on a timely basis.

We currently do not have long-term contracts with any of our manufacturers.
As a result, our contract manufacturers are not obligated to supply products to
us for any specific period, in any specific quantity or at any specific price,
except as may be provided in a particular purchase order. If for any reason
these manufacturers were to stop satisfying our needs without providing us with
sufficient warning to procure an alternate source, our ability to sell our
products could be harmed. In addition, any failure by our contract
manufacturers to supply us with our products on a timely basis could result in
late deliveries. Our inability to meet our delivery deadlines could adversely
affect our customer relationships and, in some instances, result in termination
of these relationships or potentially subject us to litigation. Qualifying a
new contract manufacturer and commencing volume production is expensive and
time-consuming and could significantly interrupt the supply of our products. If
we are required or choose to change contract manufacturers, we may damage our
customer relationships and lose revenues.

We purchase several of our key components from single or limited sources. If we
are unable to obtain these components on a timely basis, we will not be able to
meet our customers' product delivery requirements, which could harm our
reputation and decrease our sales.

We purchase several key components from single or, in some cases, limited
sources. We do not have long-term supply contracts for these components. If any
of our sole or limited source suppliers experience capacity constraints, work
stoppages or any other reduction or disruption in

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output, they may not be able or may choose not to meet our delivery schedules.
Also, our suppliers may:

. enter into exclusive arrangements with our competitors;

. be acquired by our competitors;

. stop selling their products or components to us at commercially
reasonable prices;

. refuse to sell their products or components to us at any price; or

. be unable to obtain or have difficulty obtaining components for their
products from their suppliers.

If supply for these key components is disrupted, we may be unable to
manufacture and deliver our products to our customers on a timely basis, which
could result in lost or delayed revenue, harm to our reputation, increased
manufacturing costs and exposure to claims by our customers. Even if alternate
suppliers are available to us, we may have difficulty identifying them in a
timely manner, we may incur significant additional expense and we may
experience difficulties or delays in manufacturing our products. Any failure to
meet our customers' delivery requirements could harm our reputation and
decrease our sales.

Our ability to compete could be jeopardized and our business plan seriously
compromised if we are unable to protect from third-party challenges the
development and maintenance of the proprietary aspects of the optical
networking products and technology we design.

Our products utilize a variety of proprietary rights that are critical to
our competitive position. Because the technology and intellectual property
associated with our optical networking products is evolving and rapidly
changing, our ability to protect our intellectual property rights is limited.
We rely on a combination of patent, copyright, trademark and trade secret laws
and contractual restrictions to protect the intellectual property utilized in
our products. For example, we enter into confidentiality or license agreements
with our employees, consultants, corporate partners and customers and control
access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Also, it is possible that no patents or trademarks will
be issued from our currently pending or future patent or trademark
applications. Because legal standards relating to the validity, enforceability
and scope of protection of patent and intellectual property rights in new
technologies are uncertain and still evolving, the future viability or value of
our intellectual property rights is uncertain. Moreover, effective patent,
trademark, copyright and trade secret protection may not be available in some
countries in which we distribute or may anticipate distributing our products.
Furthermore, our competitors may independently develop similar technologies
that limit the value of our intellectual property or design around patents
issued to us. If competitors are able to use our technology, our competitive
edge would be reduced or eliminated.

If necessary licenses of third-party technology are not available to us or are
very expensive, our products could become obsolete and our business seriously
harmed because we could have to limit or cease the development of some of our
products.

We currently license technology, and we may occasionally be required to
license additional technology from third parties or expand the scope of current
licenses to sell or develop our products. Existing and future third-party
licenses may not be available to us on commercially-reasonable terms, if at
all. Our inability to maintain, expand or obtain any third-party license
required to sell or develop our products could require us to obtain substitute
technology of lower quality or performance standards or at greater cost or
limit or cease the sale or development of certain products or services. If
these events occur, we may not be able to increase our sales and our revenue
and profitability could decline.

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<PAGE>

We could become subject to litigation regarding the intellectual property
utilized in our products, which would be costly to us and distract our
management team, and could subject us to liability for damages and diminish our
proprietary rights.

Although we have not been involved in any intellectual property litigation,
we or our customers may be a party to litigation in the future to protect the
intellectual property utilized in our products or as a result of an allegation
that we infringe the intellectual property of others. Any parties asserting
that our products infringe upon their proprietary rights could force us to
defend ourselves and, pursuant to the indemnification provisions of some of our
customer and supplier contracts, possibly our customers or manufacturers
against the alleged infringement. These claims and any resulting lawsuit, if
successful, could subject us to significant liability for damages and weaken
the extent of, or lose the protection offered by, our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert our management's time and attention. This
litigation could also compel us to do one or more of the following:

. stop selling, incorporating or using our products that use the
challenged intellectual property;

. obtain from the owner of the infringed intellectual property right a
license to make, use or sell the relevant technology, which license may
not be available on reasonable terms, or at all;

. redesign those products that use the technology; and

. pay monetary damages for past infringement of third-party intellectual
property rights.

Risks Related to this Offering

Insiders will continue to have substantial control over us after this offering
and could limit your ability to influence the outcome of key transactions,
including changes of control.

Our directors and principal stockholders and entities affiliated with them
will own approximately 55.6% of the outstanding shares of our common stock
after this offering. As a result, these stockholders, if acting together, will
be able to control all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. These stockholders or their affiliates may
even acquire additional equity in the future. The concentration of ownership
may also have the effect of delaying, preventing or deterring a change of
control of our company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of our company and
might ultimately affect the market price of our common stock.

A market for our common stock may not develop, which will inhibit your ability
to sell our common stock. If a market does develop, the trading price for our
common stock is likely to be highly volatile. This makes your investment in our
common stock more risky and litigation more likely.

Before this offering, there was no public trading market for our common
stock. A market may not develop or be sustained after this offering. The
initial public offering price for our common stock will be determined through
our negotiations with the underwriters and may not bear any relationship to the
market price at which it will trade after this offering or to any other
established criteria of our value.

In addition, the trading price of our common stock is likely to be
volatile. The market for technology companies, including companies whose
business involves some aspect of optical networking, has recently experienced
substantial price and volume fluctuations, which often have been unrelated or
disproportionate to the operating performance of those companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action

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<PAGE>

litigation has often been brought against that company. Due to the potential
volatility of our stock price, we may therefore be the target of securities
litigation in the future. Securities litigation could result in substantial
costs and divert management's attention and resources from our business.

If a substantial number of shares becomes available for sale and is sold in a
short period of time, the market price of our common stock could decline.

If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decrease. Based on shares outstanding as of June 30, 2000, upon
consummation of this offering, we will have outstanding 203,575,238 shares of
common stock. Other than the shares of common stock sold in this offering,
approximately shares will immediately be eligible for sale in the
public market. Most of our stockholders will be subject to agreements with the
underwriters or us that restrict their ability to transfer their stock for
periods varying from 90 to 180 days from the date of this prospectus, subject
to a few exceptions. For a detailed description of these exceptions, see
"Underwriting". After all of these agreements expire, an aggregate of
additional shares will be eligible for sale in the public market. For a
detailed discussion of the shares eligible for future sale, see "Shares
Eligible for Future Sale".

Management will have broad discretion as to how we use the proceeds of this
offering, and we may not use these proceeds in a way that increases our
profitability.

Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. We have not committed the net proceeds of this offering to any
particular purpose at this time. The net proceeds may be used for corporate
purposes that do not increase our profitability or our market value. Also,
pending applications of the proceeds, our management may place the proceeds in
investments that do not produce income or that lose value.

As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.

The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
dilution of $11.62 a share, assuming a public offering price of $14.00, the
mid-point of the range shown on the cover page of this prospectus. The exercise
of outstanding options and warrants and future equity issuances will result in
further dilution.

We have various mechanisms in place to discourage takeover attempts that could
suppress our stock price and delay or prevent transactions that many
stockholders may favor.

Our amended and restated certificate of incorporation and our bylaws that
will be effective on the completion of this offering will contain provisions
that could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. These provisions include:

. authorizing the issuance of shares of blank check preferred stock;

. prohibiting cumulative voting in the election of directors;

. prohibiting stockholders from calling stockholders' meetings;

. providing for a classified board of directors with staggered, three-year
terms; and

. prohibiting stockholder action by written consent.

These provisions could delay or prevent transactions that our stockholders
may favor. In addition, Section 203 of the Delaware General Corporation Law
prohibits us from engaging in a business combination with any of our interested
stockholders for three years after such stockholder became an interested
stockholder unless specified conditions are met. For information regarding
these and other provisions, see "Description of Capital Stock".

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<PAGE>

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks" and
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. This prospectus also contains forward-
looking statements attributed to third parties relating to their estimates
regarding the growth of Internet use and telecommunications data traffic. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These risks
and uncertainties include those described in "Risk Factors" and elsewhere in
this prospectus. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.

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<PAGE>

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 17,500,000 shares of
common stock we are offering at an assumed initial public offering price of
$14.00 will be approximately $224.9 million, or $259.0 million if the
underwriters exercise their over-allotment option in full, after deducting the
estimated underwriting discount and offering expenses.

The principal purposes of this offering are to:

. increase working capital;

. create a public market for our common stock;

. enhance our ability to acquire other businesses, products or
technologies; and

. facilitate future access to public equity markets.

We expect to use the net proceeds from this offering for general corporate
purposes, including working capital. We may also use a portion of the net
proceeds from this offering to acquire or invest in businesses, technologies or
products that are complementary to our business. We have not determined the
amounts we plan to spend on any of the uses described above or the timing of
these expenditures. Accordingly, our management will have considerable
discretion in the application of the net proceeds of this offering. Pending
these uses, we intend to invest the net proceeds of this offering in short-
term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock or
other securities and do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain future earnings, if any, to finance the
expansion and development of our business.

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2000:

. on an actual basis;

. on a pro forma basis to reflect:

. the automatic conversion of our Series A, B, C and D preferred stock
outstanding as of June 30, 2000 into 113,389,848 shares of common
stock upon the completion of this offering based on a one-to-six
conversion ratio;

. the automatic conversion of our Series E preferred stock into
15,588,028 shares of common stock upon the completion of this
offering, assuming an initial public offering price of $14.00 per
share, the mid-point of the range shown on the cover page of this
prospectus;

. the issuance of 3,000,000 shares of common stock to AT&T in
connection with our license of intellectual property from AT&T;

. the issuance of 7,500,000 shares of common stock to the former
stockholders of Astarte; and

. the issuance of 666,666 shares of common stock to officers and
affiliates of Qwest.

. on a pro forma as adjusted basis to reflect:

. the sale of 17,500,000 shares of common stock in this offering at an
assumed initial public offering price of $14.00 per share, the mid-
point of the range shown on the cover page of this prospectus, after
deducting the estimated underwriting discount and offering expenses.

21
<PAGE>

<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ------------ ------------
<S> <C> <C> <C>
Long-term portion of notes payable.... $ 912,808 $ 912,808 $ 912,808
Long-term portion of capital lease
obligations.......................... 1,080,160 1,116,325 1,116,325
Stockholder's Equity:
Common stock, $0.001 par value,
900,000,000 authorized, 45,930,696
shares issued and
outstanding,185,036,036 issued and
outstanding pro forma and
203,575,238 issued and outstanding
pro forma as adjusted.............. 45,931 92,605 110,105
Preferred stock, Series A, $0.001
par value, 10,322,917 shares
authorized, 10,089,584 shares
issued and outstanding, -0- shares
outstanding pro forma and pro forma
as adjusted........................ 10,091 -- --
Preferred stock, Series B, $0.001
par value, 233,333 shares
authorized, 233,333 shares issued
and outstanding, -0- shares
outstanding pro forma
and pro forma as adjusted.......... 233 -- --
Preferred stock, Series C, $0.001
par value, 2,593,974 shares
authorized, 2,564,465 shares issued
and outstanding, -0- shares
outstanding
pro forma and pro forma as
adjusted........................... 2,565 -- --
Preferred stock, Series D, $0.001
par value, 6,010,926 shares
authorized, 6,010,926 shares issued
and outstanding, -0- shares
outstanding
pro forma and pro forma as
adjusted........................... 6,011 -- --
Preferred stock, Series E, $0.001
par value, 7,500,000 shares
authorized, -0- shares issued
and outstanding.................... -- -- --
Additional paid-in capital............ 150,242,582 530,385,585 755,218,085
Notes receivable...................... (37,995,430) (37,995,430) (37,995,430)
Accumulated deficit................... (65,019,587) (65,019,587) (65,019,587)
Deferred employee compensation........ (7,606,228) (7,606,228) (7,606,228)
----------- ------------ ------------
Total stockholders' equity........ 39,686,168 419,856,945 644,706,945
----------- ------------ ------------
Total capitalization............ $41,679,136 $421,886,078 $646,736,078
=========== ============ ============
</TABLE>

The outstanding share information in the preceding table excludes:

. 31,993,056 shares of common stock subject to options outstanding under
our stock option plan with a weighted average exercise price of $0.95
per share;

. 5,518,320 shares of common stock reserved for future issuance under our
stock option plan;

. 150,000 shares of common stock subject to options that were issued
outside of our stock option plan;

. 10,452,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $1.53 per share;

. 177,054 shares of common stock subject to outstanding warrants to
purchase Series C preferred stock at an exercise price of $1.53 per
share;

. 4,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $15.00 per share; and

. shares of common stock to be issued according to the over-
allotment option.

22
<PAGE>

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock immediately after this offering.

The pro forma net tangible book value of our common stock as of June 30,
2000 was $260.0 million, or approximately $1.40 per share assuming the
conversion of all outstanding shares of preferred stock into shares of common
stock. Pro forma net tangible book value per share represents the amount of our
total tangible assets less our total liabilities divided by the pro forma
number of shares of common stock outstanding after giving effect to:

. the issuance of 3,000,000 shares of common stock to AT&T in connection
with our license of intellectual property from AT&T;

. the issuance of 7,500,000 shares of common stock to the former
stockholders of Astarte; and

. the issuance of 666,666 shares of common stock to officers and
affiliates of Qwest.

Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of common stock
immediately after the completion of this offering.

After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the estimated underwriting discount and
offering expenses payable by us, our pro forma net tangible book value as of
June 30, 2000 would have been $260.0 million, or $1.40 per share. This
represents an immediate increase in pro forma net tangible book value of $0.98
per share to existing stockholders and an immediate dilution of $11.62 per
share to new investors purchasing shares in this offering. If the initial
public offering price is higher or lower, the dilution to the new investors
will be greater or less, respectively. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $14.00
Pro forma net tangible book value per share as of June 30,
2000........................................................... $1.40
Increase in pro forma net tangible book value per share
attributable to new investors in this offering................. 0.98
-----
Pro forma as adjusted net tangible book value per share after the
offering......................................................... 2.38
------
Dilution per share to new investors in this offering.............. $11.62
------
</TABLE>

The following table summarizes, as of June 30, 2000, on the pro forma basis
described above, the total number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid to us
by the existing stockholders and by the investors purchasing shares of common
stock in this offering. The calculation below is based on and assumed

23
<PAGE>

initial public offering price of $14.00 per share, the mid-point of the range
shown on the cover page of this prospectus, before deducting the estimated
underwriting discount and offering expenses payable by us:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 186,075,238 91.4% $521,764,861 68.0% $ 2.80
New Investors........... 17,500,000 8.6 245,000,000 32.0 14.00
----------- ----- ------------ -----
Total................. 203,575,238 100.0% $766,764,861 100.0%
=========== ===== ============ =====
</TABLE>

The discussion and table assume no exercise of any stock options or
warrants outstanding. As of June 30, 2000, there were options outstanding to
purchase a total of 31,993,056 shares of our common stock, with a weighted
average exercise price of $0.95 per share, warrants outstanding to purchase a
total of 10,452,000 shares of our common stock at an exercise price of $1.53
per share, and warrants outstanding to purchase a total of 29,509 shares of our
Series C Preferred stock at an exercise price of $9.15 per share, which shares
are convertible into 177,054 shares of our common stock. From July 1, 2000
through October 31, 2000, we granted options to purchase 6,914,158 shares of
common stock with weighted average exercise price of $1.16 per share. To the
extent that any options or warrants are exercised, there will be further
dilution to new public investors.

24
<PAGE>

SELECTED FINANCIAL DATA
(in thousands, except per share data)

The following selected financial data should be read with our financial
statements and related notes thereto appearing elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The statement of operations data set forth below for the period
from May 8, 1997 (inception) to December 31, 1997 and for the fiscal year ended
December 31, 1998 and the balance sheet data as of December 31, 1998 have been
derived from our financial statements, which were audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this prospectus. The
statement of operations data set forth below for the fiscal year ended December
31, 1999 and the balance sheet data as of December 31, 1999 have been derived
from our financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the periods ended June 30, 1999 and 2000, and
the balance sheet data as of June 30, 2000, are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which are
considered necessary for a fair presentation of the data. The historical
results are not necessarily indicative of results to be expected for any future
period.

<TABLE>
<CAPTION>
Period from
May 8, 1997 Six Months
(Inception) Year Ended Ended
to December 31, June 30,
December 31, ---------------- ---------------
1997 1998 1999 1999 2000
------------ ------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenue........................ $ 55 $ 1,364 $ 5,227 $1,063 $ 7,585
Non-cash charges related to
equity issuances.............. -- -- 559 -- 371
------- ------- ------- ------ -------
Revenue, net of non-cash
charges....................... 55 1,364 4,668 1,063 7,214
Cost of revenue................ 12 1,260 3,882 911 5,061
------- ------- ------- ------ -------
Gross profit.................. 43 104 786 152 2,153
Operating expenses:
Research and development...... 4,540 14,461 9,600 4,942 12,333
Sales and marketing........... 202 1,858 3,843 1,172 4,144
General and administrative.... 1,671 3,644 4,385 2,065 5,502
Amortization of Deferred
Stock Compensation........... -- 924 2,595 1,250 1,246
------- ------- ------- ------ -------
Total operating expenses.... 6,413 20,887 20,423 9,429 23,225
Operating loss................. 6,370 20,783 19,637 9,277 21,072
Other income, net:............. (802) (7) -- -- --
Interest (income) expense,
net........................... (303) (266) 162 151 (1,627)
------- ------- ------- ------ -------
Net loss....................... $ 5,265 $20,510 $19,799 $9,428 $19,445
======= ======= ======= ====== =======
Basic and diluted net loss per
share......................... $ (1.69) $ (4.83) $ (3.71) $(1.78) $ (1.00)
======= ======= ======= ====== =======
Weighted average shares
outstanding used in computing
basic and diluted net loss per
share......................... 3,108 4,245 5,335 5,285 19,453
======= ======= ======= ====== =======
Pro forma basic and diluted net
loss per share (unaudited).... $ (0.18) $ (0.15)
======= =======
Weighted average shares
outstanding used in computing
pro forma basic and diluted
net loss per share
(unaudited)................... 109,894 132,843
======= =======
</TABLE>

<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999 2000
------- ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Balance sheet data
Cash and cash equivalents................ $ 8,424 $ 7,733 $45,239 $30,228
Working capital (deficiency)............. 7,790 (3,120) 45,295 34,628
Total assets............................. 9,475 10,781 53,234 53,412
Long term debt and obligations under
capital leases, less current portion.... 74 9,465 1,339 1,993
Total stockholders' equity (deficiency).. $ 8,619 $(9,858) $47,674 $39,686
</TABLE>

25
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and the notes thereto appearing elsewhere in
this prospectus.

Overview

We design, develop and market high-speed, high-capacity, intelligent
optical switches that enable network service providers to quickly and cost-
effectively deliver new high-speed services. From May 1997 to September 1999,
we developed and manufactured dense wave division multiplexing products and the
initial versions of our Aurora 32 optical switch for the U.S. Department of
Defense. Accordingly, substantially all of our revenue in 1998 and the first
two quarters of 1999 was derived from product sales to Telcordia Technologies,
Inc., in connection with a project with the U.S. Department of Defense.
Substantially all of our obligations under this contract have been satisfied,
and we do not anticipate recognizing future revenue from equipment and product
sales under this contract. During the second quarter of 1999, we decided to
focus on the development of optical switches and discontinued the manufacture
of dense wave division multiplexing products. Our product line consists of
several hardware products and related software tools. In September 1999, we
shipped our Aurora 32 optical switch to Extant, and, in the third quarter of
2000, we delivered our next-generation Aurora Optical Switch to Extant for
evaluation in its laboratories. We currently market and sell all of these
products. Our future revenue growth depends on the commercial success of our
optical switches. Although we are developing and plan to introduce new products
and enhancements, we may not be successful in these efforts.

We have three customers: Cable & Wireless, Dynegy Connect, an affiliate of
Dynegy Global Communications, and Qwest. In September 2000, we entered into a
five-year contract with Cable & Wireless, a multinational provider of voice,
data and network services. Under the terms of this contract, Cable & Wireless
has a minimum purchase commitment of $350 million for the worldwide deployment
of our products, including the Aurora Optical Switch, the Wavelength Management
System and the StarNet Operating System. Cable & Wireless is conducting
laboratory testing of the Aurora Optical Switch. We expect to commence
commercial shipment to Cable & Wireless during the first quarter of 2001. In
September 1999, we entered into a five-year contract with Extant. On September
29, 2000, Extant was acquired by Dynegy Global Communications, a wholly-owned
subsidiary of Dynegy, a publicly-traded energy company. As part of the
acquisition, our contract with Extant was transferred to Dynegy Connect, a
limited partnership owned 80% by subsidiaries of Dynegy and 20% by Telstra
Corporation, an Australian telecommunications and information services company.
Dynegy has announced that it plans to proceed with Extant's planned network
build-out. We expect Dynegy Connect will purchase approximately $250 million of
products under the contract, although it has no obligation to do so. However,
under the terms of this contract, Dynegy Connect is required to purchase its
full requirements for optical switches from us during the first three years of
the contract. Our Aurora 32 optical switch, Wavelength Management System,
PlaNet and StarNet Operating System have been in service in the Dynegy Connect
network since April 2000. Dynegy Connect is conducting laboratory testing on
the Aurora Optical Switch, and we expect to commence commercial shipment during
the first quarter of 2001. We have a three-year contract with Qwest, a
multinational provider of voice, data and network services. Under the terms of
this contract, Qwest has a minimum purchase commitment of $300 million for the
deployment of our products, including the Aurora Optical Switch, the Aurora
Full-Spectrum and the StarNet Operating System. We expect to commence
commercial shipment under this contract during the first quarter of 2001.

26
<PAGE>

We sell our products through a direct sales force. In the future, we
anticipate expanding our sales efforts to include resellers and distribution
partners in the United States and selected international markets. Customers'
decisions to purchase our products to deploy in commercial networks involve a
significant commitment of resources and a lengthy evaluation, testing and
product qualification process. We believe these long sales cycles, as well as
our expectation that customers will tend to sporadically place large orders
with short lead times, will cause our revenue and results of operations to vary
significantly and unexpectedly from quarter to quarter. In addition, we expect
our revenues will be generated by sales to a limited number of customers for
the foreseeable future.

Since our inception, we have incurred significant losses and as of June 30,
2000, we had an accumulated deficit of approximately $65.0 million. We have not
achieved profitability on a quarterly or an annual basis and anticipate that we
will continue to incur net losses for the foreseeable future. We have a lengthy
sales cycle for our products and, accordingly, we expect to incur sales related
costs and other expenses before we realize the related revenue. We also expect
to incur significant sales and marketing, research and development and general
and administrative expenses and, as a result, we will need to generate
significant revenues to achieve and maintain profitability.

On September 1, 2000, we issued 3,000,000 shares of our common stock to AT&T
as consideration for the license of intellectual property from AT&T.

In September 2000, we also completed a private placement of 666,666 shares of
our common stock to officers and affiliates of Qwest for $15.00 per share.

On October 10, 2000, we acquired Astarte and issued 7,500,000 shares of our
common stock to the former stockholders of Astarte in connection with this
acquisition, 1,499,874 of which are escrowed to secure indemnity obligations of
the former stockholders of Astarte. The principal assets of Astarte that we
acquired are intellectual property rights and goodwill.

Revenue

Our revenue is derived from the sale of optical switches and related software
and the provision of related services. We recognize revenue from equipment
sales when the product has been shipped. For transactions where we have not
obtained customer acceptance, revenue is deferred until the terms of acceptance
are satisfied.

Software license revenue for software embedded within our optical switches or
our stand-alone software products is recognized when a purchase order has been
received or a sales contract has been executed, delivery of the product and
acceptance by the customer have occurred, the license fees are fixed and
determinable and collection is probable. The portion of revenue that relates to
our obligations to provide customer support, if any, are deferred, based upon
the price charged for customer support when it is sold separately and
recognized ratably over the maintenance period. Amounts received in excess of
revenue recognized are included as deferred revenue on our balance sheet.
Revenue from technical support and maintenance contracts is deferred and
recognized ratably over the maintenance period. Maintenance and warranty
periods are generally one year and five years, respectively. Estimated warranty
costs are recorded as a cost of revenue at the time the related revenue is
recognized.

Non-Cash Charges Related to Equity Issuances

Non-cash charges related to warrants issued to customers significantly affect
our reporting of revenue. In conjunction with the execution of our contract
with Extant in September 1999, we granted

27
<PAGE>

a warrant to purchase up to 10,452,000 shares of our common stock at an
exercise price of $1.53 per share. The contract with Extant was subsequently
transferred to Dynegy Connect. Upon execution of that contract, 2,090,400 of
the shares subject to the warrant vested, and as there was no purchase
commitment, a charge of approximately $1.1 million was recorded to sales and
marketing expense for the year ended December 31, 1999 to reflect the fair
value of the vested shares subject to the warrant at the grant date. As the
vesting of the remaining shares subject to the warrant was initially dependent
upon future purchases made by the customer, variable accounting was required.
Charges of $559,000 and $371,000 were recorded as an offset to revenue for the
year ended December 31, 1999 and the six-month period ending June 30, 2000,
respectively, to reflect the fair market value of the shares subject to the
warrant earned by Extant based upon purchases through that date. As of November
2, 2000, we amended the warrant agreement to immediately vest all of the
remaining shares subject to the warrant. The revised agreement provides that
the warrant becomes exercisable based on the schedule of milestones previously
contained in the warrant. If the milestones are not reached by March 31, 2005,
the remaining unexercised shares subject to the warrant shall then become
exercisable. In connection with the execution of this amendment, we expect to
incur a non-cash charge of approximately $90.6 million. This charge will be
recorded as a reduction of revenue as we realize revenue from this contract.
The amount of the charge was calculated using the Black-Scholes model.

In conjunction with executing a contract with Qwest, we granted two warrants
for a total of 4,000,000 shares of our common stock exercisable at $15.00 per
share. The fair market value of the shares subject to the warrants,
approximately $34.5 million, will be recorded as an offset to revenue as Qwest
makes purchases under the contract.

Cost of Revenue

Our cost of revenue includes manufacturing expenses which consist of
amounts paid to third-party manufacturers for assembly and testing, warranty
and maintenance expense, manufacturing start-up expenses, manufacturing
personnel and related costs and costs of our customer support group. A
significant portion of our manufacturing expenses consists of payments to
third-party contract manufacturers.

We anticipate our cost of revenue to increase in future periods as our
revenue increases. We believe that our gross margins will be affected by
several factors including:

. the demand for our products;

. new product introductions both by us and by our competitors;

. changes in our pricing policies and those of our competitors;

. the mix of product configurations sold;

. the volume of manufacturing;

. our ability to reduce our manufacturing and component costs; and

. non-cash charges related to customer warrants.

Research and Development Expense

Research and development expense consists primarily of salaries and related
personnel costs, prototype costs and other costs related to the design,
development, testing and enhancement of our products. We have expensed our
research and development costs as they were incurred. Several components of our
research and development effort, including the purchase of testing equipment
for our products, require significant expenditures, the timing of which can
cause variability in our quarterly expenses. We are devoting substantial
resources to the continued development and

28
<PAGE>

enhancement of our products. We believe that research and development is
critical to our strategic product development objectives, and we intend to
enhance our technology to meet the changing requirements of our customers. As a
result, we expect our research and development expense to increase in absolute
dollars in the future.

Sales and Marketing Expense

Sales and marketing expense consists primarily of salaries and the related
costs of sales and marketing personnel, commissions, promotions, travel and
other marketing expenses and recruiting expenses. We expect that sales and
marketing expense will increase in absolute dollars in the future as we
increase our direct sales efforts, expand our operations internationally, hire
additional sales and marketing personnel, initiate additional marketing
programs and establish sales offices in new locations.

General and Administrative Expense

General and administrative expense consists primarily of salaries and
related expenses for personnel, recruiting expenses and professional fees. We
expect that general and administrative expense will increase in absolute
dollars as we add personnel and incur additional costs related to the growth of
our business and our operation as a public company.

Stock-Based Compensation

During 1998 and 1999, we recorded deferred stock-based compensation expense
of approximately $2.1 million and $6.2 million, respectively. We recorded an
additional $4.1 million of deferred compensation expense in the six months
ended June 30, 2000. Deferred stock-based compensation expense consists of
charges resulting from the grant of stock options and the issuance of
restricted shares with exercise or sales prices deemed to be below the fair
value of our common stock on the date of grant. These amounts are being
amortized ratably over the vesting periods of the applicable options, which
vary depending on vesting schedules. Typically, 25% of the options granted vest
on the first anniversary of the date of grant and the remainder vest at either
1/36 monthly thereafter or 25% on each anniversary of the grant date.

We granted approximately 7,224,158 additional stock options to employees
from July 1, 2000 through October 31, 2000. We will record deferred stock
compensation expense of approximately $78.8 million for the difference between
the exercise price and the fair value of the underlying common stock at the
grant date.

As a result of our stock option grants, we expect to recognize additional
deferred compensation in future periods as follows:

. 2000--$8.0 million (in the third and fourth quarters of 2000);

. 2001--$21.9 million;

. 2002--$21.9 million;

. 2003--$21.1 million; and

. 2004--$13.3 million.

The amortization of deferred stock-based compensation expense is allocated
to cost of revenue, research and development, sales and marketing or general
and administrative expense, as appropriate.

29
<PAGE>

Amortization of Goodwill and Intangible Assets

We will record approximately $160.0 million of goodwill and intangible
assets related to our recent acquisition of Astarte and our acquisition of an
intellectual property license from AT&T. We expect to amortize these amounts in
future periods as follows:

. 2000--$9.0 million (in the third and fourth quarters of 2000);

. 2001--$32.0 million;

. 2002--$32.0 million; and

. 2003-05--$87.0 million.

Results of Operations

We plan to continue to increase our operating expenses significantly in
order to fund greater levels of research and development, expand our sales and
marketing operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that will result from being a publicly traded company and the increasing size
of our business. Our operating expenses are largely based on anticipated
revenue trends and a high percentage of our expenses are, and will continue to
be, fixed in the short term. In addition, we expect to generate revenues from a
limited number of customers for the foreseeable future. As a result of these
factors, we expect to continue generating operating losses in the short term.

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Revenue

In the six months ended June 30, 2000, we recognized revenue in the amount
of approximately $7.6 million. This represents an increase of approximately
$6.5 million over the same period in 1999 due primarily to the commencement of
shipments of our Aurora 32 optical switches to Extant in the third quarter of
1999. Substantially all of our revenue in the six months ended June 30, 2000
related to the Aurora 32 product shipments to Extant. In the first six months
of 1999, we recognized revenue in the amount of $1.1 million, the majority of
which was derived from sales of dense wave division multiplexing products.

During the six months ended June 30, 2000, we recognized as an offset to
revenue $371,000 of non-cash charges related to the warrant issued to Extant.

Cost of Revenue

In the six months ended June 30, 2000, we incurred cost of revenue of
approximately $5.1 million, which represented an increase of approximately $4.2
million over the same period in 1999. This increase in cost of revenue was
directly related to the corresponding increase in revenue, primarily related to
the increase in personnel costs of approximately $200,000 and material costs of
approximately $4.0 million. Cost of revenue for the six months ended June 30,
2000 includes amortization of stock-based compensation expense of $49,000.

Research and Development Expense

In the six months ended June 30, 2000, we incurred research and development
expense of approximately $12.3 million of which $6.6 million represented
personnel costs and $4.0 million represented prototype development expense.
This represented an increase of approximately $7.4 million over the same period
in 1999. The increased expenses were primarily associated with a

30
<PAGE>

significant increase in personnel related expenses of approximately $4.6
million and an increase of approximately $2.7 million in prototype expenses for
the design and development of our Aurora optical switches. As of June 30, 2000,
the number of employees dedicated to research and development was 124 people,
as compared to 40 people at June 30, 1999.

Sales and Marketing Expense

In the six months ended June 30, 2000, we incurred sales and marketing
expense of approximately $4.1 million, of which $2.0 million represented
expenses for sales and marketing personnel and $1.5 million represented costs
related to marketing programs. This represented an increase of approximately
$3.0 million over the same period in 1999. The increase resulted from costs
associated with the hiring of additional sales and marketing personnel of
approximately $1.5 million and marketing program costs. Increases in marketing
program costs included an increase of approximately $400,000 for travel,
$300,000 for outside consulting services and $800,000 on advertising and
promotion. As of June 30, 2000, the number of sales and marketing personnel was
53 people, as compared to 12 people at June 30, 1999.

General and Administrative Expense

In the six months ended June 30, 2000, we incurred general and
administrative expense of approximately $5.5 million of which approximately
$1.9 million represented expenses for personnel, $1.4 million represented
professional fees and $407,000 represented depreciation. This represented an
increase of approximately $3.4 million from the same period in 1999.
Approximately $1.1 million of this increase resulted from the hiring of
additional general and administrative personnel, and approximately $1.1 million
resulted from increased professional fees and expenses necessary to accommodate
our growing operations.

Amortization of Deferred Stock Compensation

In the six months ended June 30, 2000, we amortized approximately $1.3
million related to deferred stock compensation. This amount is relatively
unchanged versus the six months ended June 30, 1999 because the options we
granted between June 30, 1999 and June 2000 did not have an exercise price less
than the deemed fair market value of our common stock at the time of the grant.
As discussed above, we expect these amounts to increase substantially in future
periods.

Interest Income, Net

In the six months ended June 30, 2000, we recorded interest income, net of
interest expense, of approximately $1.6 million, as compared to net interest
expense of $152,000 in the six months ended June 30, 1999. Net interest income
consists of interest earned on our cash balances and marketable securities
offset by interest expense related to outstanding borrowings. The increase in
our interest income during the six months ended June 30, 2000 is primarily
attributable to the interest income on the cash proceeds from our Series D
preferred stock issuance in December 1999 and January 2000. This interest
income was offset by interest expense related to an equipment loan arrangement
we secured in November 1999 for up to $6.0 million.

Income Taxes

We have recorded no income tax provision or benefit for the six months
ended June 30, 1999 and June 30, 2000, respectively, due to our operating loss
position and the uncertainty of our ability to utilize our net operating loss
carry forwards.

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<PAGE>

Period From Inception (May 8, 1997) Through December 31, 1997, the Year Ended
December 31, 1998 and the Year Ended December 31, 1999

Revenue

In 1997, we recognized revenue of $54,600 related to consulting work we
performed for an affiliate. In 1998, we recognized approximately $1.4 million
in revenue under our contract with the U.S. Department of Defense.

In 1999, we recognized revenue of approximately $5.2 million, which
comprised $964,000 in revenue recognized under our contract with Telcordia
Technologies in connection with a project with the U.S. Department of Defense,
$3.1 million in revenue from shipments of our Aurora 32 optical switches and
related software to Extant and $1.1 million in revenue from the sale of our
remaining dense wave division multiplexing inventory.

In 1999, we recognized an offset to revenue of $559,000 of non-cash charges
related to the warrant issued to Extant.

Cost of Revenue

Cost of revenue was $11,500 in 1997. In 1998, we incurred cost of revenue
of approximately $1.3 million.

In 1999, we incurred cost of revenue of approximately $3.9 million, of
which $500,000 represented materials, $2.5 million represented labor and
production overhead, $283,000 represented warranty and obsolescence costs and
$77,000 represented amortization of deferred stock-based compensation expense.

Research and Development Expense

Research and development expense was approximately $4.5 million in 1997. In
1998, we incurred research and development expense of approximately $14.5
million.

In 1999, we incurred research and development expense of $9.6 million, of
which $5.5 million represented personnel costs, $2.4 million represented
prototype development expenses and $200,000 represented costs for technical
consultants. Research and development expenses represented approximately 71%,
69% and 47% of total operating expenses for 1997, 1998 and 1999, respectively.
The decrease in expenses in 1999 relative to 1998 was attributable to costs
incurred in 1998 related to the purchase, development and fabrication of dense
wave division multiplexing products, which were discontinued in 1999. This
decrease was offset by increased costs associated with a significant increase
in personnel and personnel-related expenses.

Sales and Marketing Expense

Sales and marketing expense was $202,000 in 1997. In 1998, we incurred
sales and marketing expense of approximately $1.9 million.

In 1999, we incurred sales and marketing expense of approximately $3.8
million of which $1.5 million represented expenses for sales and marketing
personnel and $1.7 million represented costs related to marketing programs.
Sales and marketing expenses represented approximately 3%, 9% and 19% of total
operating expenses for 1997, 1998 and 1999, respectively. The increase in
expense in 1999 represents the hiring of additional sales and marketing
personnel, sales-based commissions and marketing program costs, including trade
shows and product launch activities. Sales and

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<PAGE>

marketing expense for the year ended December 31, 1999, includes a charge of
approximately $1.1 million representing the fair value of the warrant earned by
Extant.

General and Administrative Expense

General and administrative expense was approximately $1.7 million in 1997.
In 1998, we incurred general and administrative expense of approximately $3.6
million.

In 1999, we incurred general and administrative expense of approximately
$4.4 million, of which $1.5 million represented expenses for personnel costs
and professional fees, $500,000 represented rent and maintenance costs and $1.1
million represented depreciation. General and administrative expenses
represented approximately 26%, 17% and 21% of total operating expenses in 1997,
1998 and 1999, respectively. The increase in expense in 1999 reflects the
hiring of additional administrative personnel and expenses incurred in
connection with our growing operations as well as increased rent and associated
costs related to moving to larger facilities.

Deferred Stock Compensation

We amortized deferred stock compensation of $950,000 in 1998 and $2.7
million in 1999. There was no amortization of deferred stock compensation in
1997. Amortization of deferred stock compensation increased over these periods
because we granted stock options with exercise prices below the deemed fair
market value of the common stock at the time of grant.

Interest Income (Expense), Net

Interest income, net of interest expense, was $303,000 in 1997, $265,000 in
1998 and ($163,000) in 1999. The significant decrease in 1999 relates to our
decreasing cash reserves in 1999 as well as the increased interest expense
related to a $5.0 million loan in 1999.

Other Income

Other income was $803,000 in 1997, which included approximately $600,000,
related to fees paid to us under a non-exclusive license agreement.

Income Taxes

We have recorded no income tax provision or benefit for the years ended
1997, 1998 and 1999 due to our operating loss position and the uncertainty of
our ability to utilize our net operating loss carryforwards.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through private
sales of our capital stock. As of June 30, 2000, our cash, cash equivalents and
marketable securities totaled approximately $30.2 million and, for the six
months ended June 30, 2000, our working capital totaled $34.6 million. In
addition, in September 2000, we received approximately $213.0 million in net
proceeds from the private placement of our capital stock.

Cash used in operating activities for the six months ended June 30, 2000
was approximately $23.9 million and was approximately $20.5 million in 1999.
The increased use of cash in operating activities for the six months ended June
30, 2000 related primarily to our continued investment in the growth of our
business.

Cash used in investing activities was approximately $2.4 million for the
first six months of 2000 and was approximately $1.7 million in 1999. The
increase in net cash used for investing activities reflected increased
purchases of property and equipment, primarily for computers and test equipment
for our development and manufacturing activities. Our projected capital
expenditures for the 12 months ending December 31, 2000 are approximately $5.4
million.

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<PAGE>

Cash provided by financing activities in the six months ended June 30, 2000
was approximately $11.3 million and was approximately $59.7 million in 1999. In
1999, we raised net proceeds of approximately $23.2 million from the sale of
our Series C preferred stock and net proceeds of approximately $49.7 million
from the sale of our Series D preferred stock. In January 2000, we issued an
additional $5.0 million of Series D preferred stock and in June 2000, we issued
approximately $4.1 million of Series A preferred stock to existing shareholders
upon the exercise of warrants.

In November 1999, we entered into a financing arrangement with Comdisco,
Inc. We raised approximately $1.8 million through the issuance of secured
promissory notes that bear interest at 7.5% and are payable in installments
through 2002. Additionally, we entered into a lease line of credit with
Comdisco that allows us to finance up to $4.0 million of equipment purchases.
The line bears an interest rate of 7.5% and expires in November 2002. As of
June 30, 2000, $3.2 million was outstanding under this facility.

During the six months ended June 30, 2000, we entered into a $10.0 million
line of credit with Commerce Bank. The line of credit bears interest at 6.75%
and expires on June 30, 2001. As of June 30, 2000, $2.0 million was outstanding
under this line of credit.

We believe that our available cash, including the proceeds from our recent
private placement of Series E preferred stock, combined with net proceeds from
this offering, our line of credit facilities and cash anticipated to be
available from future operations, will enable us to meet our working capital
requirements for the next 12 months. Our expenses have exceeded, and in the
foreseeable future are expected to exceed, our revenue. Accordingly, we do not
expect to be able to fund our operations solely from internally-generated funds
for the foreseeable future. Our future liquidity and capital requirements will
depend upon numerous factors, including expansion of operations, product
development and sales and marketing. Also, we may need additional capital to
fund cash acquisitions of complementary businesses and technologies, although
we currently have no commitments or agreements for any cash acquisitions. If
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. Any additional equity
financing may be dilutive to our stockholders and debt financing, if available,
may involve restrictive covenants with respect to dividends, raising capital
and other financial and operational matters that could restrict our operations.

Recent Accounting Developments

In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133.
Additionally, in June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an amendment of
FASB Statement No. 133. SFAS No. 133, as amended, is effective for January 1,
2001. SFAS No. 133 establishes new disclosure requirements, which provide a
comprehensive standard for recognition and measurement of derivatives and
hedging activities. This will require all derivatives to be recorded on the
balance sheet at fair value and special accounting for some types of hedges. We
do not believe that SFAS No. 133, as amended, will have a material effect on
our consolidated financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation and disclosure
of revenue in financial statements filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We have reviewed these
criteria and believe our policies for revenue recognition are in accordance
with SAB 101.

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<PAGE>

Qualitative and Quantitative Disclosures about Market Risk

We have assessed our vulnerability to many market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents. Due to the short-term nature of these investments and other
investment policies and procedures, we have determined that the risks
associated with interest rate fluctuations related to these financial
instruments are not material to our business.

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<PAGE>

BUSINESS

Overview

We design, develop and market high-speed, high-capacity, intelligent
optical switches that enable telecommunications service providers to quickly
and cost-effectively deliver new high-speed services. Intelligent optical
switches are products that are installed in telecommunications networks to
manage the flow of optical signals, which are beams of light transmitted over
fiber optic cables. With the growth of the Internet and the global deregulation
of telecommunications services, there continues to be a dramatic increase in
data traffic, as well as accelerating demand for new and complex services and
network capacity. Our service provider customers are under increasing pressure
to improve and expand data services and to upgrade their networks in a timely
and cost-effective manner. We believe that the network equipment that service
providers are currently using does not offer them sufficient flexibility to
improve their data service offerings and upgrade their networks in a timely and
cost-effective manner.

Our products are based on a highly reliable set of hardware combined with
feature-rich software, both of which can be easily expanded, enabling service
providers to grow and manage their networks quickly and efficiently in order to
keep pace with the dynamic requirements of data services. We have designed our
products to be cost-effective for emerging service providers as they begin to
build out their networks, as well as for established service providers to
expand and enhance the capabilities of their existing networks. Our optical
switches operate with existing optical networking equipment to support the
transition from older networks to advanced, intelligent optical networks
without service disruption. This capability protects service providers' prior
investment in fiber optics and transmission equipment. Our optical switches are
easily upgraded, providing our customers with the ability to adopt new
technologies and features without the need to replace our equipment.

Our objective is to be a leading provider of intelligent optical switches
for global public telecommunications networks.

Industry Background

Increase in Data Traffic is Leading to Increased Demand for Network Capacity

The rapid global adoption of the Internet and the World Wide Web is
dramatically increasing data traffic in the world's public telecommunications
networks. RHK, Inc., an industry research firm, estimates that North American
Internet traffic capacity reached 350,000 terabytes per month in December 1999,
compared to 50,000 terabytes per month for voice traffic in the same period.
Internet traffic capacity is expected to increase to approximately 16 million
terabytes per month in 2003.

Consumers and businesses are increasingly using the Internet for
applications such as electronic mail, electronic commerce, and other voice,
video and data services. This additional traffic demand is expected to
accelerate with the development, deployment and increased use of high-capacity
network access technologies, such as cable modems and digital subscriber lines,
that enable commercial and consumer users to transmit and receive large volumes
of information. Substantial growth is expected to increase the demand for
capacity, or bandwidth, at all levels of public networks. According to RHK,
Internet traffic alone is growing at approximately 200% per year. Thus, public
network bandwidth will have to increase at least as fast to satisfy expected
Internet and other data traffic requirements.

Deregulation Has Resulted in Increased Competition

Deregulation of the telecommunications industry worldwide has opened
markets to new providers and permitted existing service providers to offer
competing services in expanded geographic areas. The ability to create and
offer new services quickly and cost-effectively has

36
<PAGE>

become an important competitive advantage among service providers. Competition
has also reduced prices for service offerings, decreasing margins and forcing
service providers to look to new technology to provide increased operating
efficiencies.

Today's Optical Network

Optical networking refers to the use of fiber optic cables and connections
that use light, rather than electricity, to transfer information. These fiber
optic cables are connected to equipment that sends the streams of data carried
by light over the fiber optic cables. The high performance of optical
networking has led to rapid deployment of fiber optic networks.

Today, service providers employ two primary methods for managing and
transporting traffic within their optical networks. SONET/SDH, which stands for
synchronous optical network/synchronous digital hierarchy, is used to provide
operational features. DWDM, which stands for dense wave division multiplexing,
is used to add capacity.

SONET, in North America, and SDH, in Europe and other countries, is based
on standards that govern the management of traffic within an optical network.
SONET/SDH equipment combines multiple, low-speed signals onto higher-speed
connections to transport these signals across the optical network. SONET/SDH
also provides the ability to restore services in the event of failures in the
signal path.

Dense wave division multiplexing is an optical transport technology that
dramatically multiplies the amount of traffic that can be carried over a fiber
optic network by dividing each beam of light into multiple, discrete beams of
light, referred to as channels. Service providers have widely deployed dense
wave division multiplexing technology to increase capacity within their long-
distance networks. However, as hundreds of channels are added across the
network, complexities and inefficiencies increase. Dense wave division
multiplexing equipment alone is incapable of performing key functions that
SONET/SDH equipment performs, such as performance monitoring, identification of
faults and restoration of service, that ensure reliable network operations. For
this reason, service providers have typically deployed both SONET/SDH and dense
wave division multiplexing equipment in their optical networks.

Limitations of Existing Optical Networks

Many aspects of today's network designs limit service providers' ability to
cost effectively expand their networks and efficiently meet increasing capacity
and service demands. The following are key limitations of the existing
networks:

. SONET/SDH systems were designed to support voice traffic. SONET/SDH
systems combine multiple dedicated voice channels into higher-speed
channels. While this approach provides quality delivery of traditional
voice traffic, SONET/SDH standards are very inefficient for
unpredictable and dynamic data traffic that does not fit neatly into
channels. Moreover, the multiple signals are broken down and recombined
at every network intersection, negatively impacting performance of the
network. Data traffic exhibits enormous peaks in demand that SONET/SDH
standards cannot support in an efficient manner at reasonable cost.

. Current networks use a ring design. SONET/SDH equipment is typically set
up in what is called a ring to connect several intersections in a
network. Optical paths are linked in rings so that in the event of a
single fiber cut or single equipment failure between two points on the
ring, the signal can be immediately directed through another path,
called the protection path of the ring. However, there are several
disadvantages to ring networks. The delivery of high-speed services
across many of these network intersections takes months to test and
deploy due to the amount and complexity of the equipment that must be
connected to the rings. In addition, for every service path in a ring a
duplicated path for protection is reserved, which forces half of the
overall capacity of the network to be dedicated to protection capacity
that is rarely used.

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<PAGE>

. Current network upgrades are difficult and expensive. All of the
SONET/SDH equipment operating in the same part of the network must
transmit and receive data at the same speed. Therefore, if a service
provider needs to increase the speed in one part of the network, the
service provider must replace every part of the network with new,
costly, higher-speed equipment in order for the upgrade to be effective.
This process can take months of intense planning and deployment, slowing
a service provider's ability to respond to substantial or unplanned
increases in the demand for higher capacity. As each new dense wave
division multiplexing channel is put into service, it must be
permanently connected to the existing network, a time and labor-
intensive process. As end users' data demands change and grow, these
permanent connections limit service providers' ability to change their
network quickly in response to service requests. Service providers
therefore must route new services across their networks in inefficient
ways, using more equipment and connections and creating more points of
failure in order to achieve the desired connection.

. Current networks are difficult to set up. Current networks contain large
numbers of individual pieces of equipment, each of which must be
separately set up, connected and reconnected in response to each new
customer order. This complex process is referred to as provisioning.
These efforts require technicians to visit multiple locations in the
network to reconnect paths and install hardware and software, a process
that often requires hundreds of separate tasks. This process can take
months and requires the efforts of a large, highly-skilled workforce
equipped with specialized tools and knowledge.

. SONET/SDH equipment currently requires substantial central office space
and power. Service providers' central office facilities are increasingly
crowded with many types of equipment that must be connected to the
network. In addition, deregulation has forced service providers to share
their facilities with competitors. As a result, space for equipment has
become scarce and expensive. SONET/SDH equipment occupies a large amount
of space which limits capacity for network expansion. The increase in
amount of equipment has also resulted in additional power consumption,
cooling requirements and other related overhead costs.

As a result of these limitations, service providers face considerable costs
of building and managing networks, which are unlikely to be recovered over an
acceptable period of time. In addition, each day of delay in service delivery
is a day of lost revenue and negatively impacts customer satisfaction. To date,
the steps that service providers have used to address these limitations have
largely been tactical and incremental, such as buying more fiber, installing
new SONET/SDH rings, increasing the speed of existing rings and employing more
dense wave division multiplexing to increase fiber capacity. Service providers
are seeking more strategic solutions that remove these limitations by upgrading
the overall network in a cost-effective manner.

[GRAPHIC: SONET/SDH RINGS]

[Three separate circles, representing active paths, each with an outer
circle, representing an idle protection path. The circles have groups of boxes
on them which represent traditional SONET/SDH equipment. Each of the three
large circles is connected by an octagon representing traditional equipment for
managing voice traffic. Rectangles representing voice and data networking
equipment are located at the four corners.]

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<PAGE>

Service Provider Requirements for the New Optical Network

To overcome existing network limitations, service providers need a way to
build a new network that is designed for data traffic rather than traditional
voice traffic without disrupting current voice and data services. The network
must support the ability to deliver optical services, anywhere, at any time,
for any customer. In addition, emerging service providers need a network that
allows them to grow quickly with lower capital costs and reliable, modular
equipment that reduces their operating expenses while increasing their revenue
opportunities. Specifically, the new optical network must:

. Rapidly provision and restore optical services. The new network must
allow service providers to provision and restore optical services to end
users quickly, while significantly reducing manual labor-intensive
activities.

. Enable the development of new optical services. As competition among
service providers increases, the new network must be flexible enough to
allow service providers to differentiate themselves and increase
revenues by providing their customers with new value-added services.

. Reduce operational and maintenance costs. The new network must have
operational and maintenance costs that are substantially lower than the
current network incurs with respect to personnel, space occupied, power
consumption and cooling requirements. The new network also must limit
the number of times personnel need to be dispatched to other locations
by providing the capability to easily and automatically make changes in
support of service delivery, maintenance and administration.

. Reduce capital costs. The new network must allow service providers to
reduce the amount of equipment required to deploy and expand the
network, allowing service providers to reallocate capital for new
services and additional capacity.

. Provide for easy upgrades. The new network must be easy to upgrade in
order to accommodate emerging technologies and enable future services.
Today's networks are generally rigid in design, with limited ability to
implement breakthrough technologies such as optical switching. Service
providers typically seek a network that is upgradable without major
disruption to the design and layout of the network. This approach
extends the life of the products, reduces capital replacement costs and
simplifies the introduction of new technologies.

. Deploy proven, reliable products. Given the many pressures that service
providers face, they do not want to risk their networks by deploying
unproven products. They seek products that have been thoroughly tested
and verified through previous deployments and comprehensive testing and
evaluation.

The Tellium Solution

We design, develop and market high-speed, high-capacity, intelligent
optical switches that enable network service providers to quickly and cost-
effectively deliver new high-speed services. Our first-generation products are
field-proven, having been in service for more than one year. Our second-
generation products are currently undergoing laboratory evaluation with global
service providers. These products benefit from the experience gathered from
over a year of live service of our first-generation products. Our products are
designed to manage only very high capacity optical signals and not lower speed
signals. We have a world-class technology team that has pioneered many
innovations in optical network engineering and has a strong heritage in the
telecommunications industry. Our optical switches provide the following key
benefits to service providers:

. Improved network design. Our optical switches are designed to enable
service providers to reduce their costs by deploying a network that is
more efficient than SONET/SDH rings. In this approach, called mesh
architecture, each network junction is connected to any number of

39
<PAGE>

other network junctions, allowing for multiple paths through the network.
With this design, mesh networks are more efficient in their utilization
of equipment, while still achieving the important goal of rapidly
restoring service after a network failure. In addition, mesh networks are
simpler to operate, administer and maintain than SONET/SDH ring networks.

. Simplified delivery of new services. Our optical switches help service
providers to create flexible optical networks, enabling reliable, fast,
cost-effective delivery of new and existing optical data services. Our
optical switches enable a new generation of data networking equipment to
deliver data directly to the optical network and bypass costly SONET/SDH
equipment. Service providers can combine their existing equipment with
our optical switches that deliver data services with improved
expandability, flexibility and survivability.

. Fast provisioning of new services. Our optical switches are designed to
allow service providers to provision services across their networks in a
matter of minutes, replacing a process which can often take up to
several months. Our advanced administration and management software
allows service providers to provision their networks from a central
management workstation in anticipation of changing end-user needs,
eliminating the requirement to dispatch personnel to remote locations.
As a result, re-routing traffic around network bottlenecks or failure
points becomes easier, allowing service providers to offer their
customers on-demand service delivery and fast recovery from network
failures. More efficient and rapid network provisioning can lead to
direct cost savings and revenue opportunities for our customers. In a
highly competitive industry, our customers are able to differentiate
themselves from their competitors by offering faster, more reliable
services with increased flexibility.

. Easy network expansion. Our optical switches are designed to help
service providers expand their networks rapidly, enabling new revenue-
generating services that meet their customers' needs. Our products
convert the optical network from a system requiring manual changes to a
dynamic system in which it is easy to add or change components. Our
Aurora Optical Switch, for example, offers the same or greater capacity
than other systems on the market, in a physical configuration that is
smaller, consumes less power and has a lower cost per connection.

. Cost-effectiveness. Our optical switches are designed to enable service
providers to eliminate costly SONET/SDH equipment while retaining the
features that service providers expect. Our products include modular,
configurable hardware and software that allow our customers to retain
their investments as they expand capacity and automate operations, while
also significantly reducing the cost of service delivery. Our software
reduces the amount of equipment required by operating in a mesh network.
Service providers can install the capability to restore traffic with
less capital equipment and less floor space, reducing both capital and
ongoing costs while maintaining fast restoration time.

. Compatibility with existing networks. Our optical switches can be
deployed quickly because they are compatible with existing networks. Our
products are designed to support and enable mesh networks and operate
with existing ring networks. Our equipment interoperates with a wide
range of network hardware, such as dense wave division multiplexing
systems, data network equipment, and all major types of SONET/SDH
products. In addition, we offer comprehensive network management,
planning and administration software that communicates with existing
network management systems through common standards.

. Flexible products. Our optical switches are designed to be highly
flexible and upgradable. For example, it is easy for a technician to add
or remove components in our switches without interrupting or
compromising the performance of the network. All of our products share a
common management software system. A service provider can start small,
using our products

40
<PAGE>

from the initial deployment through future network expansion. As our
equipment is upgraded, there is no requirement to reprogram the
connections between our products and other equipment and software systems
in the network.

[GRAPHIC: MESH ARCHITECTURE]

[Various intersecting lines representing shared active and protection
paths. Where the lines intersect, there are diamonds representing Tellium
optical switches. Rectangles representing voice and data networking equipment
are located at the four corners.]

Strategy

Our objective is to be a leading provider of intelligent optical switching
solutions for global public telecommunications networks. The key elements of
our strategy include the following:

. Maximize our first mover advantage. We were the first optical switching
vendor to place into service a high-performance optical switch, the
Aurora 32. We are currently shipping for lab evaluations our high-
capacity second-generation switch, the Aurora Optical Switch. We intend
to maintain and extend this leadership position by continuing to invest
in research and development. We may also make acquisitions in order to
expand our base of technology expertise, intellectual property and
product capability.

. Maintain a tight focus on optical switching. We are focused on providing
a full range of optical switches for the high-performance optical
network. We intend to commit a substantial portion of our research and
product development efforts toward the goal of creating an industry-
leading optical switching product line. We believe that our focus gives
us a time-to-market advantage over our competitors whose efforts are
more broadly dispersed over multiple product lines.

. Build on our heritage. Our founders and first employees were pioneers of
optical networking at Bellcore. Our technical staff and management team
come from leading companies in the optical engineering and
telecommunications equipment industries, prominent service providers and
renowned academic institutions. We believe that this heritage provides
us with a depth of expertise and proven operating experience that is
unique in our industry. We will continue to build on this heritage of
excellence throughout our engineering and management staff by
aggressively recruiting top talent from around the world.

. Build on our relationships with our customers. Our management,
engineering and sales forces have strong contacts and long-standing
relationships with key people in the networking and optics industries,
as well as in our customer base. We believe that our experience and
relationships will enable us to sell additional products to our existing
customers, add new customers and bring innovative products to market
that meet our customers' needs.

. Expand our sales force and distribution channels. We intend to continue
building an experienced sales force that specializes in selling optical
switches to service providers. We will also add to our systems
engineering force in order to help our customers implement our products.
Additionally, we intend to expand our distribution network in order to
reach a broader base of customers, particularly in international
markets.

. Maximize our ability to expand our operations. We outsource our
manufacturing and purchase some key components from third parties.
Outsourcing enables us to focus on our core competencies, including
product development, marketing and sales and allows us to rapidly
increase our ability to meet demand for our products.

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<PAGE>

Tellium Products

Our products include highly-reliable hardware and standards-based software
designed to deliver intelligent optical switching and integrated network
management for public telecommunications networks. Our products consist of
optical switches that intelligently route optical traffic between network
intersections and enable service providers to rapidly plan, provision, manage
and restore services. Our optical switching products deliver the operational
benefits of today's SONET/SDH standards, including performance monitoring,
identification of faults and service restoration, while eliminating complex and
expensive SONET/SDH equipment. Our products also enable service providers to
rapidly plan and provide new, revenue-generating services to their customers.
Our line of optical switches is designed for use in a wide variety of networks,
including metropolitan, regional and national networks.

Optical Switching Products Summary

All of our products go through a development and customer evaluation
process before the customer begins using the product in its operations. The
length of this process will vary, depending on the product and the customer.
For purposes of the following chart, a product is described as "in development"
if our engineers currently are preparing and developing the product for
eventual customer use. A product is described as "development complete" if our
engineers have completed their work on the product, and the product is ready to
be shipped to a customer for evaluation. A product is described as "in customer
evaluation" if a customer has received the product and is evaluating the
product for compatibility with its existing systems and needs. At the customer
evaluation stage, the customer works with our engineers to correct any
deficiencies and to make any adjustments required by the customer until the
product is ready to move into the "in service" stage. A product is described as
"in service" if a customer has completed its evaluation of the product and that
customer has begun commercial use of the product.

We sell the following optical switching and software products:

<TABLE>
<CAPTION>
Product Name Capabilities Status
------------ ------------ ------

<S> <C> <C>
Hardware Products:

Aurora 32 OC-3, OC-12 and OC-48 (SONET) In service
STM-1, STM-4 and STM-16 (SDH) Development complete

Aurora Optical Switch OC-48 (SONET) In customer
OC-192 (SONET) evaluation
STM-16 and STM-64 (SDH) In development
In development

Aurora Full-Spectrum OC-192 and OC-768 (SONET) In development
STM-64 and STM-256 (SDH) In development
Transparent Optical Paths In development

Software Products:

StarNet Operating System End-to-end service delivery and In service
restoration

Wavelength Management System End-to-end wavelength management In service

PlaNet Network planning and design In service
</TABLE>

Our line of Aurora optical switches enables service providers to automate
the delivery of optical services, reduce their costs by enabling optical mesh
networking, restore optical services in the event of network failures and
redirect traffic around network bottlenecks. Our Aurora optical switches also
provide the ability to connect high-speed data networking equipment directly to
the optical network without requiring additional expensive SONET/SDH equipment.

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Our hardware and software products are standards-based and are designed to
seamlessly operate within existing optical networking equipment, protecting
service providers' prior investment in fiber optic and transmission equipment.
Our systems are modular, enabling in-service growth, from a single optical
switch channel to thousands of optical channels, in increments as small as one
channel at a time.

Our software products, combined with our optical switches, support rapid,
automated planning, provision and restoration of the optical network using
point and click operations. This capability addresses the time-to-market
requirements that our service provider customers must meet. In addition, our
products reduce service providers' costs by delivering mesh networking and
eliminating expensive SONET/SDH equipment while still providing all of the
operational features needed to manage networks.

Aurora 32. The Aurora 32 is a compact optical switch designed to connect
optical paths primarily in small central offices or metropolitan networks. The
Aurora 32 is designed for service providers that desire equipment that occupies
a small amount of floor space. This system switches 32 optical channels under
software control that can carry data with speeds ranging from 155 megabits per
second up to 2.5 gigabits per second to support the rapidly changing
environment of metropolitan areas. Through simple software commands, service
providers can upgrade the speed of an optical channel without changing any
hardware. The Aurora 32 is commercially available and has been carrying live
traffic in customer networks since the first quarter of 1999.

Aurora Optical Switch. The Aurora Optical Switch is designed to provide
automated service delivery and restoration of optical services in primarily
regional and national networks. Its initial capacity delivers 1.28 terabits per
second of switching bandwidth or 512 optical channels at 2.5 gigabits per
second. Each of the channels supports either SONET or SDH signals under
software control. The Aurora Optical Switch operates at optical signal speeds
up to 10 gigabits per second and is designed for service providers that
anticipate high rates of growth in their network locations. The Aurora Optical
Switch is modular and designed to grow to many times its initial capacity while
the network and product remain in service. The Aurora Optical Switch is
currently in lab evaluation at a customer site and has undergone customer
evaluations at our facility.

Aurora Full-Spectrum. The Aurora Full-Spectrum is an all-optical switch
currently in development. The Aurora Full-Spectrum will feature an all-optical
switch that is being designed to switch at OC-768 and faster signal speeds. It
supports the mesh networking features and intelligence found in our other
products, while switching optical traffic at more than 40 gigabits per second.

StarNet Operating System--Service Delivery and Restoration
Software. StarNet is the operating system software for our optical switches.
StarNet is purchased by service providers in conjunction with our optical
switches. The StarNet software provides communication between switches, routes
optical signals around network failures and bottlenecks and performs optical
service provisioning for the mesh networks. Our StarNet software allows a
single path, called the protection path, to serve as backup to several working
paths, saving much of the equipment cost of traditional ring networks. StarNet
is currently in service.

Wavelength Management System--Network Management Software. Our Wavelength
Management System provides fault location, network configuration, performance
monitoring and analysis and network security. In addition, this system provides
the capability to operate, administer, maintain and provision the entire
optical switching network, not just individual network elements. Our Wavelength
Management System is currently in service.

PlaNet--Software Planning Tool for Optical Networks. PlaNet allows
customers to plan and design networks with optical switches. This tool allows
the user to optimize the network plan for minimum cost and provides the user
with graphical network cost comparisons so they can compare SONET/SDH ring
architectures with optical mesh architectures. PlaNet is currently in service.

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Customers

Our target customer base includes emerging and established service
providers. These include long-distance carriers, wholesale service providers,
competitive local exchange carriers, Internet service providers and cable
operators. We have been shipping our products since January 1999 and our
products have been in service and carrying live traffic for more than one year.
In 1999, two customers, Extant and Telcordia Technologies, accounted for 63%
and 27% of our revenues, respectively, and revenues under our contract with
Extant, which was recently transferred to Dynegy Connect, represented
approximately 99% of our revenues for the six months ended June 30, 2000.

We have a five-year contract with Cable & Wireless, a multinational
provider of voice, data and network services. Under the terms of this contract,
Cable & Wireless has a minimum purchase commitment of $350 million for the
worldwide deployment of our products, including the Aurora Optical Switch, the
Wavelength Management System and the StarNet Operating System. Cable & Wireless
is conducting laboratory testing of our Aurora Optical Switch. We expect to
commence commercial shipment under this contract during the first quarter of
2001. Our agreement with Cable & Wireless gives it the right to reduce its
minimum purchase commitment from $350 million to $200 million if we do not
maintain a technological edge so that there exists in the marketplace superior
technology that we have not matched. However, if the minimum purchase
commitment under our agreement is reduced, then, at the end of the contract
term, all purchases made by Cable & Wireless, including prior purchases, will
be repriced at a higher rate. Cable & Wireless has the right to terminate the
agreement if we breach our obligations under the contract and fail to remedy
the breach within 30 days, we are prevented by forces beyond our control from
performing our obligations under the contract for more than 60 days or we
persistently breach our obligations under the contract, whether or not cured.

We have a five-year contract with Dynegy Connect. On September 29, 2000,
Extant was acquired by Dynegy Global Communications, a wholly-owned subsidiary
of Dynegy, a publicly-traded energy company. As part of the acquisition, our
contract with Extant was transferred to Dynegy Connect, a limited partnership
owned 80% by subsidiaries of Dynegy and 20% by Telstra Corporation, an
Australian telecommunications and information services company. Dynegy has
announced that it plans to proceed with Extant's planned network build-out. We
expect Dynegy Connect will purchase approximately $250 million of products
under the contract, although it has no obligation to do so. However, under the
terms of this contract, Dynegy Connect is required to purchase its full
requirements for optical switches from us during the first three years of the
contract. Dynegy Connect has the right to terminate the agreement if, among
other things, we breach a material obligation under the contract and fail to
remedy the breach within 30 days, we violate any applicable law and so
materially impair Dynegy Connect's ability to perform its material obligations
or receive its material benefits under the contract or Dynegy Connect cannot
obtain acceptable financing for the transaction. Our Aurora 32 optical switch,
Wavelength Management System, PlaNet and StarNet Operating System have been in
service in the Dynegy Connect network since April 2000. Dynegy Connect is
conducting laboratory testing of our Aurora Optical Switch, and we expect to
commence commercial shipment under this contract during the first quarter of
2001.

We have a three-year contract with Qwest, a multinational provider of
voice, data and network services. Under the terms of this contract, Qwest has a
minimum purchase commitment of $300 million for the deployment of our products,
including the Aurora Optical Switch, the Aurora Full-Spectrum and the StarNet
Operating System. We expect to commence commercial shipment under this contract
during the first quarter of 2001. If we breach our obligations under the
contract and fail to remedy the breach within 30 days, Qwest, through binding
arbitration, may have the right to terminate the agreement.

We also have shipped our Aurora 32 optical switch and other custom products
to the U.S. Department of Defense as part of their high-speed optical
networking program. Shipments are completed for this contract. Our agreement
with the U.S. Department of Defense to provide maintenance expired on November
1, 2000.

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Sales and Marketing

We sell our products through a direct sales force. We intend to establish
relationships with selected distribution and marketing partners, both
domestically and internationally, in order to extend our reach and serve new
markets. As of June 30, 2000, our sales and marketing organization consisted of
53 employees, 14 of whom are located in our headquarters in Oceanport, New
Jersey and 39 of whom are located in other sales and support offices around the
United States. We intend to expand our sales force in Europe and may also
expand our sales force into other international markets.

Our marketing objectives include building market awareness and acceptance
of our company and our products by working very closely with our prospective
customers, industry analysts and consultants. We use our Web site as a major
communications vehicle, speak at relevant industry events and participate
actively in relevant standards organizations such as the Optical
Internetworking Forum, the Internet Engineering Task Force and the
Telecommunications Management Forum. We also conduct public relations
activities, including interviews, presentations at industry forums and investor
conferences and demonstrations for industry analysts. In addition, our senior
executives and our sales people have significant industry contacts as a result
of their prior experience.

Customer Service and Support

Our customer service team works collaboratively with our existing and
prospective customers to support their ongoing network deployments and help
them identify and create new high-speed services that they can offer to their
customers. We believe that this assistance is an integral aspect of our sales
and marketing efforts and can drive additional demand for our products. We have
assembled a nationwide team of dedicated customer engineers, and we are
expanding internationally to target new markets and support multinational
customers. As of June 30, 2000, our customer service and support organization
consisted of 20 employees.

Research and Development

We believe that to be successful we must continue to enhance our existing
products and develop new products that meet the rapidly evolving needs of our
customers. We have made, and will continue to make, a substantial investment in
research and development. We have assembled a team of highly-skilled engineers
who have significant data communications and telecommunications industry
experience drawn from approximately 50 companies. Our engineers have expertise
in fields such as optical system design, optical network design, hardware
development and software development, including key Internet protocol routing
expertise. As of June 30, 2000, we had 124 employees and 10 full-time
contractors responsible for product development and quality assurance. We are
focused on enhancing the scalability, performance and reliability of our
intelligent optical switching products.

Intellectual Property, Proprietary Rights and Licensing

Our intellectual property portfolio includes rights to over 30 patents,
more than 60 patents pending and over 15 licenses. Our patents and patent
applications are in the fields of optical switching, algorithms for mesh
networking and optical device technology. The remaining duration of our patents
ranges from 12 to 17 years. Our intellectual property licenses are in the field
of mesh networking and optical switching devices and generally range in
duration from 10 to 17 years.

Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology and product marketing and to
operate without infringing on the

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proprietary rights of others. In addition, we must continue to create and
acquire rights to intellectual property in the areas of optical networking
technology, such as mesh networking, optical switching, switch architecture,
control systems and signaling algorithms. We rely on a combination of patent,
trademark, trade secret and copyright law and contractual restrictions to
protect our intellectual property. We license our intellectual property,
including patents and software, under license agreements, which impose
restrictions on the licensee's ability to utilize the intellectual property.
Finally, we seek to limit disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting access to our
proprietary information.

These legal protections afford only limited protection for our technology
and products. For example, others may independently develop similar or
competing technology or attempt to copy or use aspects of our products or
technology that we regard as proprietary. Furthermore, intellectual property
law may not fully protect products or technology that we consider to be our
own, and claims of intellectual property infringement may be asserted against
us or against our customers in connection with their use of our products.

We also currently license intellectual property from third parties, some
of which may subject us to royalty payments. The intellectual property
associated with optical networking products is evolving rapidly, so protection
under a license that was once adequate may be insufficient in the future. We
may be required to license additional intellectual property from third parties
to develop new products or enhance our existing products. These additional
third-party licenses may not be, and our existing third-party licenses may not
continue to be, available to us on commercially-reasonable terms.

Given the rapid technological changes in this industry, establishing and
maintaining a technology leadership position through the technological and
creative skills of our personnel, new product developments and enhancements to
existing products will be more important to us than excessive reliance on
legally protecting our technology.

Tellium(R) is a federally registered trademark of Tellium. Aurora(TM),
StarNet(TM), Full-Spectrum(TM), PlaNet(TM) and Smarter, Faster Optical
Networks(TM) are also trademarks of Tellium. Any other trademarks or service
marks appearing in this prospectus are trademarks or service marks of the
respective companies that use them.

Competition

Competition in the market for public network infrastructure is intense.
Our competitors include Alcatel, CIENA Corporation, Cisco Systems, Inc.,
Lucent, Nortel Networks Corporation and Sycamore Networks, Inc. The market for
optical switching is expected to grow rapidly and therefore will continue to
attract competitors who will continue to introduce new products. Therefore, we
expect the level of competition to intensify over time. Our established
competitors have longer operating histories, greater name recognition, larger
customer bases and greater financial, technical, sales, marketing and
manufacturing resources, including more resources devoted to research and
development of new products, than we do. In addition, unlike some of our
competitors, we have only a limited ability to provide vendor-sponsored
financing, which may influence the purchasing decision of prospective
customers. Our competitors could develop new technologies that compete with
our products or even render our products obsolete. In addition, some of our
competitors have more significant customer relationships and broader product
lines than we have.

For us to compete successfully in this market, we must continue to deliver
optical switches that:

. can be easily expanded at low cost to meet the ever-increasing demands
driven by data services;

. lower a service provider's cost of building and operating an optical
network by reducing its complexity and increasing its flexibility;

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. deliver a range of cost-effective solutions for small and large
networks;

. operate with existing equipment and networks;

. comply with all applicable standards;

. increase the level of network reliability for data services;

. allow optical services to be delivered much more quickly and easily than
they are today; and

. provide software tools for service providers to plan, design and operate
their optical networks.

Manufacturing

We outsource almost all of the manufacturing of our products. We design,
specify and monitor all of the tests that are required to meet our internal and
external quality standards.

In August 2000, we signed a contract with Solectron Corporation, a leading
contract manufacturer of high-quality, technology-based equipment, to
manufacture printed circuit boards. Solectron will provide comprehensive
manufacturing services, including assembly, test, control and shipment to our
customers and procure materials on our behalf. Under our contract with
Solectron, we have the option to move final assembly and test functions to
Solectron.

We are currently negotiating with another vendor for chassis assembly and
are also negotiating with several other vendors and distributors to establish
relationships that will support our future growth. In addition, we are
investing in automation, testing and data collection equipment to enable us to
further improve product quality as quickly as possible.

We believe that our relationship with Solectron and the continued
outsourcing of our manufacturing will enable us to:

. expand our access to key components;

. conserve the working capital that would be required to purchase
inventory or develop manufacturing facilities of our own;

. better adjust manufacturing volumes to meet changes in demand; and

. build and deliver our products more quickly.

We currently purchase products through purchase orders. We cannot assure
you that we will be able to continue this arrangement on a long-term basis on
terms acceptable to us, if at all.

We are in the process of registering with the International Organization
for Standardization, or ISO, for ISO 9001 quality certification.

Employees

As of June 30, 2000, we had 234 employees, of which:

. 124 were in research and development;

. 53 were in sales and marketing, customer service and support;

. 36 were in manufacturing, quality assurance and documentation; and

. 21 were in finance and administration.

We believe our relations with our employees are good. None of our employees
is covered by a collective bargaining agreement. Generally, our employees are
retained on an at-will basis. Only one of our key employees is subject to an
employment agreement. All of our employees are required to sign
confidentiality, non-competition and intellectual property agreements.

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Properties

Our headquarters are located in Oceanport, New Jersey and consist of
approximately 72,000 square feet of leased space, the lease for which expires
in April 2003. We also have a major facility adjacent to our headquarters,
which consists of approximately 68,000 square feet. This lease expires in
November 2006.

Legal Proceedings

We are not a party to any pending material legal proceedings.

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MANAGEMENT

Executive Officers and Directors

Our executive officers and directors, and their respective ages and
positions, are set forth below.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harry J. Carr................... 44 Chief Executive Officer and Chairman of the
Board of Directors
Richard W. Barcus............... 53 President and Chief Operating Officer
Krishna Bala.................... 36 Chief Technology Officer
Robert J. DeSantis.............. 44 Executive Vice President
Michael J. Losch................ 45 Chief Financial Officer, Secretary and
Treasurer
William B. Bunting.............. 42 Director
Michael M. Connors.............. 59 Director
Jeffrey A. Feldman.............. 37 Director
Edward F. Glassmeyer............ 59 Director
William A. Roper, Jr............ 54 Director
Richard C. Smith................ 58 Director
Michael G. Albers............... 39 Senior Vice President, Sales
Grace M. Carr................... 53 Vice President, Marketing
Thomas J. Cassa................. 51 Vice President, Engineering
Anthony J. DeMambro............. 58 Vice President, Operations
Nicholas P. DeVito.............. 37 Vice President, Product Management and
Business Development
</TABLE>

Harry J. Carr has served as Chairman and Chief Executive Officer of our
company since January 2000. From 1998 to 2000, Mr. Carr served as Chief
Operating Officer and then President of Lucent Technologies, Inc.'s Broadband
Carrier Networks unit, Lucent Technologies' service provider-focused data
switching business. From 1997 to 1998, Mr. Carr served as President, Chief
Operating Officer and Director of Yurie Systems, Inc., a network equipment
provider. From 1992 to 1997, he served in various executive positions at AT&T
Corp., a telecommunications provider, including Market Development Vice
President for the Atlantic States region, National Program Manager of AT&T
Local Services and Vice President of AT&T's Defense Markets Division. Mr. Carr
earned a B.S. in Finance from Fairfield University and a J.D. from the
University of Connecticut Law School.

Richard W. Barcus has served as President and Chief Operating Officer of
our company since May 1999. He originally joined our company in February 1998
as Vice President of Marketing and Product Management. From 1992 to 1998,
Mr. Barcus was employed at ADC Telecommunications, Inc., a communications
equipment provider, where he served as General Manager, Americas, from 1997 to
1998, Vice President of Marketing from 1996 to 1997 and Vice President of Sales
from 1995 to 1996. Mr. Barcus earned a B.A. from Aurora University and an
M.B.A. from George Mason University.

Krishna Bala has served as Chief Technology Officer of our company since
December 1999. Dr. Bala is the lead system architect for our Aurora Optical
Switch. From 1997 to 1999, Dr. Bala served as our Manager of Optical Cross-
Connect Product development. Prior to joining our company, Dr. Bala was a
scientist with Bellcore's Optical Networking Group, a research and
telecommunications services provider, from 1992 to 1997. Dr. Bala earned a
Bachelors in Electrical Engineering from Bombay University in India, a Masters
in Electrical Engineering from Columbia University and a Ph.D. in Electrical
Engineering from Columbia University for his work on optical wavelength
routing.

Robert J. DeSantis has served as Executive Vice President of our company
since November 2000. Prior to joining our company, from 1986 to 2000, Mr.
DeSantis was employed by Citizens Communications Company, a communications
service provider, as Chief Financial Officer,

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Vice President and Treasurer from 1997 to 2000 and as Vice President and
Treasurer from 1991 to 1997. Mr. DeSantis also served as Chief Financial
Officer, Vice President and Treasurer of all of Citizens Communications'
subsidiaries, including Electric Lightwave, Inc., an integrated communications
service provider, from 1991 to 2000. Mr. DeSantis earned a B.S.E. and an M.S.
from the University of Pennsylvania and a J.D. from Boston College Law School.

Michael J. Losch has served as Chief Financial Officer, Secretary and
Treasurer of our company since October 1999. From 1998 to 1999, he served as
Chief Financial Officer and Chief Operating Officer of IDF International, an
investment company. From 1997 to 1998, Mr. Losch was Vice President, Finance
and Administration of Cardre, Inc., a cosmetics manufacturing company. From
1978 to 1997, Mr. Losch served in various capacities with Bell Atlantic
Corporation, a telecommunications company, including Special Assistant to New
Jersey Governor's Office of Business Ombudsman from 1996 to 1997, Executive
Director for Bell Atlantic-New Jersey's Cable Telecom Project from 1995 to 1996
and Chief Financial Officer of Bell Atlantic-New Jersey from 1993 to 1995.
Mr. Losch earned both a B.S. and an M.B.A. from Lehigh University.

William B. Bunting has been a member of our company's board of directors
since December 1999. Mr. Bunting has served as a partner of Thomas Weisel
Partners Group LLC, a merchant bank, since 1998. From 1987 to 1998, Mr. Bunting
held a number of positions with Montgomery Securities in the private equity,
corporate finance and mergers and acquisitions departments. Mr. Bunting
currently serves on the board of directors for Hostcentric, Inc., a Web site
hosting company, OptCom, Inc., a manufacturer of thin film, and General
Bandwidth, Inc., a broadband telephony company. Previously, Mr. Bunting served
on the board of directors of Netcom Systems, a network analysis company. He
earned an A.B. from Stanford University and an M.B.A. from the Harvard Business
School.

Michael M. Connors has been a member of our company's board of directors
since June 2000. From 1992 to 1998, he held the office of president of AOL
Technologies, an Internet service provider, where he led the creation and
growth of AOLnet and the development of AOL software and services. Dr. Connors
is currently a member of the board of directors of the AOL Foundation and
MedSpecialists, an Internet-based provider of medical information. In 1999, he
was appointed Chairman of the board of Webley Systems, a communications
provider. He is also a director of The Connors Foundation and a member of the
advisory board of the European Technology Fund. Mr. Connors earned a B.S. in
Engineering, an M.S. in Statistics and a Ph.D. in Applied Mathematics from
Stanford University.

Jeffrey A. Feldman has been a member of our company's board of directors
since December 1999. He has served as President and Chief Executive Officer of
Everest Broadband Networks, a telecom services provider, since 2000. Dr.
Feldman has also served as a member of the General Partnership of Pequot
Venture Partners, L.P., the venture fund at Pequot Capital Management, since
1998. From 1997 to 1998, Dr. Feldman served as Investment Director for Digital
Media Capital, LLC. From 1995 to 1996, he served as an Associate at Canaan
Partners, an investment firm. Dr. Feldman currently serves on the board of
directors of Alidian Networks, an optical networking provider, Ennovate
Networks, a data communications company, and Sphera Optical Networks, an
optical local exchange carrier. Dr. Feldman earned a B.S. and a Ph.D. from the
University of Connecticut and an M.B.A. from the Yale School of Management.

Edward F. Glassmeyer has been a member of our company's board of directors
since May 1997. Mr. Glassmeyer is a founding general partner of Oak Investment
Partners, a venture capital firm, where he has served as a general partner or
managing member of various affiliated funds since 1978. Mr. Glassmeyer serves
on the board of directors of Mobius Management Systems, a Web-based software
solutions provider, The Street.com, a financial news and analysis Web site, and
several private Oak portfolio companies in the information technology and
Internet infrastructure sectors. Since 1996, Mr. Glassmeyer has served as
Overseer of The Tuck School at Dartmouth College. Mr. Glassmeyer earned a B.A.
from Princeton University and an M.B.A. from the Tuck School at Dartmouth
College.

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William A. Roper, Jr. has been a member of our company's board of directors
since September 1998. Mr. Roper has served as Corporate Executive Vice
President and Chief Financial Officer of Science Applications International
Corporation, or SAIC, a technology services company, since 2000. From 1990 to
1999, Mr. Roper served as Senior Vice President and Chief Financial Officer of
SAIC and from 1999 to 2000, he served as Executive Vice President of SAIC. Mr.
Roper currently serves on the boards of directors of Daleen Technologies, Inc.,
an eBusiness software provider, Verisign, Inc., a provider of Internet-based
trust services, Intrusion.com, a computer networking company, VocalData, Inc.,
a communications hardware provider, and several other corporations and non-
profit institutions. Mr. Roper earned a B.A. in Mathematics from the University
of Mississippi, and has graduated from Southwestern Graduate School of Banking
at Southern Methodist University and Stanford University, Financial Management
Program.

Richard C. Smith has been a member of our company's board of directors
since February 2000. Since 1998, he has served as Chief Executive Officer of
Telcordia Technologies, a telecommunications software provider acquired by SAIC
in 1997. Prior to joining Telcordia Technologies, from 1991 to 1997, Dr. Smith
was a Senior Vice President at Sprint Corp., a telecommunications company,
where he was responsible for brand investment strategy and management, public
relations, training and education, total quality management and the Sprint
Foundation. Dr. Smith earned a B.E. from Vanderbilt University and an M.S. and
a Ph.D. from the Department of Engineering and Applied Science at Yale
University.

Michael G. Albers has served as Senior Vice President of Sales for our
company since March 2000. Prior to joining our company, from 1999 to 2000, Mr.
Albers served as a Vice President of Sales for Lucent Technologies, a
communications company. From 1995 to 1999, Mr. Albers served as Vice President
of Sales at Ascend Communications, a data networking company. Mr. Albers earned
a B.S. in Computer Science from the University of Maryland.

Grace M. Carr has served as Vice President of Marketing of our company
since March 2000. Prior to joining our company, from 1998 to 2000, Ms. Carr was
Vice President of Sales and Marketing at Northchurch Communications, a data
communications provider acquired by Newbridge Networks in 1999. From 1996 to
1998, Ms. Carr was Vice President of Corporate Marketing at Bay Networks, a
data communications company. From 1994 to 1996, Ms. Carr was Vice President of
Sales and Marketing at Xylogics, a data communications company acquired by Bay
Networks in December 1995. Ms. Carr earned a B.A. in Mathematics from Douglass
College.

Thomas J. Cassa has served as Vice President of Engineering of our company
since April 2000. Prior to joining our company, from 1999 to 2000, he was Vice
President of Engineering at Northchurch Communications, a data communications
company acquired by Newbridge Networks in 1999. From 1998 to 1999, Mr. Cassa
was Vice President of Engineering at Telco Systems, a telecommunications
company. From 1997 to 1998, Mr. Cassa held senior engineering positions and led
engineering teams at Argon Networks, acquired by Siemens in March 1999. From
1995 to 1997, he held senior engineering positions at Nexion, an Internet
hardware provider. Mr. Cassa earned his B.E.E. from City University of New
York.

Anthony J. DeMambro has served as Vice President of Operations of our
company since January 2000. From 1998 to 2000, he served as Vice President of
Operations for Lucent Technologies, Data Network System Carrier Products. From
1996 to 1998, he served as Vice President of Operations for Yurie Systems, a
network equipment provider. From 1993 to 1996, he was Vice President of
Operations for Steinbrecher Corporation, now Tellabs Wireless, Inc., a cellular
equipment manufacturer.

Nicholas P. DeVito has served as our Vice President, Product Management and
Business Development since January 2000. Mr. DeVito joined our company as
Director of Product Management in August 1998. From 1985 to 1998, he held
senior positions at Bell Laboratories, a research and development organization,
and AT&T, a telecommunications provider, in network

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<PAGE>

engineering, local services delivery, network design and operations, product
management and network restoration and reliability. He earned a B.S. and an
M.S. in Electrical Engineering from Columbia University and an M.B.A. from New
York University.

Board of Directors

Our board of directors consists of seven members. Upon the completion of
this offering, the terms of office of the board of directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 2001, will consist of Messrs. Glassmeyer and Smith;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2002, will consist of Messrs. Bunting and Roper; and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2003, will
consist of Messrs. Carr, Connors and Feldman. At each annual meeting of
stockholders after the initial classification, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. This
classification of the board of directors may have the effect of delaying or
preventing a change of control or management of our company. Each officer
serves at the discretion of the board of directors. There are no family
relationships between any of our directors or officers.

Board Committees

In 1999, the members of our compensation committee were Mr. Glassmeyer and
Dr. William K. Hagan. Upon the completion of this offering, our board of
directors will have a compensation committee and an audit committee. The
members of our compensation committee will be Messrs. Bunting, Feldman and
Glassmeyer. Our compensation committee will review and make recommendations to
our board regarding compensation for our executive officers. The compensation
committee will also administer our stock option plans. The members of our audit
committee will be Messrs. Bunting, Connors and Feldman. Our audit committee
will review and monitor our financial statements and accounting practices, make
recommendations to our board regarding the selection of independent auditors
and review the results and scope of the audit and other services provided by
our independent auditors.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee in 1999 and none of the
people who will be members of our compensation committee upon completion of
this offering are, or have ever been at any time since our incorporation, one
of our officers or employees. None of the members of our compensation committee
in 1999 and none of the people who will be members of our compensation
committee upon completion of this offering serve as a member of the board of
directors or compensation committee of any entity that has one or more of our
executive officers serving as a member of its board of directors or
compensation committee.

Director Compensation

Our board of directors determines the amount of any fees, whether payable
in cash, shares of common stock or options to purchase common stock, and
expense reimbursements that directors receive for attending meetings of the
board of directors or committees of the board. To date, we have not paid any
fees to our directors, but have reimbursed them for their reasonable expenses
in attending board and board committee meetings. We have granted options to our
directors in the past, and we may continue to do so in the future.

52
<PAGE>

As of October 18, 2000, we have granted options to purchase shares of our
common stock at an exercise price of $1.55 per share to the following
directors:

<TABLE>
<CAPTION>
Name Number of Options
---- -----------------
<S> <C>
William B. Bunting 60,000
Jeffrey A. Feldman 60,000
Edward F. Glassmeyer 60,000
William A. Roper, Jr. 60,000
Richard C. Smith 60,000
Michael M. Connors 100,000
</TABLE>

Executive Compensation

The following table sets forth the total compensation paid to our former
Chief Executive Officer and to our former Chairman who served in 1999 and each
of the four other most highly-compensated executive officers who served in 1999
and whose annual salary and bonus exceeded $100,000 for services rendered to us
in all capacities during the year ended December 31, 1999. Harry J. Carr was
appointed as our Chairman and Chief Executive Officer in January 2000.

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Other Securities
------------------ Annual Underlying
Name and Principal Position Salary($) Bonus($) Compensation($) Options(#)
--------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Michael Hodges(1)
Former Chief Executive
Officer....................... $266,297 $ 12,500 $ 30,810(4) 2,180,820

Farouque Mesiya(2)
Former Chairman............... 232,029 -- -- --

Richard W. Barcus(3)
President and Chief Operating
Officer....................... 150,078 37,000 -- 2,400,000

John K. Kostibas
Vice President, Sales......... 152,763 112,500 -- 990,000

Krishna Bala
Chief Technology Officer...... 126,900 -- -- 2,700,000

Nicholas P. DeVito
Vice President, Product
Management and Business
Development................... 125,458 30,000 -- 930,000
</TABLE>
--------
(1) Mr. Hodges was our Chief Executive Officer and President from January 1999
until May 1999.
(2) Mr. Mesiya was our Chairman from January 1999 until June 1999. We conducted
a search for our Chairman from July 1999 to December 1999.
(3) Mr. Barcus was appointed as our President and Chief Operating Officer in
May 1999.
(4) We provided Mr. Hodges with a car allowance of $13,694 and a housing
allowance of $17,116.

53
<PAGE>

Option Grants

The following table sets forth information regarding options we granted to
the executive officers named in the Summary Compensation Table during 1999. The
potential realizable value is calculated based on the term of the option at its
time of grant. It is calculated assuming that the fair market value of common
stock on the date of grant appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. These numbers
are calculated based on the requirements of the Securities and Exchange
Commission and do not reflect our estimate of future stock price growth. The
percentage of total options granted to our employees in the last fiscal year is
based on options to purchase an aggregate of 24,143,016 shares of common stock
granted under our 1997 employee stock option plan for fiscal year 1999. We have
never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Option Grants
in Last Fiscal Year
Individual grants
----------------------------------------
Percent Potential Realizable
of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted Stock Price
Underlying to Appreciation for
Options Employees Exercise Option Term(/1/)
Granted in Fiscal Price Expiration -----------------------------------
Name (#) Year ($/Sh) Date 0% ($) 5% ($) 10% ($)
---- ---------- --------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Hodges.......... 2,180,820 9.03% $0.08 05/05/09 $30,357,014 $49,558,098 $79,016,330

Farouque Mesiya......... -- -- -- -- -- -- --

Richard W. Barcus....... 136,200 0.56 0.08 05/05/09 1,895,904 3,095,080 4,934,852
450,000 1.86 0.08 06/23/09 6,264,000 10,226,036 16,304,577
1,813,800 7.51 1.07 12/08/09 23,452,434 39,422,081 63,922,655

John K. Kostibas........ 204,000 0.85 0.08 05/05/09 2,839,680 4,635,803 7,391,408
82,200 0.34 0.08 06/23/09 1,144,224 1,867,956 2,978,303
703,800 2.92 1.07 12/08/09 9,100,134 15,296,759 24,803,597

Krishna Bala............ 120,000 0.50 0.08 05/05/09 1,670,400 2,726,943 4,347,887
162,000 0.67 0.08 06/23/09 2,255,040 3,681,373 5,869,648
2,418,000 10.02 1.07 12/08/09 31,264,740 52,554,081 85,216,110

Nicholas P. DeVito...... 72,000 0.30 0.08 05/05/09 1,002,240 1,636,166 2,608,732
180,000 0.75 0.08 06/23/09 2,505,600 4,090,414 6,521,831
678,000 2.81 1.07 12/08/09 8,766,540 14,736,008 23,894,343
</TABLE>

--------

(/1/) Potential realizable values are computed by (i) multiplying the number of
shares of common stock subject to a given option by $14.00, the mid-point
of the range shown on the cover page of this prospectus, (ii) assuming
that the aggregate stock value derived from that calculation compounds at
the annual 0%, 5% or 10% rates shown in the table over the term of the
options, and (iii) subtracting from that result the aggregate option
exercise price. The potential realizable values set forth above do not
take into account applicable tax expense payments that may be associated
with such option exercises. Actual realizable value, if any, will be
dependent on the future price of the common stock on the actual date of
exercise, which may be earlier than the stated expiration date.

54
<PAGE>

Fiscal Year-End Option Values

The following table provides some information with respect to options held
by the executive officers named in the Summary Compensation Table as of
December 31, 1999. No options were exercised during 1999 by any of these
executive officers. Options are "in-the-money" if the value of our common stock
exceeds the exercise price of the options. There was no public trading market
for the common stock as of December 31, 1999. Accordingly, the values set forth
below were calculated based on an assumed initial public offering price of
$14.00 per share, the mid-point of the range shown on the cover page of this
prospectus, less the exercise price per share, multiplied by the number of
shares underlying the options.

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal the-Money Options at
Year-End (#) Fiscal Year-End ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael Hodges.............. 2,180,820 -- $30,357,014 $ --
Farouque Mesiya............. -- -- -- --
Richard W. Barcus........... 630,000 2,370,000 8,485,800 31,502,538
John K. Kostibas............ 247,500 1,642,500 3,455,100 22,192,938
Krishna Bala................ -- 2,700,000 -- 35,190,180
Nicholas P. DeVito.......... 15,000 975,000 209,400 12,902,580
</TABLE>

Employment Agreements

Harry J. Carr. We entered into an executive employment agreement with Mr.
Carr, dated December 21, 1999, which provides for his employment as Chairman of
the Board and Chief Executive Officer beginning in January 2000 for a period of
two years or until he resigns, is disabled, dies or is terminated by us for any
reason. The agreement will be renewed automatically for one-year periods unless
we or Mr. Carr give notice of intent not to renew at least 90 days before the
end of an employment term.

Mr. Carr began to receive an annual base salary of $300,000 in January
2000, subject to increases as determined by our board of directors based upon
Mr. Carr's performance and other factors described in the agreement. In
addition, we granted options to purchase 13,200,000 shares of our common stock
to Mr. Carr at an exercise price of $1.07 per share, which Mr. Carr exercised
on April 4, 2000. Mr. Carr will also be eligible to receive a bonus of up to
66-2/3% of his base salary each year during the term of employment in which we
and Mr. Carr achieve objectives mutually agreed upon by Mr. Carr and our board
of directors for such fiscal year. If Mr. Carr exceeds the agreed upon
objectives, the board of directors may provide for an additional bonus. The
agreement also provides for benefits, the reimbursement of expenses and the
payment of the rental costs of Mr. Carr's residence near our offices.

The employment agreement also prohibits Mr. Carr, during his employment
with us and for one year after his employment ends, from soliciting any of our
employees, or interfering with any of our business relationships. The agreement
also requires that Mr. Carr protect Tellium's trade secrets and confidential
information during his employment with us, and for one year after his
employment ends.

Pursuant to the employment agreement, if we terminate Mr. Carr's employment
for any reason or if Mr. Carr exercises his right to terminate the agreement
within six months of the occurrence of any of the following:

. an adverse change in Mr. Carr's title, position, duties, powers and
authority, reporting relationship or the scope of his responsibilities,

55
<PAGE>

. the occurrence of a change of control,

. a failure by our successor to assume Mr. Carr's employment agreement in
a situation other than a change in control, or

. a material breach of the employment agreement that remains uncured for
14 days following our receipt of notice of the breach,

Mr. Carr is entitled to receive, among other things, his annual base salary for
one year paid ratably over this period, any unpaid bonuses earned prior to
termination, any unpaid benefits under group health and life insurance plans
for one year after termination, any unpaid benefits under employee benefit
plans and any reimbursable expenses.

According to the employment agreement, if Mr. Carr dies or becomes
disabled, he is entitled to receive all of the amounts described above, except
that he will only be entitled to receive his then-current salary through the
last day of the month he died or became disabled and any unpaid bonus for that
portion of the year that the death or disability occurred.

Mr. Carr may also terminate the employment agreement at any time upon 30
days written notice. In that event, he will be entitled to receive his salary
as of the date of termination, any unpaid bonus earned with respect to prior
years, any unpaid benefits under group health and life insurance plans or
employee benefit plans and any reimbursable expenses.

The employment agreement also provides that if Mr. Carr receives a payment
or benefit upon a change of control that is subject to an excise or similar-
purpose tax, we will pay Mr. Carr such additional compensation as is necessary
to place him in the same after-tax position he would have been in had no such
taxes been paid or incurred.

Employee Benefit Plans

Amended and Restated 1997 Employee Stock Incentive Plan

We have an Amended and Restated 1997 Employee Stock Incentive Plan. The
following is a summary description of the material terms of the plan.

Overview. The purpose of the plan is to provide an additional incentive to
key employees and consultants to further our growth, development and financial
success and to enable us to obtain and retain the services of key employees
considered essential to our long-range success by offering them an opportunity
to own options to purchase our common stock and restricted stock.

Share Reserve. As of October 31, 2000, 37,576,412 stock options were
outstanding and 7,777,790 shares were available for future grant.

Eligibility. Our employees, officers and consultants are eligible to
receive awards under our stock option plan.

Options. Unless determined by our board of directors or the compensation
committee in its sole discretion, options to purchase our common stock granted
under the plan are exercisable in cumulative installments, one-quarter on the
first anniversary of the date of option grant and the remainder in 36 equal
monthly installments commencing on the first day of the 13th month following
the date of option grant. At any time after the grant of an option, our board
of directors or the compensation committee may, in its sole discretion,
accelerate the period during which an option vests. There are options
outstanding that have different vesting schedules, including vesting 25% per
year over four years.

56
<PAGE>

Restricted Stock. Our board of directors or the compensation committee may
grant restricted stock under our stock option plan and may condition the grant
or vesting upon the attainment of performance goals as established by the
compensation committee. Our board of directors or the compensation committee
may also condition the grant of restricted stock upon the continued service of
the grantee. The terms of the stock option plan state that the conditions for
grant or vesting need not be the same with respect to each recipient. In
addition, our board of directors or the compensation committee may, at any time
and in its sole discretion, accelerate or waive any of the foregoing
restrictions.

Administration. Our stock option plan will be administered by our board of
directors or by the compensation committee. Under the stock option plan, our
board of directors or the compensation committee has the authority to, among
other things:

. select the employees, officers and consultants to whom stock options and
restricted stock awards will be granted;

. determine the type, size and the terms and conditions of stock options
and restricted stock awards; and

. establish the terms for treatment of stock options and restricted stock
awards upon termination of employment or change in control.

Corporate Events. In the event of a transaction in which:

. we are not the surviving entity,

. we sell all or substantially all of our assets,

. we liquidate or dissolve or

. we are the surviving entity but in which a majority of our stockholders
prior to the transaction do not hold a majority of our voting power
after the transaction,

our board of directors or the compensation committee, in its sole discretion,
may provide:

. for the purchase of any option for a cash amount equal to the amount
that a share of common stock would receive in the transaction, assuming
the option was exercised, after deducting the exercise price of the
option;

. that an option cannot be exercised after the event;

. for the replacement of the option with other rights or property;

. for the exercise of the option for a specified period of time prior to
the transaction;

. that an option or award will be assumed by the successor corporation or
that the successor corporation will provide a substituted option;

. that the restrictions applicable to any outstanding restricted stock
shall lapse and that all restricted shares shall become fully vested and
transferable; or

. for adjustments in the terms and conditions of awards.

Termination and Amendment. The stock option plan has no termination date,
but no incentive stock options may be granted under the plan after the
expiration of 10 years from the date of its adoption by our board of directors.
Our board of directors or the compensation committee will be able to, at any
time and from time to time, amend or terminate the stock option plan. However,
to the extent necessary under applicable law, no such change will be effective
without the requisite approval of the stockholders. In addition, no such change
will alter or adversely impair any rights or obligations under any stock option
and restricted stock awards previously granted, except with the consent of the
grantee.

57
<PAGE>

CERTAIN RELATIONSHIPS AND TRANSACTIONS

Related-Party Transactions

We paid approximately $118,000 in consulting expenses to Telcordia
Technologies, Inc., an affiliate of Science Applications International
Corporation, or SAIC, and Telcordia Venture Capital Corporation during 1999.
Telcordia Technologies was formerly known as Bellcore, one of our original
investors that was subsequently acquired by SAIC.

Approximately $1.4 million of our revenues in 1999 were derived from sales
to Telcordia Technologies in connection with a project with the U.S. Department
of Defense. We also purchased approximately $360,000 of product from Telcordia
Technologies in 1999.

On our board of directors, we have one representative from SAIC and one
representative from Telcordia Technologies.

Securities Transactions

Issuance of warrants and Series C preferred stock. On February 9, 1999, in
connection with a December 1998 $16.0 million bridge financing under which our
then preferred stockholders received senior convertible promissory notes from
us, we issued warrants to purchase shares of our Series A preferred stock at an
exercise price of $4.58 to the following persons who own of record or
beneficially more than five percent of our securities:

. warrants to purchase an aggregate of 185,370 shares of Series A
preferred stock to entities affiliated with Oak Investment Partners;

. a warrant to purchase 93,750 shares of Series A preferred stock to Ortel
Corporation, which was recently acquired by Lucent Technologies, Inc.;
and

. a warrant to purchase an aggregate of 484,020 shares of Series A
preferred stock to SAIC.

On February 11, 1999, we sold shares of our Series C preferred stock at a
purchase price of $9.15 per share for cash and conversion of our senior
convertible promissory notes originally issued in December 1998, including
accrued and unpaid interest, to the following persons who own of record or
beneficially more than five percent of our securities:

. 330,194 shares to entities affiliated with Oak Investment Partners in
exchange for the conversion of our senior promissory notes in the
aggregate amount of $3,021,275;

. 166,475 shares to Ortel Corporation, in exchange for the conversion of
our senior promissory note in the aggregate amount of $1,523,246; and

. 861,961 shares to SAIC and various of its affiliates in exchange for the
conversion of our senior promissory note in the aggregate amount of
$7,886,943.

Issuance of senior promissory notes. On June 30, 1999, we sold senior
promissory notes with an annual interest rate of 9.75%, to the following
persons who own of record or beneficially more than five percent of our
securities in the following amounts:

. $825,646 to entities affiliated with Oak Investment Partners;

. $960,231 to Ortel Corporation; and

. $2,155,853 to SAIC.

58
<PAGE>

Issuance of Series D preferred stock. In December 1999, we sold shares of
our Series D preferred stock at a purchase price of $9.15 per share for cash
and conversion of our senior promissory notes to the following persons who own
of record or beneficially more than five percent of our securities:

. 478,596 shares to entities affiliated with Oak Investment Partners in
exchange for $3,519,071 in cash and our senior promissory notes in the
aggregate amount of $860,082;

. 524,736 shares to Ortel Corporation in exchange for $3,801,054 in cash
and our senior promissory note in the aggregate amount of $1,000,280;

. 518,663 shares to SAIC in exchange for $2,500,000 in cash and our senior
promissory note in the aggregate amount of $2,245,766; and

. 2,732,241 shares to entities affiliated with Thomas Weisel Capital
Partners LLC in exchange for $25,000,005 in cash.

Issuance of Series A preferred stock. On June 30, 2000, substantially all
of the holders of the Series A preferred stock warrants, which were originally
issued on February 9, 1999, exercised these warrants, and we issued shares of
our Series A preferred stock to the following persons who own of record or
beneficially more than five percent of our securities:

. 185,370 shares to entities affiliated with Oak Investment Partners; and

. 484,020 shares to SAIC.

Issuance of Series E preferred stock. On September 20, 2000, we sold shares
of our Series E preferred stock at a purchase price of $30.00 per preferred
share to the following persons who own of record or beneficially more than five
percent of our securities:

. 33,333 shares to entities affiliated with Thomas Weisel Capital Partners
LLC in exchange for $999,990 in cash; Thomas Weisel Partners LLC, an
affiliate of Thomas Weisel Capital Partners LLC, received 91,375 shares
of Series E preferred stock as the fee for its services as co-placement
agent in the Series E preferred stock offering.

Restricted Stock Agreements

Harry J. Carr. On December 21, 1999, we granted stock options to Mr. Carr
to purchase an aggregate of 13,200,000 shares of our common stock at an
exercise price of $1.07 per share. On April 4, 2000, Mr. Carr exercised these
stock options in full and received 13,200,000 shares of our common stock, which
are subject to two restricted stock agreements. In connection with the stock
purchases, Mr. Carr delivered two promissory notes to us in the aggregate
amount of $14,099,800, less the par value of the stock purchased, which was
paid in cash. Each promissory note is secured by a pledge of the purchased
stock.

Mr. Carr purchased 12,000,000 shares of our common stock under a restricted
stock agreement dated April 4, 2000. Under the terms of this agreement,
6,000,000 shares vested as of January 2, 2000. Of the remaining 6,000,000
shares, 1,500,000 will vest on December 21, 2000, and 4,500,000 will vest
ratably on a monthly basis over the succeeding three years.

The restricted stock agreement provides that Mr. Carr may only transfer his
unvested shares to us or by will or laws of descent and distribution, under a
domestic relations order, by gift to members of his family, to trusts solely
for the benefit of his family members, to persons with whom he has had a
significant pre-existing business or personal relationship, to entities in
which such family members, friends and/or trusts are the only partners and to
charitable organizations.

59
<PAGE>

Under the terms of the restricted stock agreement, we have the right to
repurchase any unvested shares of restricted stock, at a per share price equal
to the exercise price per share paid by Mr. Carr, plus accrued interest, if Mr.
Carr voluntarily terminates his employment with us. Our repurchase right is
exercisable only during the one-year period following such termination.

The restricted stock agreement also provides that all of the unvested
shares will immediately vest, and Tellium's right of repurchase shall lapse,
upon the occurrence of any of the following:

. the sale or acquisition of beneficial ownership of our equity securities
constituting 50% or more of the total voting power of our stockholders
by a party or group of related parties (other than us or a person that
directly or indirectly controls, is controlled by, or is under common
control with us);

. a merger or consolidation of Tellium with or into another entity and the
holders of our equity securities prior to such transaction possess less
than 50% of the total voting power of the surviving company after such
transaction;

. a complete liquidation or dissolution of Tellium;

. a sale of all or substantially all of our assets; or

. a change in the composition of our board of directors over a 36-month
period such that a majority of the board is no longer comprised of
persons who either have been board members continuously since the
beginning of such period or have been elected or nominated for election
as board members during such period by at least a majority of the
persons who have been board members over that same period.

If, as a result of the acceleration of the vesting of the then-unvested shares
due to a corporate transaction as described above, Mr. Carr is required to pay
an excise tax with respect to the accelerated shares, then Mr. Carr is entitled
to receive an additional payment from us in an amount as is necessary to place
him in the same after-tax position he would have been in had no such excise
taxes been paid or incurred.

Mr. Carr also purchased 1,200,000 shares of our common stock under a second
restricted stock agreement dated April 4, 2000. The terms and conditions of
this agreement are substantially similar to those in the restricted stock
agreement with Mr. Carr described above. The differences are outlined below.
Under the terms of the restricted stock agreement under which Mr. Carr
purchased 1,200,000 shares, those shares will vest according to the following
vesting schedule:

. 1,200,000 shares of common stock will vest upon the conclusion of a
written or oral general equipment purchase agreement involving the sale
of hardware and other equipment by Tellium with one of the large
telecommunications service providers described in the restricted stock
agreement, and the receipt by the service provider of its first
commercial shipment, each to have occurred prior to December 21, 2001;

. 600,000 shares of restricted common stock will vest upon the conclusion
of each written or oral general equipment purchase agreement involving
the sale of hardware and other equipment by Tellium with each of the
smaller telecommunications service providers described in the restricted
stock agreement, and the receipt by the service provider of its first
commercial shipment, each to have occurred prior to December 21, 2001;
and

. no more than 1,200,000 shares will be issued under the restricted stock
agreement.

Under the terms of the 1,200,000 share restricted stock agreement, we have
the right to repurchase any unvested shares of restricted stock, at a per share
price equal to the exercise price per share paid by Mr. Carr, plus accrued
interest, within one year of Mr. Carr's employment with us being terminated for
any of the following reasons:

. Mr. Carr dies or becomes disabled during the term of his employment
agreement with us;

60
<PAGE>

. we terminate Mr. Carr's employment at any time with or without cause,
including our failure to renew Mr. Carr's employment agreement with us;

. Mr. Carr terminates his employment with us within six months after the
occurrence of any of the following events:

. an adverse change in Mr. Carr's title, position, duties, powers and
authority, reporting relationship or the scope of his
responsibilities;

. the occurrence of a change of control;

. a failure by our successor to assume Mr. Carr's employment agreement
in a situation other than change of control;

. a material breach of the employment agreement that remains uncured for
14 days following our receipt of notice of breach; or

. Mr. Carr voluntarily terminates his employment with us.

Our right to repurchase unvested shares under this agreement terminates on
April 13, 2002.

Other Restricted Stock Agreements. We have also entered into restricted
stock agreements with each of Messrs. Albers, Bala, Barcus, Cassa, DeMambro,
DeVito and Losch and Ms. Carr. In connection with these restricted stock
agreements, each executive delivered a promissory note to us for the full
amount of the purchase price, less the par value of the stock purchased. The
loans are for the following amounts:

<TABLE>
<CAPTION>
Aggregate
Name Loan Amount
---- -----------
<S> <C>
Michael G. Albers................................................... $ 3,204,500
Krishna Bala........................................................ 2,582,827
Richard W. Barcus................................................... 2,010,093
Grace M. Carr....................................................... 1,922,700
Thomas J. Cassa..................................................... 2,082,925
Anthony J. DeMambro................................................. 1,922,700
Nicholas P. DeVito.................................................. 1,612,183
Michael J. Losch.................................................... 1,922,700
-----------
Total............................................................. $17,260,628
</TABLE>

Each promissory note is secured by a pledge of the purchased stock. Each
executive is obligated to repay his or her loans, plus a fixed rate of interest
of 7.5% per annum on the outstanding principal balance:

. upon the occurrence of a liquidity event (with respect to the portion of
the principal attributable to the shares of restricted stock that are
sold); or

. on the termination date of each such executive's restricted stock
agreement.

Each restricted stock agreement also contains restrictions on the transfer
of shares, except to permitted transferees, such as to his or her executors or
beneficiaries upon death, to his or her spouse and persons with whom he or she
has had a significant pre-existing business or personal relationship.

Each restricted stock agreement provides us the right to repurchase any of
the executive's unvested shares at a per share price equal to the exercise
price per share paid by the executive, plus accrued interest, during the one-
year period after the executive's employment with us is terminated for any
reason, with or without cause.

61
<PAGE>

Our right to repurchase the executive's unvested shares shall lapse with
respect to, and the executive, if he or she is then employed with us, shall
acquire a vested interest in, 50% of the then-unvested shares if any of the
following corporate transactions occur:

. a complete liquidation or dissolution of Tellium;

. a sale of all or substantially all of our assets; or

If, as a result of the transactions described above, the executive is required
to pay an excise tax with respect to the shares that vested as a result of such
transactions, the executive is entitled to receive an additional payment from
us in an amount as is necessary to place him or her in the same after-tax
position he or she would have been in had no such excise taxes been paid or
incurred.

Our right to repurchase shall lapse with respect to, and the executive, if
he or she is then employed with us, shall acquire a vested interest in, the
remaining 50% of the executive's unvested shares if:

. there is a meaningful alteration that is adverse to the executive in the
nature or status of his or her responsibilities or in his or her
position with us from those in effect immediately prior to a corporate
transaction described above;

. a requirement by us, after a corporate transaction, that the executive
perform his or her responsibilities for us at a location that is more
than 60 miles from the location of the executive's employment at the
time of such transaction; or

. we breach a material term of such executive's restricted stock agreement
and fail to cure within 30 days after notice from the executive of such
breach.

Under the terms of each restricted stock agreement, we have the right to
repurchase any or all of the executive's vested shares of restricted stock at a
per share price equal to the fair market value if:

. the executive's employment with us is or could be terminated by us for
cause; or

. the executive attempts to transfer any vested shares other than as
permitted under the executive's restricted stock agreement.

Under the terms of the restricted stock agreements, the shares will vest,
unless vested earlier, according to the following schedule:

. 25% of the shares will vest on the first anniversary of the date set
forth in the restricted stock agreements as the vesting measurement
date, if the executive is then employed by us;

62
<PAGE>

. 1/36th of the remaining shares will vest on the last day of each
calendar month commencing with the thirteenth month anniversary of the
vesting measurement date and ending on the 48th month anniversary of the
vesting measurement date, if, on each monthly vesting date, the
executive is then employed by us.

Management Investor Subscription Agreements

We have also entered into management investor subscription agreements with
each of Messrs. Bala and Mesiya. In connection with these management investor
subscription agreements, these management investors purchased 300,000 and
1,500,000 shares, respectively, of our common stock for an aggregate purchase
price of $50 and $250, respectively.

Each management investor subscription agreement provides that any unvested
shares become vested shares 120 days after the management investor's employment
is terminated as follows:

. without cause;

. due to a voluntary resignation by the management investor; or

. by reason of the management investor's death or disability.

Under the terms of the management investor subscription agreements, the
shares will vest, unless vested earlier, over four years according to the
following vesting schedule:

. 20% immediately upon issuance of the shares under the agreement;

. 40% on the first anniversary of the agreement date;

. 60% on the second anniversary of the agreement date;

. 80% on the third anniversary of the agreement date; and

. 100% on the fourth anniversary of the agreement date.

Stockholders' Agreement

The Stockholders' Agreement grants our stockholders rights to register
their shares of common stock for future sale as described in "Shares Eligible
for Future Sale--Stockholder Registration Rights".

Board Approval of Related-Party Transactions

We intend to have the terms of all future related-party transactions be no
less favorable to us than terms that could be obtained from unaffiliated third
parties, and to have all future related-party transactions approved by a
majority of our board of directors.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 31, 2000, information with
respect to the beneficial ownership of our common stock by:

. each person known to us to beneficially own more than 5% of the
outstanding shares of our common stock;

. each director of Tellium and each executive officer named in the Summary
Compensation Table; and

. all directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of October 31, 2000 are
deemed to be outstanding and beneficially owned by the person holding such
options or warrants. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Percentage
of beneficial ownership is based on 187,467,504 shares of common stock
outstanding as of October 31, 2000, and 204,967,504 shares of common stock to
be outstanding after the offering. Shares of our Series A, B, C and D preferred
stock are counted on an as-converted basis, assuming a one-to-six conversion
ratio. Shares of our Series E preferred stock are counted on an as-converted
basis, assuming an initial public offering price of $14.00 per share, the mid-
point of the range shown on the cover page of this prospectus.

Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares beneficially owned by the stockholder and has
the same address as Tellium. Our address is 2 Crescent Place, Oceanport, New
Jersey 07757-0901.

64
<PAGE>

<TABLE>
<CAPTION>
Percent
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Science Applications International Corpora-
tion(1)
10260 Campus Point Drive
San Diego, CA 92121............................ 34,687,866 18.5% 16.9%

Lucent Technologies, Inc.(2)
2015 West Chestnut Street
Alhambra, CA 91803............................. 16,647,264 8.9 8.1

Entities affiliated with Oak Investment Part-
ners(3)
One Gorham Island
Westport, CT 06880............................. 14,964,960 8.0 7.3

Entities affiliated with Accel V L.P.(4)
428 University Avenue
Palo Alto, CA 94301............................ 9,507,078 5.1 4.6

Entities affiliated with Thomas Weisel Capital
Partners LLC(5)
One Montgomery Street,
Suite 3700
San Francisco, CA 94104........................ 16,660,678 9.0 8.3

Harry J. Carr(6)................................ 13,200,000 7.0 6.4

Richard W. Barcus(7)............................ 3,000,000 1.6 1.5

Krishna Bala(8)................................. 2,788,500 1.5 1.4

William B. Bunting(5)........................... 16,675,678 9.0 8.1

Michael M. Connors(9)........................... 382,141 * *

Jeffrey A. Feldman(10).......................... 6,703,745 3.6 3.3

Edward F. Glassmeyer(3)......................... 14,979,960 8.0 7.3

William A. Roper, Jr.(1)........................ 34,702,866 18.5 17.0

Richard C. Smith(1)............................. 34,702,866 18.5 17.0

Nicholas P. DeVito(11).......................... 1,800,000 1.0 1.0

Michael Hodges(12).............................. 2,180,820 1.2 1.1

John K. Kostibas................................ 517,200 * *

Farouque Mesiya(13)............................. 1,656,252 1.0 1.0

Executive officers and directors as a group (15
persons)....................................... 104,582,890 55.8 51.0
</TABLE>
--------
* Represents less than one percent.

(1) SAIC is the beneficial owner of the shares held by Telcordia Venture
Capital Corporation, the record owner of these shares. Mr. Roper is an
Executive Vice President and Chief Financial Officer of SAIC and as such
he may be deemed to exercise voting and investment power over the shares
held by Telcordia Venture Capital. Mr. Roper disclaims beneficial
ownership of these shares except to the extent of his proportionate
interest in SAIC. These shares include, with respect to Mr. Roper, vested
options to purchase 15,000 shares but exclude unvested options to purchase
45,000 shares held by Mr. Roper. Mr. Smith is the Chief Executive Officer
of Telcordia Technologies, Inc., which is a wholly-owned subsidiary of
SAIC and wholly owns Telcordia Venture Capital, and as such he may be
deemed to exercise voting and investment power over the shares held by
Telcordia Venture Capital. Mr. Smith disclaims beneficial ownership of
these shares except to the extent of his proportionate interest in
Telcordia Technologies. These shares include, with respect to Mr. Smith,
vested options to purchase 15,000 shares but exclude unvested options to
purchase 45,000 shares held by Mr. Smith.
(2) Ortel Corporation, the record owner of these shares, was acquired by
Lucent Technologies in April 2000.

(3) Includes (a) 14,598,318 shares held by Oak Investment Partners VII,
Limited Partnership; and (b) 366,642 shares held by Oak VII Affiliates
Fund, Limited Partnership. Mr. Glassmeyer is a managing member of the Oak
Investment Partners entities and as such he may be deemed to exercise
voting and investment power over the shares held by these entities. Mr.
Glassmeyer disclaims beneficial ownership of these

65
<PAGE>

shares except to the extent of his proportionate interest in the Oak
Investment Partners entities. These shares also include vested options to
purchase 15,000 shares but exclude unvested options to purchase 45,000
shares held by Mr. Glassmeyer.

(4) Includes (a) 7,662,720 shares held by Accel V L.P.; (b) 456,336 shares
held by Accel Investors "96 L.P.; (c) 1,026,762 shares held by Accel
Internet/Strategic Technology Fund L.P.; (d) 152,112 shares held by Accel
Keiretsu V L.P.; and (e) 209,148 shares held by Ellmore C. Patterson
Partners.

(5) Includes (a) 13,870,914 shares held by Thomas Weisel Capital Partners,
L.P., (b) 320,472 shares held by TWP CEO Founders' Circle (AI), L.P., (c)
1,170,852 shares held by TWP CEO Founders' Circle (QP), L.P.; (d) 324,510
shares held by Thomas Weisel Capital Partners (Dutch), L.P.; (e) 324,510
shares held by Thomas Weisel Capital Partners (Dutch II), L.P.; (f)
130,530 shares held by Thomas Weisel Capital Partners Employee Fund,
L.P.; (g) 209,034 shares held by TWP 2000 Co-Investment Fund, L.P.; (h)
42,624 shares held by TWP Tellium Investors; (i) 195,804 shares held by
Thomas Weisel Partners LLC; (j) 30,829 shares held by Tailwind Investment
Partners (QP), L.P.; (k) 1,845 shares held by Tailwind Investment
Partners (AI), L.P.; (l) 2,456 shares held by Tailwind Investment
Partners Employee Fund, L.P.; and (m) 36,298 shares held by Tailwind
Investment Partners International, L.P. Thomas Weisel Capital Partners
LLC is the general partner or the managing member of the general partner
of each of these entities, except TWP Tellium Investors and Thomas Weisel
Partners LLC. Thomas Weisel Capital Partners LLC is an affiliate of
Thomas Weisel Partners LLC and an officer of Thomas Weisel Capital
Partners LLC is the managing partner of TWP Tellium Investors. As such,
Thomas Weisel Capital Partners LLC may be deemed to exercise voting and
investment power over the shares held by these entities. Mr. Bunting is a
partner in Thomas Weisel Partners Group LLC, of which Thomas Weisel
Capital Partners LLC and Thomas Weisel Partners LLC are each wholly-owned
subsidiaries. Mr. Bunting disclaims beneficial ownership of these shares
except to the extent of his proportionate interest in Thomas Weisel
Partners Group LLC. These shares also include vested options to purchase
15,000 shares but exclude unvested options to purchase 45,000 shares held
by Mr. Bunting.

(6) Includes (a) 467,574 shares held by Marietta Partners LLC; (b) 108,000
shares held by Pluto Partners LLC; and (c) 688,074 shares held by the
Deborah A. Carr 2000 Family Trust. Of these shares, 6,000,000 shares are
vested and 7,200,000 shares are unvested under restricted stock
agreements between us and Mr. Carr. Mr. Carr may be deemed to
beneficially own these shares.

(7) Includes (a) 895,000 shares held by Julie C. Barcus; (b) 600,000 shares
held by the Barcus Family Limited Partnership No. 2, L.L.L.P.; and (c)
600,000 shares held by the Barcus Family Limited Partnership No. 1,
L.L.L.P. Of these shares, 866,550 shares are vested and 2,133,450 shares
are unvested under a restricted stock agreement between us and Mr.
Barcus. Mr. Barcus may be deemed to beneficially own these shares.

(8) Includes 2,418,000 shares held by Khrishna Bala LLC. Upon the completion
of this offering, (a) 1,209,000 shares will be vested and 1,209,000
shares will be unvested under a restricted stock agreement between us and
Dr. Bala; (b) 150,000 shares will be vested and 150,000 shares will be
unvested under a management investor subscription agreement between us
and Dr. Bala; and (c) 141,000 shares will be vested and 141,000 shares
will be unvested under option agreements between us and Dr. Bala. Dr.
Bala may be deemed to beneficially own these shares.

(9) Includes (a) 357,141 shares held by Suaimhneas LLC and (b) vested options
to purchase 25,000 shares held by Mr. Connors. These shares exclude
unvested options of 75,000 shares. Mr. Connors is the sole manager of
Suaimhneas LLC and, as such, he may be deemed to exercise voting and
investment power over these shares. Mr. Connors disclaims beneficial
ownership of these shares.

(10) Includes (a) 4,918,032 shares held by Pequot Private Equity Fund II,
L.P.; (b) 1,249,999 shares held by Pequot Technology Perennial Fund,
L.P.; and (c) 535,714 shares held by Pequot Endowment Fund, L.P.
Mr. Feldman may be deemed to exercise voting and investment power over
these shares. Mr. Feldman disclaims beneficial ownership of these shares
except to the extent of his proportionate interest in Pequot Private
Equity Fund II, L.P. of which he is a limited partner. These shares also
include vested options to purchase 15,000 shares but exclude unvested
options to purchase 45,000 shares held by Mr. Feldman.

(11) Includes (a) 978,000 shares held by NCAL, LLC and (b) 171,600 shares held
by KD Family LLC. Of these shares, 247,500 shares are vested and
1,552,500 shares are unvested under a restricted stock agreement between
us and Mr. DeVito. Mr. DeVito may be deemed to beneficially own these
shares.

(12) Includes 357,726 shares that are vested pursuant to option agreements
between us and Mr. Hodges.

(13) Includes 1,500,000 shares that are vested pursuant to a management
investor subscription agreement between us and Mr. Mesiya.

66
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

As of October 31, 2000, our authorized capital stock consisted of
900,000,000 shares of common stock, par value $.001 per share, and 26,661,150
shares of preferred stock, par value $.001 per share. After this offering,
there will be 25,000,000 authorized and unissued shares of preferred stock.
Also after this offering, there will be issued and outstanding 204,967,504
shares of common stock. As of October 31, 2000, there were 58,489,628 shares
of common stock outstanding that were held of record by approximately 336
stockholders and an aggregate of 26,172,721 shares of preferred stock
outstanding that were held of record by approximately 84 stockholders.

The number of shares of common stock outstanding as of October 31, 2000
does not include:

. 113,389,848 shares of common stock into which the shares of Series A, B,
C and D preferred stock will automatically convert based on a one-to-six
conversion ratio upon the completion of this offering;

. 15,588,028 shares of common stock into which the shares of Series E
preferred stock will automatically convert, assuming an initial public
offering price of $14.00 per share, the mid-point of the range shown on
the cover page of this prospectus;

. 37,576,412 shares of common stock subject to options outstanding under
our 1997 employee stock option plan with a weighted average exercise
price of $0.95 per share, and 7,777,790 shares of common stock available
for future grant under this plan;

. 550,000 shares of common stock subject to options that were issued
outside of our employee stock option plan;

. 10,452,000 shares of common stock subject to an outstanding warrant to
purchase common stock at an exercise price of $1.53 per share;

. 177,054 shares of common stock subject to outstanding warrants to
purchase Series C preferred stock at an exercise price of $1.53 per
share; and

. 4,000,000 shares of common stock subject to outstanding warrants to
purchase common stock at an exercise price of $15.00 per share; and

. shares of common stock to be issued under the over-allotment option.

The descriptions of common stock and preferred stock reflect changes to
our capital structure that will occur upon completion of this offering in
accordance with the amended and restated certificate of incorporation that we
will adopt immediately prior to this offering.

Common Stock

Under the terms of our amended and restated certificate of incorporation,
to be effective upon completion of this offering, holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of
a majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive proportionately any such dividends
declared by the board of directors, subject to any preferential dividend
rights of outstanding preferred stock. Upon the liquidation, dissolution or
winding up of Tellium, the holders of common stock are entitled to receive
ratably our net assets available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The rights, preferences and privileges of holders of common
stock are subject to the rights of the

67
<PAGE>

holders of any series of preferred stock which we may designate and issue in
the future. A significant percentage of the holders of our common stock have
the right to require us to register their shares of common stock under the
Securities Act in specified circumstances.

Preferred Stock

Under the terms of our amended and restated certificate of incorporation,
to be effective upon completion of this offering, our board of directors is
authorized to issue shares of preferred stock in one or more series without
stockholder approval. The board has discretion to determine the rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences of
each series of preferred stock. The purpose of authorizing the board of
directors to issue preferred stock and determine its rights and preferences is
to eliminate delays associated with a stockholder vote on specific issuances.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could make
it more difficult for a third party to acquire, or could discourage a third
party from acquiring, a majority of our outstanding voting stock.

Warrants

Affiliates of Dynegy Connect hold warrants to purchase 10,452,000 shares of
our common stock at an exercise price of $1.53 per share. The purchase rights
represented by the warrants were initially subject to a vesting schedule based
on purchase milestones set forth in the Dynegy Connect equipment purchase
agreement. As of November 2, 2000, we amended the warrant agreement to
immediately vest all of the remaining shares subject to the warrant. The
revised agreement provides that the warrant becomes exercisable based on the
schedule of milestones previously contained in the warrant. If the milestones
are not reached by March 31, 2005, the remaining unexercised shares subject to
the warrant shall then become exercisable.

On November 11, 1999, we issued two warrants to purchase an aggregate of
29,509 shares of our Series C preferred stock to Comdisco, Inc., at a purchase
price of $9.15 per share, as consideration for a lease line of credit. Under
the terms of each of these warrants, Comdisco also has the right to purchase
additional shares of our Series C preferred stock if the total cost of
equipment we lease from Comdisco exceeds specified amounts. The warrant is
exercisable at any time and expires on the earlier of five years after this
offering or ten years from the date the warrant was issued.

As part of our agreement with Qwest, we issued two warrants to a wholly-
owned subsidiary of Qwest to purchase 4,000,000 shares of our common stock at
an exercise price of $15.00 per share. The warrants to purchase 4,000,000
shares were vested when we issued the warrants and become exercisable as Qwest
meets specified milestones during the term of our procurement contract. The
first warrant expires September 18, 2005, and the second warrant expires the
later of six months after the last day the warrant becomes exercisable or
September 18, 2005.

Delaware Law And Certain Charter And Bylaw Provisions; Anti-Takeover Effects

We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to exceptions, an "interested
stockholder" is a person who, together with his affiliates and associates,
owns, or

68
<PAGE>

within three years did own, 15% or more of the corporation's voting stock. The
amended and restated certificate of incorporation and amended and restated
bylaws to be effective upon completion of this offering provide that:

. the board of directors be divided into three classes, as nearly equal in
size as possible, with staggered three-year terms;

. directors may be removed only for cause by the affirmative vote of the
holders of two-thirds of the shares of our capital stock entitled to
vote; and

. any vacancy on the board of directors, however the vacancy occurs,
including a vacancy due to an enlargement of the board, may only be
filled by vote of the directors then in office.

The classification of the board of directors and the limitations on removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from,
acquiring us.

The amended and restated certificate of incorporation and amended and
restated bylaws, both effective upon completion of this offering, also provide
that, after this offering:

. any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if
it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting; and

. special meetings of the stockholders may only be called by the board of
directors.

Our amended and restated bylaws, effective upon completion of this
offering, provide that, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with requirements
regarding advance notice to us. These provisions could delay until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer for our common
stock, because such person or entity, even if it acquired a majority of our
outstanding voting securities, would be able to take action as a stockholder
(such as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.

Delaware's corporation law provides generally that the affirmative vote of
a majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws requires a greater percentage. Our
amended and restated certificate of incorporation, effective upon completion of
this offering, permits our board of directors to amend or repeal our bylaws by
majority vote but requires the affirmative vote of the holders of at least 66-
2/3% of the shares of our capital stock entitled to vote to amend or repeal any
of the provisions of our amended and restated bylaws. Generally our amended and
restated certificate of incorporation, effective upon completion of this
offering, may be amended by holders of a majority of the shares of our capital
stock issued and outstanding and entitled to vote. The stockholder vote with
respect to our certificate of incorporation or bylaws, as amended and restated
upon completion of this offering, would be in addition to any separate class
vote that might in the future be required under the terms of any series
preferred stock that might be outstanding at the time any such amendments are
submitted to stockholders.

Limitation of Liability and Indemnification

Our amended and restated certificate of incorporation, effective upon
completion of this offering, provides that our directors and officers shall be
indemnified by us to the fullest extent authorized by Delaware law. This
indemnification would cover all expenses and liabilities reasonably incurred in

69
<PAGE>

connection with their services for or on behalf of us. In addition, our amended
and restated certificate of incorporation, effective upon completion of this
offering, provides that our directors will not be personally liable for
monetary damages to us for breaches of their fiduciary duty as directors,
unless they violated their duty of loyalty to us or our stockholders, acted in
bad faith, knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit from their
action as directors.

Delaware law also provides that indemnification permitted under the law
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. Our amended and restated certificate of
incorporation, effective upon completion of this offering, provides that we
shall fully indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact that such person is or was one of our directors or officers or is or was
serving at our request as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding.

Our amended and restated bylaws, effective upon completion of this
offering, permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions,
regardless of whether the Delaware General Corporation Law would permit
indemnification. We have obtained liability insurance for our officers and
directors.

At present, we are not the subject of any pending litigation or proceeding
involving any director, officer, employee or agent as to which indemnification
will be required or permitted under our certificate of incorporation. We are
not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Computer Share
Trust Company.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market could
adversely affect the market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.

Upon consummation of this offering, we will have 203,575,238 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Of these
shares, the 17,500,000 shares to be sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
of 1933, as amended, except that any shares purchased by our affiliates may
generally only be sold in compliance with the limitations of Rule 144 described
below. An affiliate is defined under Rule 144 as a person that controls, is
controlled by or is under common control with Tellium. The remaining
186,075,238 shares of common stock held by existing stockholders were issued
and sold by us in reliance on exemptions from the registration requirements of
the Securities Act. Of these shares, shares will be subject to "lock-
up" agreements described below on the effective date of this offering. Upon
expiration of the lock-up agreements, as described below, the shares in the
amounts set forth below will become eligible for sale subject in most cases to
the limitations of either Rule 144 or Rule 701 under the Securities Act. In
addition, holders of stock options could exercise such options and sell the
shares issued upon exercise as described below under "Stock Options".

Sales of Restricted Shares

<TABLE>
<CAPTION>
Number of Shares Date of Availability for Resale into the Public Market
---------------- ------------------------------------------------------
<S> <C>
On effectiveness
90 days after effectiveness
180 days after effectiveness
</TABLE>

of the shares listed in the foregoing table as not saleable until 180
days after effectiveness may become saleable earlier as described below under
"Lock-up Agreements".

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
including an affiliate, who has beneficially owned shares for at least one
year, is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of:

. one percent of the then outstanding shares of common stock, which will
equal approximately 2,035,753 shares immediately after this offering; or

. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of such sale on Form 144 is filed,

provided the requirements concerning availability of public information, manner
of sale and notice of sale are satisfied. In addition, our affiliates must
comply with the restrictions and requirements of Rule 144, other than the one-
year holding period requirements, in order to sell shares of common stock which
are not restricted securities.

Under Rule 144(k), a person who is not one of our affiliates and has not
been one of our affiliates for at least three months prior to the sale and who
has beneficially owned shares for at least two years may resell such shares
without compliance with the foregoing requirements. In meeting the one- and
two-year holding periods described above, a holder of shares can include the
holding periods of a prior owner who was not an affiliate. The one- and two-
year holding periods described

71
<PAGE>

above do not begin to run until the full purchase price or other consideration
is paid by the person acquiring the shares from the issuer or an affiliate.
Rule 701 provides that currently outstanding shares of common stock acquired
under our employee compensation plans, and shares of common stock acquired upon
exercise of presently outstanding options granted under these plans, may be
resold beginning 90 days after the date of this prospectus:

. by persons, other than affiliates, subject only to the manner of sale
provisions of Rule 144; and

. by affiliates under Rule 144 without compliance with its one-year
minimum holding period, subject to limitations.

Stock Options

As soon as practicable following the date of this prospectus, we intend to
file a registration statement on Form S-8 under the Securities Act to register
up to 92,351,460 shares of our common stock reserved for issuance or previously
issued under our stock option plans. Shares of our common stock issued under
our stock option plans generally will be available for sale in the open market
by holders who are not affiliates of Tellium and, subject to the volume and
other applicable limitations of Rule 144, by holders who are affiliates of
Tellium, unless these shares are subject to vesting restrictions or the
contractual restrictions described above. The registration statement is
expected to become effective upon filing.

At October 31, 2000, options to purchase 37,576,412 shares were issued and
outstanding under our plan. All of these shares will be eligible for sale in
the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and, in the case of some of the
options, the expiration of lock-up agreements.

Lock-up Agreements

Stockholders holding an aggregate of shares of common stock or
warrants to acquire common stock are subject to contractual restrictions on
resale contained in lock-up agreements with the underwriters, which are
described in the section entitled "Underwriting". These lock-up agreements
generally provide that the stockholders will not dispose of or hedge their
shares for a period ranging from 90 to 180 days. Taking into account the lock-
up agreements, the following shares will be eligible for sale in the public
market at the following times:

. on the date of this prospectus, the shares sold in the offering will be
immediately available for sale in the public market;

. on the date of this prospectus, shares of common stock purchased in
connection with our directed share program, other than purchases by
directors, executive officers and their spouses and children, will be
immediately available for sale in the public market;

. 90 days after the date of this prospectus, the following shares shall be
released from the contractual restrictions under the lock-up agreements;

. shares held by employees who are not executives;

. shares acquired upon conversion of our Series E preferred stock;

. any shares acquired upon exercise of the Qwest warrant and shares of
common stock sold to officers and affiliates of Qwest in a recent
private placement;

. 90 days after the date of this prospectus, 10% of the shares held by
persons who acquired common stock upon the conversion of our Series A,
B, C and D preferred stock or upon the exercise of warrants, except for
the Qwest warrant, shall be released from the lock-up if the last
reported sale price of our common stock on the Nasdaq National Market is
greater than

72
<PAGE>

$28.00, which is two times $14.00 per share, the mid-point of the range
shown on the cover page of this prospectus, for 20 of the 30 consecutive
trading days preceding the 90th day after the date of this prospectus;
and

. 180 days after the date of this prospectus, any shares of common stock
not previously released from the contractual restrictions under the
lock-up agreements shall be released.

Stockholder Registration Rights

Following this offering, the holders of 139,328,250 shares of outstanding
common stock and warrants to purchase 14,629,054 shares of common stock will,
under some circumstances, have the right to require us to register their
shares for future sale.

All of our preferred stock will convert into shares of common stock upon
the consummation of this offering. Our amended stockholders' agreement with
the holders of our preferred stock and others provides that at any time after
six months following the consummation of this offering, one or more of those
stockholders have the right to demand that we file a registration statement
with the Securities and Exchange Commission to register all or part of their
shares of common stock. We are obligated to effect two demand registrations
for these stockholders. In addition, Thomas Weisel Capital Partners LLC and
its affiliates and transferees also have the right to demand that we file one
registration statement with the Securities and Exchange Commission to register
all or part of their shares of common stock obtained upon conversion of their
Series D preferred stock. The amended stockholders' agreement also provides
that these stockholders have the right to demand that we register their common
stock on a Form S-3 registration statement if we qualify to use that form and
if the anticipated gross offering price of the securities expected to be
registered exceeds $1,000,000. We will not be required to file more than one
Form S-3 registration statement in any one-year period. In addition, if we
propose to register securities for our own account, the stockholders may be
entitled to include their shares in that registration. AT&T and some of the
stockholders of Astarte also have the right to include their shares of common
stock on future registration statements that we may file. All of these
registration rights are subject to conditions and limitations, among them our
right or the right of the underwriters of an offering to limit the number of
shares included in a registration under some circumstances.

We have agreed to file a shelf registration statement covering resales of
the shares of common stock to be issued upon conversion of the Series E
preferred stock. We have agreed to use our reasonable best efforts to cause
the shelf registration statement to become effective within 90 days of the
completion of this offering and to keep it effective for a two-year period.
Qwest and the officers and affiliates of Qwest that participated in a recent
private placement of our common stock have the right to include their shares
on this shelf registration statement.

73
<PAGE>

UNDERWRITING

Tellium and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to some conditions,
each underwriter has severally agreed to purchase the number of shares
indicated in the following table. Goldman, Sachs & Co., Thomas Weisel Partners
LLC, J.P. Morgan Securities Inc., CIBC World Markets Corp. and Wit SoundView
Corporation are the representatives of the underwriters.

<TABLE>
<CAPTION>
Number of
Underwriters shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .................................................
Thomas Weisel Partners LLC............................................
J.P. Morgan Securities Inc. ..........................................
CIBC World Markets Corp. .............................................
Wit SoundView Corporation.............................................
---
Total...............................................................
===
</TABLE>

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Tellium to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Tellium. The amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.

<TABLE>
<CAPTION>
Paid by Tellium
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share................................................ $ $
Total.................................................... $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.

Tellium and its directors, officers, employees and stockholders holding
shares have agreed not to dispose of or hedge any shares of common stock, or
any options or warrants to purchase any shares of common stock, or any
securities convertible into, exchangeable for or that represent the right to
receive shares of common stock which are owned directly or indirectly by such
directors, employees and stockholders. Shares of the Company's common stock
will be released from this contractual lock-up as set forth below:

. for directors, executive officers and their spouses and children, their
shares of common stock will be released from the lock-up 180 days after
the date of this prospectus;

. for persons who acquired the Company's common stock upon the conversion
of our Series A, B, C and D preferred stock or upon exercise of
warrants, except for the Qwest warrant, their

74
<PAGE>

shares will be released from the lock-up 180 days from the date of this
prospectus except that, if 90 days after the date of this prospectus the
last reported sales price of the Company's common stock on the Nasdaq
National Market has been greater than $28.00, which is two times $14.00
per share, the mid-point of the range shown on the cover page of this
prospectus, for 20 of the preceding 30 consecutive trading days, then 10%
of the shares of common stock owned by these holders will be released
from lock-up;

. for shares acquired upon the conversion of our Series E preferred stock
and upon exercise of the Qwest warrant, shares of common stock sold to
officers and affiliates of Qwest in a recent private placement and
shares held by employees who are not executive officers, their shares of
common stock will be released from the lock-up 90 days after the date of
this prospectus; and

. for other stockholders, their shares of common stock will be released
from the lock-up 180 days after the date of this prospectus.

The restrictions described in the preceding paragraphs do not apply to:

. shares of common stock purchased in the initial public offering;

. shares of common stock purchased in the open market following the
initial public offering; and

. except for the Company's directors and executive officers and their
spouses and children, shares of common stock purchased in connection
with our directed share program.

Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Tellium and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Tellium's historical performance, estimates of the business
potential and earnings prospects of Tellium, an assessment of the management of
Tellium and the consideration of the above factors in relation to market
valuation of companies in related businesses.

Tellium has applied to list its common stock on the Nasdaq National Market
under the symbol "TELM".

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from Tellium in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the overallotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of various bids for or purchase of
common stock made by the underwriters in the open market prior to the
completion of the offering.

75
<PAGE>

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of
Tellium's stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock.
As a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.

At the request of Tellium, the underwriters are reserving up to
shares of common stock for sale at the initial public offering price to
individuals designated by Tellium who have expressed an interest in purchasing
the shares of common stock in the offering through a directed share program.
The number of shares available for sale to the general public in the public
offering will be reduced to the extent these persons purchase these reserved
shares. Any shares not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered hereby.

The underwriters do not expect sales to discretionary accounts to exceed
percent of the total number of shares offered.

Tellium estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $3.0
million.

Goldman, Sachs & Co. and Thomas Weisel Partners LLC acted as placement
agents for Tellium in connection with the private placement of shares of
Tellium's Series E preferred stock in September 2000. Tellium incurred
customary placement fees payable to Goldman, Sachs & Co. and Thomas Weisel
Partners LLC for such services. Tellium paid the fees in shares of Series E
preferred stock priced at the private placement price of $30.00 per preferred
share. In addition, entities affiliated with Thomas Weisel Capital Partners LLC
beneficially own 2,732,241 shares of Tellium's Series D preferred stock and
33,333 shares of Tellium's Series E preferred stock.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 148 completed transactions and has acted as a syndicate member in an
additional 130 public offerings of equity securities.

A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters. The representatives of the
underwriters may agree to allocate a number of shares to underwriters for sale
to their online brokerage account holders. Internet distribution will be
allocated by the representatives to underwriters that may make Internet
distributions on the same basis as other allocations.

Tellium has agreed to indemnify the several underwriters against specific
liabilities, including liabilities under the Securities Act of 1933.

76
<PAGE>

VALIDITY OF COMMON STOCK

The validity of the issuance of the shares of our common stock offered by
this prospectus will be passed upon for Tellium by Fried, Frank, Harris,
Shriver & Jacobson (a partnership including professional corporations),
Washington, DC. The validity of the issuance of the shares of our common stock
offered by this prospectus will be passed upon for the underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, New York, New
York.

EXPERTS

The financial statements of Tellium, Inc. as of and for the year ended
December 31, 1999, included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
and elsewhere in the registration statement, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

The financial statements of Tellium, Inc. at December 31, 1998, and for the
year ended December 31, 1998 and the period from May 8, 1997 (inception) to
December 31, 1997, appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and such financial statements and
selected financial data are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

The audited financial statements for Astarte Fiber Networks, Inc. included
in this prospectus and elsewhere in the registration statement as of and for
the years ended December 31, 1998 and December 31, 1999 have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.

CHANGE IN INDEPENDENT AUDITORS

On March 9, 2000, we changed our auditors to Deloitte & Touche LLP from
Ernst & Young LLP. The decision to dismiss Ernst & Young LLP and engage
Deloitte & Touche LLP was approved by our board of directors.

We believe that for the period from May 8, 1997 (inception) through the
date of the change in auditors, Ernst & Young did not have any disagreement
with us on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Ernst & Young, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report on our financial statements. Ernst & Young's original report on our 1998
financial statements dated August 22, 1999, contained an explanatory paragraph
indicating there was substantial doubt regarding our ability to continue as a
going concern. Ernst & Young reissued their report on our 1998 financial
statements on September 21, 2000 indicating that the conditions that raised the
substantial doubt about whether we will continue as a going concern no longer
exist.

77
<PAGE>

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 and the rules and
regulations promulgated under the Securities Act with respect to our common
stock offered by this prospectus. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth
in the registration statement and its exhibits and schedules. For further
information with respect to Tellium and its common stock, we refer you to the
registration statement and the exhibits and the schedules filed as a part of
the registration statement. You may read and copy the registration statement at
the Securities and Exchange Commission's following locations:

<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
Office 450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Washington, DC 20549 Suite 1300 500 West Madison Street
New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>

You may also obtain copies of the registration statement by mail from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, DC 20549 or by telephone at 1-800-
SEC-0330. The registration statement is available to the public from commercial
document retrieval services and at the Securities and Exchange Commission's
World Wide Web site located at http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and make
available to our stockholders quarterly reports for the first three quarters of
each fiscal year containing interim unaudited financial information.

78
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
-------
<S> <C>
TELLIUM, INC.
FINANCIAL STATEMENTS FOR THE PERIOD FROM MAY 8, 1997 (INCEPTION) TO
DECEMBER 31, 1997, FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 (UNAUDITED) AND 1999
(UNAUDITED):
Independent Auditors' Report Of Deloitte & Touche LLP................. F-2

Independent Auditors' Report Of Ernst & Young LLP..................... F-3

Balance Sheets........................................................ F-4
Statements of Operations.............................................. F-5
Statements of Changes in Stockholders' Equity (Deficiency)............ F-6
Statements of Cash Flows.............................................. F-7
Notes to Financial Statements......................................... F-8-22

ASTARTE FIBER NETWORKS, INC.
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998,
AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2000 (UNAUDITED) AND
1999 (UNAUDITED)
Report of Independent Public Accountants.............................. F-23
Balance Sheets........................................................ F-24-25
Statements of Operations.............................................. F-26
Statements of Stockholders' Deficit................................... F-27
Statements of Cash Flows.............................................. F-28-29
Notes to Financial Statements......................................... F-30-40

UNAUDITED PRO-FORMA CONDENSED FINANCIAL DATA STATEMENTS
Unaudited Pro-Forma Condensed Financial Data.......................... F-41
Unaudited Pro-Forma Condensed Balance Sheet........................... F-42
Unaudited Pro-Forma Condensed Statement of Operations for the Six-
Month Period Ended June 30, 2000..................................... F-43
Unaudited Pro-Forma Condensed Statement of Operations for the Year
Ended December 31, 1999.............................................. F-44
Notes to Unaudited Pro-Forma Condensed Financial Statements........... F-45
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Tellium, Inc.

We have audited the accompanying balance sheet of Tellium, Inc. (the
"Company") as of December 31, 1999, and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the 1999 financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey

April 28, 2000

(November 6, 2000 as to Note 12)

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Tellium, Inc.

We have audited the accompanying balance sheet of Tellium, Inc. as of December
31, 1998, and the related statements of operations, changes in stockholders'
(deficiency) equity and cash flows for the year ended December 31, 1998 and the
period from May 8, 1997 (inception) to December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 16. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

Since the date of completion of our audit of the accompanying 1998 financial
statements and initial issuance of our report thereon dated August 22, 1999,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in Notes 6 and 13,
has completed two private placements of its preferred stock resulting in net
proceeds of approximately $268 million and has entered into a $10 million line
of credit with a bank. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tellium, Inc. as of December
31, 1998 and the results of its operations and its cash flows for the year
ended December 31, 1998 and the period from May 8, 1997 (inception) to December
31, 1997 in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the financial information set forth
therein.

/s/ Ernst & Young LLP

ERNST & YOUNG LLP

MetroPark, New Jersey
August 22, 1999,
except for Notes 6 and 13, as to which

the date is November 7, 2000

F-3
<PAGE>

TELLIUM, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, Pro Forma at
------------------------ June 30, June 30,
1998 1999 2000 2000
----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 7,733,475 $45,239,281 $30,228,378 $
Due from stockholder..... 274,400 10,000 --
Accounts receivable, less
allowance for doubtful
accounts of $60,000 as
of December 31, 1999 and
June 30, 2000........... -- 2,115,755 7,073,575
Inventories.............. -- 1,901,242 6,203,265
Prepaid expenses and
other current assets.... 46,794 241,732 2,850,785
----------- ----------- -----------
Total current assets..... 8,054,669 49,508,010 46,356,003
PROPERTY AND EQUIPMENT--
Net...................... 2,674,986 3,449,143 6,723,755
OTHER ASSETS.............. 51,754 277,327 332,540
----------- ----------- -----------
TOTAL ASSETS.............. $10,781,409 $53,234,480 $53,412,298
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Trade accounts payable... $ 3,286,433 $ 2,212,058 $ 5,958,786
Accrued expenses and
other current
liabilities............. 2,835,874 1,300,722 2,520,700
Current portion of notes
payable................. 5,000,000 583,798 2,609,143
Current portion of
capital lease
obligations............. 52,274 116,603 638,906
----------- ----------- -----------
Total current
liabilities............. 11,174,581 4,213,181 11,727,535
LONG-TERM PORTION OF NOTES
PAYABLE.................. 9,392,030 1,223,071 912,808
LONG-TERM PORTION OF
CAPITAL LEASE
OBLIGATIONS.............. 72,560 116,110 1,080,160
OTHER LONG-TERM
LIABILITIES.............. -- 7,900 5,627
----------- ----------- -----------
Total liabilities........ 20,639,171 5,560,262 13,726,130
----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
(DEFICIENCY):
Common stock, $0.001 par
value, 900,000,000
shares authorized
5,208,000, 5,455,350,
45,930,696 (unaudited)
and 159,320,544
(unaudited) issued and
outstanding at December
31, 1998, 1999, June 30,
2000 and June 30, 2000
pro-forma............... 5,208 5,455 45,931 64,831
Series A Preferred Stock,
$0.001 par value
($22,040,002 liquidation
preference), 10,322,917
shares authorized,
9,183,334 shares issued
and outstanding as of
December 31, 1998 and
1999; 10,089,584
(unaudited) and -0-
(unaudited) shares
outstanding at June 30,
2000 and June 30, 2000
pro-forma............... 9,183 9,183 10,091
Series B Preferred Stock,
$0.001 par value
($559,999 liquidation
preference), 233,333
shares authorized,
233,333 shares issued
and outstanding as of
December 31, 1998 and
1999; 233,333 and -0-
shares issued and
outstanding as of June
30, 2000 (unaudited) and
June 30, 2000 pro-forma
(unaudited)............. 233 233 233
Series C Preferred Stock,
$0.001 par value
($23,289,852 liquidation
preference) 2,593,974
shares authorized, -0-
shares issued and
outstanding as of
December 31, 1998;
2,545,339 shares issued
and outstanding as of
December 31, 1999;
2,564,465 and -0- shares
issued and outstanding
as of June 30, 2000
(unaudited) and June 30,
2000 pro-forma
(unaudited)............. -- 2,546 2,565
Series D Preferred Stock,
$0.001 par value
($49,999,983 liquidation
preference), 6,010,926
shares authorized, -0-
shares issued and
outstanding as of
December 31, 1998;
5,464,479 shares issued
and outstanding as of
December 31, 1999;
6,010,926 and -0- shares
issued and outstanding
as of June 30, 2000
(unaudited) and June 30,
2000 pro-forma
(unaudited)............. -- 5,465 6,011
Additional paid-in
capital.................. 17,083,087 98,030,187 150,242,582 150,242,582
Notes receivable.......... -- -- (37,995,430) (37,995,430)
Accumulated deficit....... (25,775,473) (45,574,767) (65,019,587) (65,019,587)
Deferred employee
compensation............. (1,180,000) (4,804,084) (7,606,228) (7,606,228)
----------- ----------- ----------- ------------
Total stockholders'
equity (deficiency)..... (9,857,762) 47,674,218 39,686,168 $ 39,686,168
----------- ----------- ----------- ============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)............. $10,781,409 $53,234,480 $53,412,298
=========== =========== ===========
</TABLE>

See notes to financial statements.

F-4
<PAGE>

TELLIUM, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
May 8, 1997
(Inception) to Year Ended December 31, Six Months Ended June 30,
December 31, ------------------------ --------------------------
1997 1998 1999 1999 2000
-------------- ----------- ----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE................. $ 54,553 $ 1,364,480 $ 5,226,735 $ 1,063,056 $ 7,585,160
Non-cash charges
related to equity
issuances............ -- -- 558,961 -- 370,925
----------- ----------- ----------- ------------ ------------
REVENUE, net of non-cash
charges related to
equity issuances....... 54,553 1,364,480 4,667,774 1,063,056 7,214,235
COST OF REVENUE......... 11,546 1,259,941 3,881,637 911,172 5,061,390
----------- ----------- ----------- ------------ ------------
Gross profit........ 43,007 104,539 786,137 151,884 2,152,845
----------- ----------- ----------- ------------ ------------
OPERATING EXPENSES:
Research and
development,
excluding deferred
stock compensation
amortization......... 4,540,079 14,461,383 9,599,664 4,942,061 12,338,906
Sales and marketing,
excluding deferred
stock compensation
amortization......... 202,359 1,857,557 3,843,099 1,172,003 4,144,480
General and
administrative,
excluding deferred
stock compensation
amortization......... 1,670,975 3,644,569 4,385,484 2,064,431 5,501,489
Amortization of
deferred stock
compensation......... -- 923,750 2,594,546 1,250,148 1,239,589
----------- ----------- ----------- ------------ ------------
Total operating
expenses........... 6,413,413 20,887,259 20,422,793 9,428,643 23,224,464
----------- ----------- ----------- ------------ ------------
OPERATING LOSS.......... 6,370,406 20,782,720 19,636,656 9,276,759 21,071,619
----------- ----------- ----------- ------------ ------------
OTHER (INCOME) EXPENSE:
Other income.......... (802,627) (6,819) -- -- --
Interest income....... (302,780) (289,340) (359,685) (149,679) (1,806,173)
Interest expense...... -- 23,913 522,323 301,180 179,374
----------- ----------- ----------- ------------ ------------
Total other (income)
expense............ (1,105,407) (272,246) 162,638 151,501 (1,626,799)
----------- ----------- ----------- ------------ ------------
NET LOSS................ $ 5,264,999 $20,510,474 $19,799,294 $ 9,428,260 $ 19,444,820
=========== =========== =========== ============ ============
BASIC AND DILUTED LOSS
PER SHARE.............. $ (1.69) $ (4.83) $ (3.71) $ (1.78) $ (1.00)
=========== =========== =========== ============ ============
BASIC AND DILUTED
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 3,108,000 4,245,498 5,335,230 5,284,950 19,453,460
=========== =========== =========== ============ ============
UNAUDITED PROFORMA BASIC
AND DILUTED LOSS PER
SHARE.................. $ (0.18) $ (0.15)
=========== ============
UNAUDITED PROFORMA BASIC
AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING............ 109,894,146 132,843,312
=========== ============
AMORTIZATION OF DEFERRED
STOCK COMPENSATION
Cost of revenue....... $ -- $ 26,250 $ 76,985 $ 26,995 $ 49,297
Research and
development.......... -- 304,094 519,844 156,400 402,512
Sales and marketing... -- 183,282 270,472 82,211 102,122
General and
administrative....... -- 436,374 1,804,230 1,011,537 734,955
----------- ----------- ----------- ------------ ------------
$ -- $ 950,000 $ 2,671,531 $ 1,277,143 $ 1,288,886
=========== =========== =========== ============ ============
</TABLE>

See notes to financial statements.

F-5
<PAGE>

TELLIUM, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------ ------------------
Series A Series B Series C Series D Additional
------------------ -------------- ---------------- ---------------- Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
---------- ------- ---------- ------- ------- ------ --------- ------ --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Series A
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- $ -- 4,850,000 $ 4,850 -- $-- -- $ -- -- $ -- $ 11,635,150
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
intellectual
property........ -- -- 392,882 393 -- -- -- -- -- -- --
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
equipment....... -- -- 3,523,785 3,524 -- -- -- -- -- -- 1,696,476
Issuance of
Series B
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- -- -- -- 233,333 233 -- -- -- -- 559,767
Issuance of
Common Stock at
par value....... 3,108,000 3,108 -- -- -- -- -- -- -- -- (2,590)
Financing cost.. -- -- -- (17,200)
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1997............ 3,108,000 3,108 8,766,667 8,767 233,333 233 -- -- -- -- 13,871,603
Issuance of
Series A
Preferred Stock
to cash
investors at
$2.40 per
share........... -- -- 416,667 416 -- -- -- -- -- -- 999,584
Issuance of
Common Stock at
partnership
value........... 2,100,000 2,100 -- -- -- -- -- -- -- -- 81,900
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 2,130,000
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1998............ 5,208,000 5,208 9,183,334 9,183 233,333 233 -- -- -- -- 17,083,087
Issuance of
Series C
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- 2,545,339 2,546 -- -- 23,177,638
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- -- -- 5,464,479 5,465 49,658,877
Exercise of
stock options... 247,350 247 -- -- -- -- -- -- -- -- 11,807
Warrant cost
related to third
parties......... -- -- -- -- -- -- -- -- -- -- 1,652,967
Issuance of
warrants........ -- -- -- -- -- -- -- -- -- -- 150,196
Issuance of
options to
employees....... -- -- -- -- -- -- -- -- -- -- 61,700
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 6,233,915
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ------- ---- --------- ------ --------- ------ ------------
DECEMBER 31,
1999............ 5,455,350 5,455 9,183,334 9,183 233,333 233 2,545,339 2,546 5,464,479 5,465 98,030,187
SIX MONTHS
UNAUDITED:
Exercise of
warrants........ -- -- 906,250 908 -- -- -- -- -- -- 4,145,212
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- -- -- 546,447 546 4,999,454
Issuance of
Series C
Preferred Stock
to cash
investors at
$9.15 per
share........... -- -- -- -- -- -- 19,126 19 -- -- 174,981
Deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- 4,091,030
Amortization of
deferred
employee
compensation.... -- -- -- -- -- -- -- -- -- -- --
Exercise of
stock options... 40,475,346 40,476 -- -- -- -- -- -- -- -- 429,142
Issuance of
restricted
stock........... -- -- -- -- -- -- -- -- -- -- 37,995,430
Warrant cost
related to third
parties......... -- -- -- -- -- -- -- -- -- -- 377,146
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ------- ---- --------- ------ --------- ------ ------------
JUNE 30, 2000
(UNAUDITED)..... 45,930,696 $45,931 10,089,584 $10,091 233,333 $233 2,564,465 $2,565 6,010,926 $6,011 $150,242,582
========== ======= ========== ======= ======= ==== ========= ====== ========= ====== ============
<CAPTION>
Total
Deferred Stockholders'
Accumulated Employee Notes (Deficiency)
Deficit Compensation Receivable Equity
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of
Series A
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... $ -- $ -- $ -- $11,640,000
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
intellectual
property........ -- -- -- 393
Issuance of
Series A
Preferred Stock
at inception to
noncash
investors for
contribution of
equipment....... -- -- -- 1,700,000
Issuance of
Series B
Preferred Stock
at inception to
cash investors
at $2.40 per
share........... -- -- -- 560,000
Issuance of
Common Stock at
par value....... -- -- -- 518
Financing cost.. -- -- -- (17,200)
Net loss........ (5,264,999) -- -- (5,264,999)
------------- ------------- ------------- -------------
DECEMBER 31,
1997............ (5,264,999) -- -- 8,618,712
Issuance of
Series A
Preferred Stock
to cash
investors at
$2.40 per
share........... -- -- -- 1,000,000
Issuance of
Common Stock at
partnership
value........... -- -- -- 84,000
Deferred
employee
compensation.... -- (2,130,000) -- --
Amortization of
deferred
employee
compensation.... -- 950,000 -- 950,000
Net loss........ (20,510,474) -- -- (20,510,474)
------------- ------------- ------------- -------------
DECEMBER 31,
1998............ (25,775,473) (1,180,000) -- (9,857,762)
Issuance of
Series C
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 23,180,184
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 49,664,342
Exercise of
stock options... -- -- -- 12,054
Warrant cost
related to third
parties......... -- -- -- 1,652,967
Issuance of
warrants........ -- -- -- 150,196
Issuance of
options to
employees....... -- -- -- 61,700
Deferred
employee
compensation.... -- (6,233,915) -- --
Amortization of
deferred
employee
compensation.... -- 2,609,831 -- 2,609,831
Net loss........ (19,799,294) -- -- (19,799,294)
------------- ------------- ------------- -------------
DECEMBER 31,
1999............ (45,574,767) (4,804,084) -- 47,674,218
SIX MONTHS
UNAUDITED:
Exercise of
warrants........ -- -- -- 4,146,120
Issuance of
Series D
Preferred
Stock to cash
investors at
$9.15 per
share........... -- -- -- 5,000,000
Issuance of
Series C
Preferred Stock
to cash
investors at
$9.15 per
share........... -- -- -- 175,000
Deferred
employee
compensation.... -- (4,091,030) -- --
Amortization of
deferred
employee
compensation.... -- 1,288,886 -- 1,288,886
Exercise of
stock options... -- -- -- 469,618
Issuance of
restricted
stock........... -- -- $(37,995,430) --
Warrant cost
related to third
parties......... -- -- -- 377,146
Net loss........ (19,444,820) -- -- (19,444,820)
------------- ------------- ------------- -------------
JUNE 30, 2000
(UNAUDITED)..... $(65,019,587) $(7,606,228) $(37,995,430) $39,686,168
============= ============= ============= =============
</TABLE>

See notes to financial statements.

F-6
<PAGE>

TELLIUM, INC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
May 8, 1997
(Inception) to Year Ended December 31, Six Months Ended June 30,
December 31, -------------------------- --------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(5,264,999) $(20,510,474) $(19,799,294) $ (9,428,260) $(19,444,820)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 124,392 458,102 1,096,956 509,221 813,357
Provision for doubtful
accounts............. -- -- 60,000 -- --
Provision for
inventory valuation.. -- -- 256,057 -- --
Amortization of
deferred compensation
expense.............. -- 950,000 2,609,831 1,277,144 1,288,886
Stock based
compensation......... -- -- 61,700 45,299 6,221
Warrant cost related
to third parties..... -- -- 1,652,967 -- 370,925
Interest incurred for
bridge financing..... -- -- 498,404 289,516 --
Gain on disposal of
fixed assets......... (160,260) -- -- -- --
Write-down of in-
process research and
development expense.. 2,400,393 -- -- -- --
Changes in assets and
liabilities:
Decrease (increase)
in due from
stockholder......... (84,954) (189,446) 264,400 (70,000) 10,000
Decrease (increase)
in accounts
receivable.......... -- -- (2,175,755) (421,167) (4,957,820)
Decrease (increase)
in inventory........ -- -- (1,901,242) (1,998,576) (4,302,023)
Decrease (increase)
in prepaid expenses
and other current
assets.............. (62,900) 16,106 (400,930) (42,549) (2,609,053)
Decrease (increase)
in other assets..... (30,645) (21,109) (129,607) (806) (55,213)
(Decrease) increase
in accounts
payable............. 258,543 3,027,890 (1,074,375) (1,542,239) 3,746,728
(Decrease) increase
in accrued expenses
and other current
liabilities......... 471,861 2,430,463 (1,535,175) (1,331,801) 1,219,978
(Decrease) increase
in other long-term
liabilities......... -- -- 7,900 5,932 (2,273)
----------- ------------ ------------ ------------ ------------
Net cash used in
operating
activities......... (2,348,569) (13,838,468) (20,508,163) (12,708,286) (23,915,107)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (435,170) (2,200,343) (1,708,432) (1,244,555) (2,420,738)
Purchase of
intellectual
property............. (2,400,000) -- -- -- --
Proceeds from fees
under nonexclusive
licensing agreement.. 600,000 -- -- -- --
Proceeds from the sale
of fixed assets...... 1,424,835 -- -- -- --
----------- ------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (810,335) (2,200,343) (1,708,432) (1,244,555) (2,420,738)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
debt................. (617,711) (43,997) (5,000,000) (5,000,000) (284,920)
Principal payments on
capital lease
obligations.......... -- -- (50,631) (14,508) (180,876)
Proceeds from long-
term borrowings...... -- 5,000,000 1,806,871 -- 2,000,000
Proceeds under bridge
financing
agreements........... -- 9,392,030 11,607,970 10,757,028 --
Issuance of Series A
Preferred Stock...... 11,640,000 1,000,000 -- -- 4,146,118
Issuance of Series B
Preferred Stock...... 560,000 -- -- -- --
Issuance of Series C
Preferred Stock,
net.................. -- -- 6,890,343 6,890,343 175,002
Issuance of Series D
Preferred Stock,
net.................. -- -- 44,455,794 -- 5,000,000
Issuance of common
stock................ 518 350 12,054 11,962 469,618
----------- ------------ ------------ ------------ ------------
Net cash provided by
financing
activities......... 11,582,807 15,348,383 59,722,401 12,644,825 11,324,942
----------- ------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 8,423,903 (690,428) 37,505,806 (1,308,016) (15,010,903)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- 8,423,903 7,733,475 7,733,475 45,239,281
----------- ------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 8,423,903 $ 7,733,475 $ 45,239,281 $ 6,425,459 $ 30,228,378
=========== ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION--
Cash paid for
interest............. $ 19,800 $ 23,913 $ 26,296 $ 11,318 $ 105,940
=========== ============ ============ ============ ============
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Series C
and D Preferred Stock
in exchange for
senior convertible
notes................ -- -- $ 21,498,389 $ 16,289,868 --
Acquisition of
property and
equipment under a
capital lease........ -- -- $ 164,159 $ 12,900 $ 1,667,228
</TABLE>

See notes to financial statements.

F-7
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM MAY 8, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND FOR
THE YEARS ENDED DECEMBER 31, 1998 AND 1999

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Tellium, Inc. (the "Company" or "Tellium"), a Delaware corporation, was
incorporated on April 21, 1997 and began business operations on May 8, 1997
(inception date). Tellium designs, develops and markets high-speed, high-
capacity, intelligent optical switching solutions that enable network service
providers to quickly and cost-effectively deliver new high-speed services.

Tellium has invested a significant amount of its effort and cash in
research and development activities. At December 31, 1999, the Company has
cumulative losses of approximately $46 million. For the year ended December 31,
1999, the Company incurred a negative cash flow from operations of
approximately $21 million. Operating losses are expected to continue in 2000.

The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, dependence on key personnel, and the
ability to obtain additional capital as needed to meet its product plans. The
Company's ultimate success is dependent upon its ability to successfully
develop and market its products and to raise additional capital. To date, the
Company has been funded principally by private equity financing. Management
believes that it has several alternatives available to obtain required capital,
including private placement financing, debt financing, and/or an initial public
offering ("IPO").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information--The financial statements as of
June 30, 2000 and for the six months ended June 30, 1999 and 2000 are unaudited
but, in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of financial position, results of operations,
and cash flows. The results of operations for the six months ended June 30,
2000 are not necessarily indicative of results to be expected for the full
calendar year 2000 or any other future period.

Based on operating losses incurred through June 30, 2000 and projected for
the year ended December 31, 2000, the Company did not record an income tax
provision for the six-month period ended June 30, 2000. All deferred tax assets
are offset by a valuation allowance.

Unaudited Pro Forma Stockholders' Equity (Deficiency)--If the offering
contemplated by this prospectus is consummated, all of the Series A, Series B,
Series C, and Series D Preferred Stock outstanding as of the consummation date
of the offering will automatically be converted into common stock. Each share
of preferred stock outstanding converts into six shares of common stock. Based
on Series A, Series B, Series C, and Series D Preferred Stock outstanding at
June 30, 2000, an aggregate of 113,389,848 shares of common stock will be
issued upon conversion. Unaudited pro forma stockholders' equity (deficiency)
at June 30, 2000, assuming the conversion of Series A, Series B, Series C, and
Series D Preferred Stock into common stock, is disclosed on the balance sheet.

Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash and Cash Equivalents--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. The majority of the Company's cash equivalents are invested
in overnight repurchase agreements, which are secured by the U.S. Government.

F-8
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out (FIFO) method.

Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets. Maintenance and repair costs
are charged to expense as incurred and renewals and improvements that extend
the useful life of the assets are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are eliminated from
the respective accounts and a resulting gain or loss is reported as income or
expense. Leasehold improvements are amortized over the shorter of the estimated
useful life of the property or the term of the lease.

The estimated useful lives for financial reporting purposes are as follows:

<TABLE>
<S> <C>
Equipment......................................................... 3-5 years
Furniture and fixtures............................................ 3-5 years
Acquired software................................................. 3 years
Leasehold improvements............................................ 3-7 years
</TABLE>

Revenue Recognition--The Company recognizes revenue from equipment sales
when the product has been shipped. For transactions where the Company has yet
to obtain customer acceptance, revenue is deferred until terms of acceptance
are satisfied. Sales contracts do not permit the right of return of product by
the customer.

Software license revenue for software embedded within the Company's optical
switches or its stand alone software products is recognized when a purchase
order has been received or a sales contract has been executed, delivery of the
product and acceptance by the customer have occurred, the license fees are
fixed and determinable, and collection is probable. The portion of revenue that
relates to the Company's obligations to provide customer support, if any, are
deferred, based upon the price charged for customer support when it is sold
separately, and recognized ratably over the maintenance period. Amounts
received in excess of revenue recognized are included as deferred revenue in
the accompanying balance sheet. Revenue from technical support and maintenance
contracts is deferred and recognized ratably over the maintenance period.

Revenue and estimated profits on long-term contracts are recognized under
the percentage of completion method of accounting. Profit estimates are revised
periodically based on changes in facts. Any losses on contracts are recognized
immediately. The Company does not have any long-term contracts in process at
December 31, 1999 and June 30, 2000.

The Company has granted warrants to a customer in connection with a supply
contract. The fair value of the warrants earned under the agreement are
recorded as an offset to revenue in the accompanying statement of operations.

Product Warranty--The Company provides for estimated costs to fulfill
customer warranty obligations upon the recognition of related equipment
revenue. Actual warranty costs incurred are charged against the accrual when
paid.

Income Taxes--The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences attributable to differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and their respective tax bases, and for operating loss and tax credit
carryforwards. A valuation allowance is recorded if it is "more likely than
not" that a portion or all of a deferred tax asset will not be realized.

F-9
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Fair Value of Financial Instruments--In the opinion of management, the
estimated fair value of the Company's financial instruments, which include cash
equivalents, accounts receivable, and accounts payable, approximates their
carrying value.

Research and Development Costs--Research and development costs are charged
to expense as incurred.

Concentration of Credit Risk--Financial instruments which potentially
subject the Company to credit risk consist principally of accounts receivable.
For 1998, one customer accounted for all revenues. For 1999, two customers
accounted for 63% and 27% of revenues, respectively. Accounts receivables from
one customer represented 93% of the outstanding balance at December 31, 1999.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
maintains reserves for potential credit losses based upon the credit risk of
specified customers. The Company's entire cash and cash equivalents balance at
December 31, 1999 were on deposit with one financial institution. One customer
accounted for all of the Company's accounts receivable at June 30, 2000 and
approximately 99% of the Company's revenue for the six months ended June 30,
2000.

Equity-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, compensation expense is based on the
difference, if any, generally on the date of grant, between the fair value of
the Company's stock and the exercise price of the option. The Company accounts
for equity instruments issued to nonemployees in accordance with the provisions
of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. All transactions
in which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair value
of the equity instrument issued is the date on which the counterparty's
performance is complete. For transactions in which equity instruments are
issued to customers, the accounting treatment is dependent upon the facts and
circumstances of each customer agreement. The measurement date of the fair
value of the equity instrument is the date on which the customer's performance
is complete. In general, the fair value of equity instruments issued to
customers is recorded as a reduction of revenue as the customer fulfills its
obligation under supply contracts. See note 6 to the financial statements.

Software Development Costs--SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated product life. The Company defines technological feasibility as
being attained at the time a working model is completed. To date, the period
between achieving technological feasibility and the general availability of
such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.

Net Loss Per Share--Basic net loss per share is computed by dividing the
net loss for the period by the weighted average number of common shares
outstanding during the period. Weighted average common shares outstanding for
purposes of computing basic net loss per share includes founders shares and
restricted stock (see note 6), as there is no mandatory forfeiture of this
common

F-10
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

stock should employment terminate. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period, if dilutive. Common
equivalent shares are composed of the incremental common shares issuable upon
the conversion of preferred stock and the exercise of stock options and
warrants, using the treasury stock method. As the effect of common equivalent
shares is anti-dilutive, basic and net loss per share are the same. For the
period from May 8, 1997 through December 31, 1997, for the years ended December
31, 1998 and 1999, and for the six month period ended June 30, 2000,
potentially dilutive shares of 54,060,000, 67,320,852, 147,806,452 and
155,759,958, respectively, were excluded from the diluted weighted average
shares outstanding calculation.

Unaudited pro forma basic and diluted loss per common share are computed as
described above, and also gives effect to the conversion of Series A, Series B,
Series C, and Series D Preferred Stock. Each share of Preferred Stock
outstanding automatically converts to six shares of common stock upon
completion of an IPO.

Segments--The Company has adopted SFAS No.131, Disclosure about Segments of
an Enterprise and Related Information, which requires companies to report
selected information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas, and major customers.
Operating segments are determined based on the way management organizes its
business for making operating decisions and assessing performance. The Company
has determined that it conducts its operations in one business segment, the
telecommunications network segment. All of the Company's revenues are derived
from customers based in the United States.

Recent Financial Accounting Pronouncements--In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of these
instruments at fair value. The statement, as amended, is effective for fiscal
years beginning after June 15, 2000. The Company is required to adopt this
standard, as amended, effective January 1, 2001. Management believes that
adopting this statement will not have a material impact on the financial
position, results of operations, or cash flows of the Company.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, ("SAB 101") "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The Company has reviewed these criteria and believes its policies for revenue
recognition to be in accordance with SAB 101.

Long-Lived Assets--Whenever events indicate that the carrying values of
long-lived assets may not be recoverable, the Company evaluates the carrying
value of such assets using future undiscounted cash flows. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset, the Company will recognize an impairment loss equal to the difference
between the fair value and the carrying value of such asset. Management
believes that as of December 31, 1999 the carrying values of long-lived assets
are appropriate.

Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.

F-11
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
June 30,
1999 2000
---------- -----------
(Unaudited)
<S> <C> <C>
Raw materials......................................... $ 567,850 $3,789,943
Work-in-process....................................... 289,199 1,576,023
Finished goods........................................ 1,044,193 837,299
---------- ----------
$1,901,242 $6,203,265
========== ==========
</TABLE>

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Equipment................................ $2,163,239 $3,440,860 $6,115,526
Furniture and fixtures................... 243,055 324,020 438,515
Acquired software........................ 628,041 1,112,883 2,311,380
Leasehold improvements................... 165,633 183,936 284,245
---------- ---------- ----------
3,199,968 5,061,699 9,149,666
Less accumulated depreciation and
amortization............................ 524,982 1,612,556 2,425,911
---------- ---------- ----------
Property, plant and equipment--Net....... $2,674,986 $3,449,143 $6,723,755
========== ========== ==========
</TABLE>

Equipment includes approximately $118,000 and $283,065 of assets acquired
through capital leases as of December 31, 1998 and 1999, respectively.
Accumulated amortization related to these assets was $46,923 and $56,255 at
December 31, 1998 and 1999, respectively.

Depreciation and amortization expenses for 1997, 1998 and 1999 related to
property and equipment totaled $124,392, $458,102, and $1,090,922,
respectively.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1998 1999 2000
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Accrued professional fees................ $ 535,584 $ 527,237 $ 550,676
Accrued compensation and related
expenses................................ 405,129 432,657 1,029,292
Accrued purchases........................ 950,135 -- --
Deferred revenue......................... 450,000 73,500 239,998
Warranty reserve......................... -- 100,000 394,911
Other.................................... 495,026 167,328 305,823
---------- ---------- ----------
$2,835,874 $1,300,722 $2,520,700
========== ========== ==========
</TABLE>

F-12
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

6. STOCKHOLDERS' EQUITY

Common Stock--On May 8, 1997, the founders of the Company purchased
3,108,000 shares of common stock under a Management Investor Subscription
Agreement. Under this agreement, these shares are subject to a vesting
schedule over a three-year or four-year period and the Company has the right
to repurchase any non-vested shares at the price paid by the founder when a
founder leaves the Company. During 1998, an additional 2,100,000 shares of
common stock were purchased under this agreement. During 1999, employees
exercised 247,350 stock options increasing the total amount of outstanding
shares of common stock to 5,455,350.

Preferred Stock--The Company is authorized to issue 10,332,917 shares of
$.001 par value Series A Preferred Stock, 233,333 shares of $.001 par value
Series B Preferred Stock, 2,593,974 shares of $.001 par value Series C
Preferred Stock, and 6,010,926 shares of $.001 par value Series D Preferred
Stock.

On May 8, 1997, the initial investors in the Company entered into a stock
purchase and contribution agreement (the "Agreement"). In accordance with the
Agreement, cash investors were issued 4,850,000 shares of Series A Preferred
Stock at $2.40 per share and 233,333 shares of Series B Preferred Stock at
$2.40 per share. Non-cash investors were issued 3,916,667 shares of Series A
Preferred Stock and contributed intellectual property and equipment which were
valued at the contributor's historical cost of $1,700,393.

On May 20, 1998, a cash investor was issued 416,667 shares of Series A
Preferred Stock at $2.40 per share for a total investment of $1 million.

On February 11, 1999, the Company issued 765,027 shares of Series C
Preferred Stock at $9.15 per share. Simultaneously, a Senior Convertible Note
plus accrued interest of $16,289,847 was converted into 1,780,312 shares of
Series C Preferred Stock at $9.15 per share (see Note 7). The total number of
shares issued was 2,545,339 and the total dollar value of the transactions,
net of issuance costs of $109,660, was $23,180,184.

On November 30, 1999, the Company issued 4,895,239 shares of Series D
Preferred Stock at $9.15 per share. Simultaneously, a Senior Promissory Note
plus accrued interest of $5,208,542 was converted into 569,240 shares of
Series D Preferred Stock at $9.15 per share. The total number of shares issued
was 5,464,479 and the total dollar value of the transaction, net of issuance
costs of $335,638, was $49,664,342.

Significant terms of Series A, Series B, Series C and Series D Preferred
Stock are as follows:

. Each share of Series A, Series C, and Series D Preferred Stock is
convertible at the option of the holder, at any time, into six shares of
common stock (see note 12) at the conversion price of $2.40 per share
for Series A and $9.15 per share for Series C and Series D. The
conversion price is subject to adjustments for events of dilution as
specified in the certificate of incorporation. Each share of Series B
Preferred Stock is convertible at the option of the holder, at any time,
into one share of Series A Preferred Stock.

All shares of Series A, Series C, and Series D Preferred Stock
automatically convert, without any action by the holder, into common
stock based on the then applicable Series A, Series C, and Series D
Conversion Price in the event of either a qualified IPO (as defined) or
upon the conversion of specified percentages of the related Preferred
Stock. All shares of Series B Preferred Stock automatically convert,
without any action by the holder, into Common Stock based on the then
applicable conversion price for the Series A Preferred Stock in the event
of the automatic conversion of Series A, Series C, and Series D Preferred
Stock.

F-13
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

. The holders of Series A, Series C, and Series D Preferred Stock have
voting rights equal to the equivalent number of shares of common stock
while Series B Preferred Stock has no voting rights.

. Dividends may be declared at the discretion of the Board of Directors
and are noncumulative. Dividends for Preferred Stock have to be paid and
declared equivalent to the per-share dividend on Common Stock.

. In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A, Series B, Series C,
and Series D Preferred Stock are entitled to receive out of the assets
of the Company, whether such assets derive from capital or surplus, an
amount equal to $2.40 per share in the case of Series A and Series B
Preferred Stock and $9.15 per share in the case of Series C and Series D
Preferred Stock (subject to adjustment for any stock splits, reverse
splits or similar capitalization affecting such shares), plus any
declared but unpaid dividends on such shares. Payment of the liquidation
preference to holders of Series A, Series B, Series C, and Series D
Preferred Stock will be made pro rata among the Series A, Series B,
Series C, and Series D Preferred Stock based on the respective
liquidation preference of each such class until each such class receives
its full liquidation, before any payment is made or any assets
distributed to the holders of common stock or any other shares ranking
on liquidation junior to the Series A, Series B, Series C, and Series D
Preferred Stock.

After payment of the liquidation preference to holders of Series A,
Series B, Series C, and Series D Preferred Stock, the holders of Series
A, Series B, Series C, and Series D Preferred Stock are entitled to share
in the distribution of any remaining assets of the Corporation on the
same basis as if the holders of Series A, Series B, Series C, and Series
D Preferred Stock had converted their shares into common stock.

1997 Employee Stock Option Plan--On May 8, 1997, the Company adopted the
1997 Employee Stock Option Plan (the "Option Plan"). The Option Plan authorized
the granting of both incentive and nonqualified stock options for an aggregate
of 6,000,000 shares of common stock, subject to authorization by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"). Options generally vest over a four-year period from the grant
date. The Board approved adding 792,000 shares to the 1997 Employee Stock
Option Plan on July 15, 1998.

During the year ended December 31, 1999, the number of shares authorized
under the Stock Plan was amended by the Compensation Committee to allow a total
of 35,850,000 options to be granted under the plan.

F-14
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Stock option activity regarding the Option Plan is summarized as follows:

<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------- --------
<S> <C> <C>
Options granted..................................... 60,000 $0.04
Options exercised................................... -- --
Options cancelled................................... -- --
----------- -----
Outstanding as of December 31, 1997................... 60,000 0.04
----------- -----
Options granted..................................... 5,496,000 0.07
Options exercised................................... -- --
Options cancelled................................... (735,150) 0.04
----------- -----
Outstanding as of December 31, 1998................... 4,820,850 0.07
----------- -----
Options granted..................................... 24,143,016 0.78
Options exercised................................... (247,350) 0.05
Options cancelled................................... (2,145,948) 0.08
----------- -----
Outstanding as of December 31, 1999................... 26,570,568 $0.72
----------- -----
Options granted..................................... 49,591,200 1.07
Options exercised................................... (40,475,346) 0.95
Options cancelled................................... (3,993,366) 0.90
----------- -----
Outstanding as of June 30, 2000....................... 31,693,056 0.95
----------- -----
Exerciseable as of December 31, 1999.................. 2,873,928
Available for future grants as of December 31, 1999... 9,032,082
Exercisable as of June 30, 2000....................... 1,257,876
Available for future grants as of June 30, 2000....... 5,518,320
</TABLE>

At December 31, 1999, stock options outstanding were as follows:

<TABLE>
<CAPTION>
Weighted
Average Weighted
Contractual Average
Exercise Options Life Exercisable Exercise
Prices Outstanding (Years) Options Price
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.04 2,531,502 8.23 851,502 $0.04
0.09 6,464,820 9.39 1,639,926 0.09
0.17 288,000 9.08 31,500 0.17
0.40 350,250 8.75 51,000 0.40
1.07 16,935,996 9.91 300,000 1.07
---------- ---- --------- -----
26,570,568 9.60 2,873,928 0.18
========== ==== ========= =====
</TABLE>

In connection with the grant of certain stock options to employees in 1998
and 1999, the Company recorded deferred stock compensation of $2,130,000 and
$6,233,915 in 1998 and 1999, respectively, for the difference between the
exercise price and the fair value of the underlying common stock at the date of
the grant. Such amount is presented as a reduction of stockholders' equity and
is amortized over the vesting period of the related stock options. Non-cash
compensation expense of $950,000 and $2,671,531 were recorded in the statement
of operations for the years ended December 31, 1998 and 1999, respectively.

F-15
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Had the Company elected to recognize compensation expense for stock options
according to SFAS 123, based on the fair value at the grant dates of the
awards, net loss and net loss per share would have been as follows:

<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported..................... $(5,264,999) $(20,510,474) $(19,799,294)
Pro forma....................... (5,266,600) (20,850,000) (21,976,600)
Net loss per basic and diluted
share:
As reported..................... $ (1.69) $ (4.83) $ (3.71)
Pro forma....................... (1.69) (4.91) (4.12)
</TABLE>

The weighted average fair value of the Company's stock options was
calculated using the Black-Scholes Model with the following weighted average
assumptions used for grants: no dividend yield; expected volatility of 0%
(minimum value); a risk free interest rate of 6.25%; and expected lives of 4
years. The weighted average fair value of options granted during the years
ended December 31, 1997, 1998 and 1999 was $0.05, $1.74 and $2.76 per share,
respectively.

Warrants--Set forth below is a summary of the Company's outstanding
warrants at December 31, 1999:

<TABLE>
<CAPTION>
Exercise
Underlying Security Price Warrants Expiration Date
------------------- -------- ---------- ------------------
<S> <C> <C> <C>
Common Stock (1)...................... $1.53 10,452,000 September 21, 2005
Preferred Stock C (2)................. 9.15 29,509 November 10, 2009
Preferred Stock A (3)................. 4.58 1,000,000 June 30, 2000
</TABLE>
--------

(1) In conjunction with executing a supply contract with a customer in
September 1999, the Company granted a warrant to purchase up to 10,452,000
shares of the Company's common stock at an exercise price of $1.53 per
share. Upon execution of the agreement, 2,090,400 of the shares subject to
the warrant vested, with the vesting of the remaining shares dependent upon
the volume of the customer's purchases from the Company. As the 2,090,400
warrants vested upon execution of the supply agreement and are not subject
to forfeiture, a measurement date has occurred for those warrants, and a
charge of $1,048,707 was recorded to sales and marketing expense for the
year ended December 31, 1999 to reflect the fair value of the warrants at
grant date. As the vesting of the remaining warrants are dependent upon
purchases made by the customer, variable plan accounting is used and
related charges will vary each accounting period until the final
measurement date. A measurement date occurs when customer purchases reach
certain specified levels. Charges of $558,961 have been recorded as an
offset to gross revenue for the year ended December 31, 1999 to reflect the
fair value of the warrants earned by the customer based upon purchases
through that date. Fair value is determined utilizing a Black-Scholes
option pricing model. Assumptions utilized by the Company in its Black-
Scholes calculations include volatility of 80%, expected life of 3 years,
and a risk free interest rate of 6%.
(2) Issued in connection with Tellium's November 1999 financing agreement (see
Note 7).
(3) Issued in connection with Tellium's December 1998 convertible note issuance
(see Note 7).

F-16
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

7. NOTES PAYABLE

a. Senior Convertible Notes--Stockholders

On December 30, 1998, the Company entered into a $16 million bridge
financing with the then preferred stockholders. At December 31, 1998,
$9,392,030 of proceeds were received, with the remaining financing received in
January 1999. The bridge financing agreement took the form of Senior
Convertible Notes with an interest rate of 18% per annum and was scheduled to
mature upon the earlier of the closing of a next round of financing, June 30,
1999, or a sale transaction (as defined in the agreement). As part of this
transaction, the providers of the bridge financing received warrants to
purchase 1 million shares of Series A Preferred Stock at an exercise price
equal to 50% of the price paid for preferred stock in the succeeding round of
financing, or $2.40 per share if a preferred stock financing transaction did
not take place by June 30, 1999. The warrants are exercisable at any time at
the option of the holder and expire on June 30, 2000 or in the event of a
qualified IPO.

In conjunction with the issuance of Series C Preferred Stock on February
11, 1999 (see Note 6), the $16 million bridge financing and related accrued
interest were converted into Series C Preferred Stock at $9.15 per share.

As part of the bridge financing agreement, the Company approved the
authorization of 7 million shares of Series C Preferred Stock and an additional
authorization of 1.5 million shares of Series A Preferred Stock, both with a
par value of $0.001.

On June 30, 1999, the Company entered into a $5 million bridge financing
agreement with current preferred stockholders. The bridge financing agreement
was secured via a Senior Promissory Note with an interest rate of 9.75% per
annum and was scheduled to mature upon the earlier of December 26, 1999 or the
closing of a sale transaction (as defined in the agreement). In conjunction
with the issuance of Series D Preferred Stock on November 30, 1999 (see Note
6), the $5 million Senior Promissory Note and accrued interest were converted
into Series D Preferred Stock at $9.15 per share.

b. Debt--Nokia, Inc.

During 1998, the Company borrowed $5,000,000 from Nokia, Inc. under a
series of note agreements. These borrowings were paid off in January 1999.

c. Secured Promissory Notes--Comdisco, Inc.

On November 23, 1999, the Company issued two secured promissory notes to
Comdisco. The notes are collateralized by substantially all of the Company's
equipment and bear interest of 7.5% per annum. The principal amounts of
$1,401,536 and $405,335 are payable in monthly installments through December 1,
2002 and June 1, 2002, respectively, commencing January 1, 2000.

Future annual maturities at December 31, 1999 are as follows:

F-17
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

d. Lines of Credit

On November 11, 1999, Tellium obtained a $4,000,000 lease-line of credit
from Comdisco, Inc. ("Comdisco"). The line of credit bears an interest rate of
7.5% and expires on November 10, 2002. At December 31, 1999 the Company had not
drawn any amount under this agreement.

In consideration of such line of credit, Tellium issued warrants to
Comdisco to purchase 29,509 shares of Series C preferred stock at an exercise
price of $9.15 per share. The warrants vested immediately upon execution of the
agreement. Vested warrants are exercisable at any time at the option of the
holder and expire on November 10, 2009; or after five years from the effective
date of the Company's qualified IPO (as defined), whichever is earlier. The
Company recorded deferred financing expense of $150,196 based on the fair value
of the warrants. Such cost are included in other assets in the accompanying
balance sheet and are amortized over the life of the line of credit.
Amortization expense was $4,172 for the year ended December 31, 1999.

8. EMPLOYEE BENEFIT PLAN

In July 1997, the Company adopted a 401(k) defined contribution plan
covering all qualified employees. The Company matches 50% of the participating
employees' contribution up to 5% of participants' contributions, capped at a
maximum 2.5% of the employee's annual salary. Company matching contributions
for 1997, 1998 and 1999 amounted to $19,879, $276,088 and $130,355,
respectively.

9. INCOME TAXES

A reconciliation of the Company's income tax provision computed at the U.S.
federal statutory rates to the recorded income tax provision for the period
from inception to December 31, 1997 and for the years ended December 31, 1998
and 1999, is as follows:

<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate.......... $(1,790,000) $(6,973,000) $(6,732,000)
State income taxes, net of federal
benefit............................ (315,000) (1,218,000) (1,210,000)
Research and development credits and
other.............................. -- (863,000) (1,424,000)
Valuation allowance recorded........ 2,105,000 9,054,000 9,366,000
----------- ----------- -----------
Recorded tax provision.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

F-18
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

The components of the Company's deferred tax asset at December 31, 1998 and
1999, is as follows:

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liability:
Deferred rent.................................. $ -- $ (11,000)
Deferred revenue............................... -- (31,600)
Warranty reserve............................... -- (43,000)
Fixed assets................................... (82,000) --
Deferred tax assets:
Net operating loss carryforwards............... 8,953,000 16,400,000
Intangible assets.............................. 874,000 900,000
Compensation expenses.......................... 380,000 1,550,000
Fixed assets................................... -- 150,000
Research and development credits............... 900,000 1,400,000
Accrued expenses............................... 134,000 --
Allowance for bad debt......................... -- 25,800
Inventory reserve.............................. -- 78,800
Inventory capitalization....................... -- 125,000
----------- -----------
Total net deferred tax assets................... 11,159,000 20,544,000
Less valuation allowance........................ (11,159,000) (20,544,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

At December 31, 1999, the Company has available U.S. net operating loss
carryforwards of approximately $38 million, approximately $16 million of which
will expire in 2019, $19 million of which will expire in 2018 and $2.7 million
which will expire in 2012. In addition, the Company also has available research
and development tax credit carryforwards of approximately $1.4 million, of
which $500,000 will expire in 2019 and $900,000 will expire in 2018.

10. RELATED PARTY TRANSACTIONS

On May 8, 1997, the Company purchased intellectual property from one of its
stockholders for $2.4 million in cash and a secured promissory note for
$600,000. The note bore interest at the bank's prime rate and was secured by
certain fabrication equipment.

On May 8, 1997, the Company entered into a nine-month lease agreement with
one of its stockholders to rent certain office space within the stockholder's
location at a base rent of $68,872 per month, plus sales, use and occupancy
tax. The lease could be terminated with 30 days written notice, and was
terminated on July 31, 1997. The total rental expense and other miscellaneous
costs for this lease were approximately $153,000.

On May 8, 1997, the Company entered into an agreement with one of its
stockholders to hire one of their employees at a fee of $16,666 per month plus
expenses. The total expense under this contract from inception to December 31,
1997 totaled approximately $150,000.

The Company paid a stockholder $75,000 for reimbursement of legal expenses
during the period ended December 31, 1997. The Company also purchased
approximately $100,000 of furniture from two stockholders for the period ended
December 31, 1997.

F-19
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

The Company paid approximately $100,000, $525,000 and $118,059 in
consulting expenses to one of its stockholders during 1997, 1998 and 1999,
respectively.

The Company entered into a three-year employment agreement with a former
employee of one of its stockholders. As part of this agreement, the Company
agreed to pay 80% of the employee's COBRA until a health plan was in place. The
stockholder agreed to pay annually $30,400 of additional compensation for the
employee commencing on July 28, 1997 and ending on July 28, 1999.

Approximately $1.4 million of the Company's revenue in 1999 and all of the
Company's revenue in 1998 were derived from sales to an affiliate of one of
Tellium's stockholders. In addition, Tellium purchased approximately $134,000
and $360,000 of product from this Company in 1998 and 1999, respectively.

Tellium has entered into a series of agreements with some of its
stockholders for joint development of technology, consulting agreements, master
collaborative agreements, technology transfer agreements and certain specific
project agreements under various terms for periods up to five years. Some of
these agreements provide for discounts for products sold to Tellium and for
royalties to be paid to Tellium, with amounts and terms to be determined. No
significant transactions have occurred under these agreements through December
31, 1999.

11. COMMITMENTS AND CONTINGENCIES

The Company leases certain telephone, computer and other equipment under
long-term capital leases and has the option to purchase such equipment at a
nominal cost at the termination of the leases. In addition, the Company is
obligated under an operating lease for a facility. The Company terminated an
operating lease for office space that was to expire in 2002 and, on February 6,
1998, the Company signed a new, noncancelable lease for a facility in
Oceanport, New Jersey that expires in 2003.

Future minimum lease payments for the capital and operating leases with
initial or remaining terms in excess of one year as of December 31, 1999 are as
follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
2000.................................................... $132,746 $ 348,866
2001.................................................... 95,321 348,866
2002.................................................... 51,016 348,866
2003.................................................... 10,082 87,217
2004.................................................... 380 --
Thereafter.............................................. -- --
-------- ----------
Total future minimum lease payments..................... $289,545 $1,133,815
======== ==========
Amount representing interest............................ $ 56,832
========
Present value of minimum lease payments................. $232,713
========
Current portion of capital lease obligation............. $116,603
========
Noncurrent portion of capital lease obligation.......... $116,110
========
</TABLE>

F-20
<PAGE>

TELLIUM, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Rent expense for the period from inception through December 31, 1997 and
for the years ended December 31, 1998 and 1999 were $236,007, $294,641 and
$340,989, respectively.

12. OTHER EQUITY TRANSACTIONS

In January 2000, the Company issued 546,447 shares of Series D Preferred
Stock at $9.15 per share. The proceeds to the Company were $5,000,000. The
Series D Preferred Stock has identical terms to the Series D Preferred Stock
that was issued during 1999.

On June 22, 2000 the Company's board of directors approved a 3 for 1 common
stock split for shareholders of record as of that date. The stock split became
effective August 11, 2000. Shares of outstanding Series A, Series B, Series C,
and Series D Preferred Stock, which were originally convertible into common
stock on a 1 for 1 basis, were amended to be convertible into common stock on a
3 for 1 basis. All share, and per share information included in these financial
statements have been restated to include the effects of the stock split for all
periods presented.

On October 10, 2000, the Company's board of directors approved a 2 for 1
stock split for shareholders of record as of that date. The stock split become
effective November 6, 2000. Shares of outstanding Series A, Series B, Series C
and Series D which as amended were convertible into common stock on a 3 for 1
basis, are now convertible into common stock on a 6 for 1 basis. All share, and
per share information included in these financial statements have been restated
to include the effects of the stock split for all periods presented.

13. SUBSEQUENT EVENTS--UNAUDITED

During the six months ended June 30, 2000, the number of shares authorized
under the 1997 Employee Stock Option Plan was amended to allow a total of
65,850,000 options to be granted under the plan.

During the quarter ended June 30, 2000, certain employees exercised stock
options for 37,177,200 shares of common stock. The consideration given by
employees were full recourse notes with a 7.5% interest rate. Upon exercise,
the employees received 37,177,200 shares of restricted common stock with
substantially the same terms and vesting period as the exercised options.

During the quarter ended June 30, 2000, the Company entered into a
$10,000,000 line of credit facility with Commerce Bank. The line of credit
bears interest at 6.75% and expires on June 30, 2001. The Company borrowed
$2,000,000 under this line in the quarter ended June 30, 2000.

On August 29, 2000, the Company entered into an agreement to acquire all of
the outstanding common stock of Astarte Fiber Networks in exchange for
7,500,000 shares of Tellium common stock for an estimated purchase price of
$112.5 million. The acquisition of Astarte which closed on October 10, 2000
will be recorded using the purchase method.

On September 1, 2000, the Company entered into an agreement with AT&T Corp.
to license certain intellectual property in exchange for 3,000,000 shares of
Tellium common stock with an estimated fair value of $45 million.

During September 2000, the Company sold 7,274,413 shares of Series E
Preferred Stock in a private placement offering, raising proceeds of
approximately $213.0 million. Each share of Series E Preferred Stock will
automatically convert into common stock upon completion of an initial public
offering, based on the initial public offering price.

F-21
<PAGE>

During September 2000, in conjunction with executing a customer supply
agreement, the Company granted a warrant for 4,000,000 shares of common stock
exercisable at $15.00 per share and sold 666,666 shares of common stock to
officers and affiliates of the customer. The fair value of the warrants,
approximately $34.5 million, will be recorded as an offset to revenue as the
customer makes purchases under the agreement.

The Company has granted approximately 7,224,158 stock options to employees
subsequent to June 30, 2000. The Company will record deferred stock
compensation expense of approximately $78.8 million for the difference between
the exercise price and the fair value of the underlying common stock at the
date of the grant. This amount will be amortized over the vesting period of the
related stock options.

In September 2000, our customer, Extant, Inc., was acquired by Dynegy
Global Communications Inc., a subsidiary of Dynegy, Inc. In connection with the
transaction, our supply contract was transferred to Dynegy Connect. In November
2000, the terms of the Company's warrant agreement (see note 6) with Dynegy was
amended, to immediately vest all of the remaining shares subject to the
warrants. The shares subject to the warrants become exercisable based on the
schedule of milestones previously contained in the warrant. If the milestones
are not reached by March 31, 2005, the remaining unexercised shares subject to
the warrant shall then become exercisable. In connection with the execution of
this amendment, we expect to incur a non-cash charge of approximately $90.6
million. This charge will be recorded as a reduction of revenue as the customer
makes purchases under the agreement.

* * * * * *

F-22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying balance sheets of Astarte Fiber Networks,
Inc. (a Colorado corporation) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Astarte Fiber Networks,
Inc. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.

/s/ Arthur Andersen

Denver, Colorado,

October 10, 2000.

F-23
<PAGE>

Page 1 of 2

ASTARTE FIBER NETWORKS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
ASSETS 1999 1998 2000
------ ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 601,600 $1,696,868 $ 300,206
Trade accounts receivable, net of
allowance of $20,369, $20,369 and
$20,369, respectively................... 130,206 474,733 30,909
Inventories.............................. 663,773 1,377,948 442,099
---------- ---------- ----------
Total current assets................... 1,395,579 3,549,549 773,214
---------- ---------- ----------
PROPERTY, FIXTURES AND EQUIPMENT:
Computers and computer software.......... 411,996 381,195 413,067
Furniture, fixtures and equipment........ 401,482 392,858 403,272
Leasehold improvements................... 74,457 54,772 74,457
---------- ---------- ----------
887,935 828,825 890,796
Less--Accumulated depreciation........... (680,266) (534,178) (721,987)
---------- ---------- ----------
Property, fixtures and equipment, net.. 207,669 294,647 168,809
DEPOSITS AND OTHER ASSETS.................. 53,625 49,845 58,068
---------- ---------- ----------
Total assets........................... $1,656,873 $3,894,041 $1,000,091
========== ========== ==========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-24
<PAGE>

Page 2 of 2

ASTARTE FIBER NETWORKS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
Liabilities and Stockholders Deficit 1999 1998 2000
------------------------------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................... $ 149,705 $ 82,789 $ 181,198
Accrued liabilities.................... 238,551 551,522 327,392
Accrued interest on notes payable to
stockholders and other related
parties............................... 86,657 32,601 186,259
Line of credit......................... -- -- 300,000
Notes payable to stockholders and other
related parties, net of unamortized
discount of $93,415, $0 and $93,168,
respectively.......................... 633,192 241,134 1,133,438
Current portion of capital lease
obligations........................... 22,280 19,188 22,280
------------ ------------ ------------
Total current liabilities............ 1,130,385 927,234 2,150,567
CAPITAL LEASE OBLIGATIONS, net of current
portion................................. 46,995 69,301 36,165
------------ ------------ ------------
Total liabilities.................... 1,177,380 996,535 2,186,732
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE SERIES A
CONVERTIBLE PREFERRED STOCK, par value
$.0001, 60,000,000 shares authorized,
35,436,075 shares issued and
outstanding; liquidation value of
$14,026,641............................. 16,607,584 15,203,348 17,306,995

WARRANTS to purchase 2,009,592, 0 and
4,009,592 shares of series A convertible
preferred stock......................... 79,060 -- 157,743

MANDATORILY REDEEMABLE SERIES B
CONVERTIBLE PREFERRED STOCK, par value
$.0001, 40,000,000 shares authorized,
23,594,398 shares issued and
outstanding; liquidation value of
$7,695,763.............................. 9,615,798 8,846,223 9,999,532
STOCKHOLDERS' DEFICIT (Note 5):
Common stock, par value $.0001,
50,000,000 shares authorized,
27,646,879, 26,642,435 and 28,259,499
shares issued and outstanding,
respectively........................... 2,765 2,664 2,826
Additional paid-in capital.............. 22,760 12,816 429,059
Accumulated deficit..................... (25,848,474) (21,167,545) (29,082,796)
------------ ------------ ------------
Total stockholders' deficit.......... (25,822,949) (21,152,065) (28,650,911)
------------ ------------ ------------
Total liabilities and stockholders'
deficit............................. $ 1,656,873 $ 3,894,041 $ 1,000,091
============ ============ ============
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-25
<PAGE>

ASTARTE FIBER NETWORKS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
SALES, net................ $ 1,909,820 $ 2,697,721 $ 683,798 $ 369,982
COSTS AND EXPENSES:
Cost of goods sold...... 1,787,173 2,020,340 504,510 966,461
Research and
development............ 1,708,179 1,452,776 1,271,314 936,710
General and
administrative......... 742,393 1,155,794 823,545 406,856
Sales and marketing..... 127,275 397,755 51,032 75,649
----------- ----------- ----------- -----------
Total costs and
expenses............. 4,365,020 5,026,665 2,650,401 2,385,676
----------- ----------- ----------- -----------
Net operating loss.... (2,455,200) (2,328,944) (1,966,603) (2,015,694)

INTEREST (EXPENSE) INCOME:
Interest expense........ (66,779) (416,834) (184,724) (36,479)
Interest income......... 14,861 20,665 150 14,744
----------- ----------- ----------- -----------
Interest (expense)
income, net............ (51,918) (396,169) (184,574) (21,735)
----------- ----------- ----------- -----------
NET LOSS.................. (2,507,118) (2,725,113) (2,151,177) (2,037,429)
ACCRETION OF PREFERRED
STOCK.................... (2,173,811) (1,583,693) (1,083,145) (1,077,193)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS...... $(4,680,929) $(4,308,806) $(3,234,322) $(3,114,622)
=========== =========== =========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-26
<PAGE>

ASTARTE FIBER NETWORKS, INC.

STATEMENTS OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31,
1997................... 24,748,795 $2,475 $ -- $(16,858,739) $(16,856,264)
Exercise of employee
stock options......... 1,294,461 129 12,816 -- 12,945
Issuance of common
stock................. 599,179 60 -- -- 60
Accretion of Series A
and Series B Preferred
Stock to redemption
value................. -- -- -- (1,583,693) (1,583,693)
Net loss............... -- -- -- (2,725,113) (2,725,113)
---------- ------ -------- ------------ ------------
BALANCES, December 31,
1998................... 26,642,435 2,664 12,816 (21,167,545) (21,152,065)
Exercise of employee
stock options......... 1,004,444 101 9,944 -- 10,045
Accretion of Series A
and Series B Preferred
Stock to redemption
value................. -- -- -- (2,173,811) (2,173,811)
Net loss............... -- -- -- (2,507,118) (2,507,118)
---------- ------ -------- ------------ ------------
BALANCES, December 31,
1999................... 27,646,879 2,765 22,760 (25,848,474) (25,822,949)
Exercise of employee
stock options
(unaudited)........... 612,620 61 6,299 -- 6,360
Stock-based
compensation
(unaudited)........... -- -- 400,000 -- 400,000
Accretion of Series A
and Series B Preferred
Stock to redemption
value (unaudited)..... -- -- -- (1,083,145) (1,083,145)
Net loss (unaudited)... -- -- -- (2,151,177) (2,151,177)
---------- ------ -------- ------------ ------------
BALANCES, June 30, 2000
(unaudited)............ 28,259,499 $2,826 $429,059 $(29,082,796) $(28,650,911)
========== ====== ======== ============ ============
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-27
<PAGE>

Page 1 of 2

ASTARTE FIBER NETWORKS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.................. $(2,507,118) $(2,725,113) $(2,151,177) $(2,037,429)
Adjustments to reconcile
net loss to net cash
used in operating
activities-
Depreciation and
amortization........... 146,088 131,473 41,721 56,757
Amortization of discount
on notes payable....... 10,765 30,181 103,930 --
Provision for excess and
obsolete inventories... 400,000 118,995 -- 400,000
Stock-based
compensation........... -- -- 400,000 --
Changes in operating
assets and liabilities-
Decrease (increase) in
trade accounts
receivable.............. 344,527 (334,280) 99,297 378,590
Decrease (increase) in
inventories............. 314,175 371,989 221,674 (157,873)
(Increase) decrease in
deposits and other
assets.................. (3,780) 84,593 (4,443) (3,687)
Increase (decrease) in
accounts payable........ 66,916 (533,920) 31,493 27,035
(Decrease) increase in
accrued liabilities..... (312,971) 90,327 88,841 (316,838)
Decrease in customer
deposits................ -- (47,589) -- --
Increase in accrued
interest on notes
payable to stockholders
and other related
parties................. 28,936 199,449 74,601 7,284
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (1,512,462) (2,613,895) (1,094,063) (1,646,161)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property,
fixtures and equipment... (59,110) (110,968) (2,861) (59,110)
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (59,110) (110,968) (2,861) (59,110)
=========== =========== =========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-28
<PAGE>

Page 2 of 2

ASTARTE FIBER NETWORKS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December Six Months Ended June
31, 30,
---------------------- ----------------------
1999 1998 2000 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock................. $ 10,045 $ 13,005 $ 6,360 $ 10,045
Proceeds from issuance of
preferred stock.............. -- 4,000,000 -- --
Proceeds from notes payable to
stockholders and other
related parties.............. 502,398 581,040 800,000 --
Repayments to related
parties...................... -- -- (300,000) (16,926)
Principal and accrued interest
payments on notes payable to
stockholders and other
related parties.............. (16,925) (210,912) -- --
Borrowings under bank
financing facilities......... 689,735 -- 300,000 76,115
Repayments under bank
financing facilities......... (689,735) -- -- --
Principal payments on capital
lease obligations............ (19,214) (12,368) (10,830) (9,200)
---------- ---------- ---------- ----------
Net cash provided by
financing activities...... 476,304 4,370,765 795,530 60,034
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND
CASH EQUIVALENTS.............. (1,095,268) 1,645,902 (301,394) (1,645,237)
CASH AND CASH EQUIVALENTS,
beginning of period........... 1,696,868 50,966 601,600 1,696,868
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of period................. $ 601,600 $1,696,868 $ 300,206 $ 51,631
========== ========== ========== ==========
SUPPLEMENTAL CASHFLOW
DISCLOSURES:
Cash interest payments........ $ 27,078 $ 29,597 $ 6,159 $ 28,282
Preferred stock issued through
conversion of debt and
accrued interest............. $ -- $6,969,310 $ -- $ --
Accretion of preferred stock.. $2,173,811 $1,583,693 $1,083,145 $1,077,193
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-29
<PAGE>

ASTARTE FIBER NETWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF DECEMBER 31, 1999 AND 1998
(Information as of June 30, 2000 and for the six months
ended June 30, 1999 and June 30, 2000 is unaudited)

1. DESCRIPTION OF BUSINESS AND RISK FACTORS:

Description of Business

Astarte Fiber Networks, Inc. (the "Company"), was incorporated in October
1990 to design, manufacture and sell optical ("photonic") switches for use in
fiber optic networks. Current customers are users of fiber optic networks such
as companies in the telephone, cable television, aerospace and financial
services industries, as well as civilian and governmental data communication
computer centers. The Company completed the release of its initial generation
of switches and began generating revenues during 1995. The Company's current
activities are primarily focused on developing a next generation of switches,
which are expected to provide substantially expanded switching capacity. These
larger capacity, single mode switches are expected to be used primarily by the
telecommunications industry.

On October 10, 2000, the Company was acquired by a telecommunications
equipment and service provider in an exchange of shares intended to constitute
a tax free reorganization under Internal Revenue Service regulations. After the
acquisition, the Company became a wholly-owned subsidiary of the aforementioned
telecommunications company.

Continuing Operating Losses

Although the Company generates revenues from operations, it has sustained
operating losses since inception and will, in the future, continue to be
subject to various risks and uncertainties. Among others, these include:

. participation in a business environment that is characterized by rapid
technological change and intense competition;

. dependence on additional funding for the required investment in
engineering personnel, materials and other expenses related to
developing new products and technology;

. the Company's ability to attract and retain qualified engineering and
other personnel;

. concentration of the Company's customer base among a relatively few key
customers;

. dependence on sole source suppliers for key components; and

. the Company's ability and access to sufficient resources to successfully
market new products, once developed.

During 1997 and 1998, the Company held discussions with major
telecommunication equipment suppliers regarding investments and distribution
agreements that would enable the continued development and future marketing of
the Company's next generation of optical switches. These discussions led to a
$4.0 million investment in the Company in the second half of 1998. However, no
satisfactory agreement could be reached regarding further investments or
product sales commitments. Therefore, in order to conserve operating capital
and focus resources on new product development, the Company in early 1999
significantly reduced the manufacturing, sales and marketing staffs for its
current product line.

The Company has continued to sell its current product line and, until
December 1999, was able to maintain its reduced level of operations without
additional funding. In December 1999 and January 2000, the Company raised
additional interim working capital through a $1.0 million debt offering to
existing shareholders.

F-30
<PAGE>

In late 1999, the Company determined that it needed to obtain significant
additional funding and/or identify a company to acquire or merge with the
Company. An investment banker was retained to assist in this effort. These
efforts have culminated in the licensing agreement discussed in Note 8,
Subsequent Events; and the acquisition discussed above. As a result of these
transactions, the Company believes sufficient financial resources should be
available in order to fund operations at least through December 31, 2000.

The unaudited interim financial statements as of June 30, 2000 and for the
six months ended June 30, 1999 and 2000 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with accounting principles
generally accepted in the United States. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the operating
results to be expected for the year ended December 31, 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities at the date of the financial statements,
and reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include investments in highly liquid instruments
with an original maturity of three months or less.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method of
valuation) or market, and consist primarily of raw materials such as printed
circuit boards and other electronic components. Writedowns for excess and
obsolete inventories are charged to expense in the period when conditions
giving rise to the writedowns are first recognized.

The following is a summary of inventories at December 31:

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials..................................... $ 830,208 $ 849,819
Work in process................................... 98,667 309,215
Finished goods.................................... 626,396 745,834
---------- ----------
Total before inventory reserves............... 1,555,271 1,904,868
Less inventory reserves........................... (891,498) (526,920)
---------- ----------
Inventories, net.............................. $ 663,773 $1,377,948
========== ==========
</TABLE>

F-31
<PAGE>

Property, Fixtures and Equipment

Significant additions and improvements are capitalized at cost, while
maintenance and repairs that do not improve or extend the life of the
respective assets are charged to operations as incurred.

Property, fixtures and equipment are depreciated on a straight-line basis
over the following estimated useful lives:

<TABLE>
<S> <C>
Computers and computer
software..................... 3 to 5 years
Furniture, fixtures and
equipment.................... 5 to 7 years
Leasehold improvements........ Shorter of economic life or term of lease
</TABLE>

Income Taxes

The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, which requires deferred income tax assets and liabilities to be
recorded for the estimated future income tax effects of temporary differences
between the tax basis of assets and liabilities and amounts reported in the
accompanying balance sheets, and for operating loss and tax credit
carryforwards.

The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year.

The change in deferred income tax assets and liabilities for the period
measures the deferred income tax provision or benefit for the period. Effects
of changes in enacted tax laws on deferred income tax assets or liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The measurement of deferred income tax assets may be reduced by a
valuation allowance, based on judgmental assessment of available evidence, to
the extent it is more likely than not that some or all of the deferred income
tax assets will not be realized (Note 6).

Fair Value of Financial Instruments

The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximate their carrying amounts as of
December 31, 1999 and 1998.

Revenue Recognition

The Company recognizes revenue when products are shipped, evidence of an
arrangement exists, the selling price is fixed, and collectibility is
reasonably assured.

Research and Development

Research and development costs, consisting primarily of salaries, supplies
and contract services, are expensed as incurred.

Concentration of Credit Risk and Sales

The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral. Its accounts receivable
balances are primarily domestic and are due from the U. S. Navy and large
telecommunications and research and development companies. As of December 31,
1999 and 1998, three or fewer customers accounted for approximately 70% and
87%, respectively, of the Company's accounts receivable balances and for 83%
and 49%, respectively, of the Company's sales during the years then ended. The
Company has no significant off-balance sheet concentration of credit risk such
as foreign exchange, option, or other foreign hedging contracts.

F-32
<PAGE>

Stock-Based Compensation Plans

The Company accounts for its stock-based compensation arrangements using
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), under which,
generally, no compensation is recognized if the exercise price of options
granted equals or exceeds the fair value of the underlying stock on date of
grant. The Company has adopted the disclosure option of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires companies that do not account for stock-based
compensation under the fair value method prescribed by the statement to
disclose pro forma earnings as if the fair value method had been adopted.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of
SFAS 123.

Comprehensive Income

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a financial statement. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. For all periods presented, net loss is the same as
comprehensive loss.

Reclassifications

Certain reclassifications have been made in the 1998 financial statements
to conform to the current year presentation. These reclassifications had no
impact on the Company's net loss or stockholders' equity as previously
reported.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 may not be applied retroactively, and must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998). SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. The Company has not historically utilized such instruments, and
has no current plans to do so. Accordingly, management believes that the impact
of SFAS No. 133 will not significantly affect its financial reporting.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44
clarifies the applications of APB No. 25 for certain issues related to equity-
based instruments issued to employees. FIN No. 44 is effective on July 1, 2000,
except for certain transactions, and will be applied on a prospective basis.

F-33
<PAGE>

3. DEBT:

Bank Financing Facility

During 1999, the Company borrowed $689,735 under a bank line of credit,
which bore interest at rates ranging from 7.75% to 8.0%. These borrowings,
which were secured by personal assets of a stockholder and member of the Board
of Directors, were repaid during that year. The line of credit expired during
1999.

Capital Lease Obligations

During 1997, the Company entered into three capital lease obligations for
computer equipment. Minimum payments are $2,717 per month, including imputed
interest of 17.3% per annum. The leases mature in July 2002 and have as
collateral the related assets, which had a net book value of $51,755 and
$69,925 at December 31, 1999 and 1998, respectively.

The following is a schedule of future minimum lease payments for the years
ending December 31:

<TABLE>
<S> <C>
2000............................................................ $ 32,604
2001............................................................ 32,604
2002............................................................ 20,329
--------
Total payments.................................................. 85,537
Less interest................................................... (16,262)
--------
Total principal................................................. 69,275
Less current portion............................................ (22,280)
--------
Long-term capital lease obligations............................. $ 46,995
========
</TABLE>

Notes Payable to Stockholders and Other Related Parties

The Company has from time to time arranged for borrowings from stockholders
and other related parties. A summary of those transactions is as follows:

Debt Converted Into Series A and B Preferred Stock

In 1990, the Company entered into a borrowing facility with four
stockholders, whereby loans could be drawn at any time until maturity, up to a
maximum principal amount of $6.5 million. These notes, which bore interest at
10%, were secured by substantially all the assets of the Company. In 1994,
unsecured additional stockholder loans were made to the Company, also bearing
interest at 10%. During 1998, all remaining balances, totaling $2,121,005,
including accrued interest of $237,991, under these borrowing arrangements were
converted to 4,328,582 shares of Series A Preferred Stock at $.49 per share.

In 1993, the Company arranged for unsecured borrowings from related parties
totaling $156,164, which bore interest at 10%. The outstanding balances,
totaling $179,643, including accrued interest of $23,477, were converted to
366,619 shares of Series A Preferred Stock in June 1998 at $.49 per share.

During 1995 and continuing into 1996, under a similar private placement,
the Company raised $900,000 and incurred an additional $100,000 of debt as a
finder's fee to the same member of the Board of Directors noted previously.
Interest of 10% on the $1.0 million of debt, which was unsecured, was payable
quarterly beginning in 1997. The note holders received an aggregate of 2.1
million shares of the Company's common stock as of January 1, 1996. The Company
has the right of first refusal on the subsequent sale of shares issued under
this agreement. Under terms of the loan,

F-34
<PAGE>

$1.0 million of this debt was converted to 2,040,815 shares of Series B
Preferred Stock in June 1998 at $.49 per share, and minor amounts were paid in
cash in 1997 and 1998. As of December 31, 1999 and 1998, amounts due related to
these obligations totaled $258,338 (including accrued interest of $34,130) and
$253,393, respectively.

During 1996, the Company raised an additional $1,700,000 in an unsecured
private placement offering. A finder's fee of $97,500, accounted for as
interest expense since the debt was due on demand, was paid to a member of the
Board of Directors. The debt bore interest at 12%. Debt holders were given the
opportunity to convert the debt and accrued interest to shares of Series A
Preferred Stock at $.30 per share. Substantially all of the remaining balance
not converted in 1997, totaling $695,627, including accrued interest of
$120,627, was converted in March 1998 to 2,318,757 shares of Series A Preferred
Stock at $.30 per share. Remaining interest obligations under this facility
were $22,384 and $20,342, respectively, as of December 31, 1999 and 1998.

From time to time during 1997 and 1998, the Company borrowed additional
funds for working capital purposes from related parties under short-term
agreements, at interest rates ranging from 10% to 12%. During 1998,
substantially all of the debt payable to these related parties, totaling
$1,913,035, including accrued interest of $116,310, was converted to 2,991,185
shares of Series A Preferred Stock and 912,968 shares of Series B stock in June
1998 at $.49 per share.

In June 1998, $1,062,500 of notes payable to a bank, which had been secured
by personal assets and guarantees of two stockholders who are also members of
the Board of Directors, were assumed by those individuals. Substantially all of
the resulting debt payable to these stockholders was converted to 1,867,347
shares of Series A Preferred Stock and 295,918 shares of Series B Preferred
Stock at $.49 per share in June 1998.

Interim Financing By Related Parties

In December 1999, the Company offered existing shareholders and option
holders the opportunity to participate in an interim financing arrangement.
Notes issued under the arrangement have a stated interest rate of 12%, and are
due on November 30, 2000. Under this offer, the Company received proceeds of
$502,398 in December 1999 and $500,000 in January 2000.

In addition to the interest, the note holders will also receive 5% of the
amount loaned ("Additional Interest") which is included in accrued interest on
the balance sheet. In addition, for every dollar loaned, the note holders
receive warrants to buy four shares of Series A Preferred Stock at a price of
$.50 per share. Therefore, the Company has attributed a portion of the proceeds
from the debt offering to the fair value of the warrants. Using the Black-
Scholes option pricing model, the 2,009,592 warrants issued in December 1999
were valued at $79,060. The 2,000,000 warrants issued in January 2000 were
valued at $78,683. For purposes of valuation, the following assumptions were
used: risk-free interest rate of approximately 6%, contractual life of 3 years,
expected volatility rate of 60%, and expected dividends of 0%. Both the
Additional Interest of $25,120 and the fair value of the warrants as of
December 31, 1999 have been recorded as an initial discount to the carrying
value of the related debt. This initial discount is being amortized over the
one-year term of the note, using the effective interest-rate method.

The Company may prepay the loans without penalty. In the event of default,
interest on the unpaid balance is payable at 18%.

F-35
<PAGE>

4. EMPLOYEE BENEFIT PLANS:

Employee Stock Option Plan

The Company's Employee Stock Option Plan (the "Plan"), adopted effective
December 31, 1996, authorizes the granting to eligible employees of incentive
and nonqualified stock options or restricted stock to acquire up to 9,000,000
shares of its common stock. Administration of the Plan is by the Incentive Plan
Committee, consisting of two disinterested members of the Board of Directors.
The Incentive Plan Committee, in its sole discretion, selects Participants, the
form and amount of each award, and any other terms considered necessary or
desirable, consistent with the terms of the Plan. Awards granted prior to 1997
vested immediately. Awards after December 31, 1996 vest 25% twelve months from
the date of grant, with the remainder vesting in equal monthly installments
over the following 36 months, or upon specified Transfers of Control. The
options generally terminate after 10 years. Incentive stock options may be
granted at an exercise price not less than fair market value on the date of
grant.

A summary of the status of the Plan as of December 31, 1999 and 1998 and
activity during the years then ended is as follows:

<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Exercise
Options Price Options Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1........... 4,345,425 $.01 6,695,300 $.01
Granted............................ 1,355,250 .05 716,250 .01
Exercised.......................... (1,004,444) .01 (1,294,461) .01
Canceled........................... (2,010,979) .02 (1,771,664) .01
---------- ----------
Outstanding at December 31......... 2,685,252 .02 4,345,425 .01
========== ==========
Exercisable at December 31......... 794,863 .01 1,925,425 .01
========== ==========
</TABLE>

If the fair value method had been used for options granted during 1999 and
1998, the fair value of options granted would have been $29,924 and $3,891,
respectively. The pro forma effect on the reported net loss would have been
additional expense of $4,745 and $5,645, in 1999 and 1998, respectively. The
risk-free interest rate, expected volatility rate, expected life and expected
dividends are approximately 6%, .001%, 10 years and 0%, respectively, for both
years. The weighted average remaining contractual life for stock options
outstanding as of December 31, 1999 was 7.96 years.

Other Stock Option Awards

In December 1998, the Board of Directors granted to the Company's president
an option to acquire 1,728,945 shares of the Company's common stock at $.15 per
share. The option vests in 25% increments on the anniversary of the grant. As
of December 31, 1999, 432,236 options were vested and exercisable. Because the
option agreement permits either cash or cashless exercise, compensation expense
is required to be measured at interim financial reporting dates, under the
rules of variable plan accounting. If the value of the Company's common stock
exceeds the option exercise price before the options are exercised,
compensation expense will be recorded as the difference between the value of
the underlying common stock and the grant price, times the number of remaining
options, notwithstanding their exercisability. No compensation expense was
recorded during 1999 or 1998 under this award. However, the Company did record
a $400,000 charge during the six-month period ended June 30, 2000 under this
award (unaudited).

F-36
<PAGE>

A 1995 employment agreement with a former executive provided for a grant of
options based on the number of diluted shares of the Company's stock
outstanding. In December 1999, in satisfaction of obligations under the
employment agreement, the Company granted the former executive a non-qualified
option to acquire up to 210,000 shares of the Company's common stock at $.30
per share. The options are exercisable at any time prior to January 1, 2001.

401(k) Profit Sharing Plan

Effective January 1, 1998, the Company established the Astarte, Inc. 401(k)
Profit Sharing Plan, which is governed by Section 401(k) of the Internal
Revenue Code. Employees with a minimum of one month of service as of a semi-
annual Entry Date may participate. Employees are also eligible to receive
discretionary employer contributions, provided they are employed as of the last
day of a plan year during which they have worked at least 1,000 hours. Employee
and discretionary employer contributions to the plan are immediately vested.
The Company made discretionary matching contributions of $15,910 and $17,821
for 1999 and 1998, respectively.

5. CAPITAL STOCK:

The Company's Articles of Incorporation, as amended, (the "Articles")
authorize three classes of stock: common, Series A Convertible Preferred, and
Series B Convertible Preferred, and designate the number of authorized shares
to be 50,000,000 for common stock, 60,000,000 for Class A Convertible
Preferred, and 40,000,000 for Class B Convertible Preferred. The Articles
further authorize the Board of Directors to adjust the number of shares of each
class, provided that the rights of any class may not be decreased and no more
than 150,000,000 may be outstanding.

Rights, preferences, and privileges of the various categories of stock are
as follows:

Dividends. Holders of Series A and Series B Preferred Stock are entitled to
dividends only in the event that, and to the extent of, any dividends on common
stock.

Voting Rights. Holders of Series A and Series B Preferred Stock are
entitled to vote with holders of common stock as a single voting group on the
basis of the number of common shares into which the shares of preferred stock
may be converted.

Liquidation Rights. In the event of a liquidation or winding up of the
Company or a consolidation or merger where the Company is not the surviving
entity, the order of liquidation rights is as follows:

. holders of Series A Preferred Stock are first entitled to receive the
acquisition price of their shares plus any declared but unpaid
dividends,

. holders of Series B Preferred Stock are then entitled to receive the
acquisition price of their shares plus any declared but unpaid
dividends, and

. any remainder is then to be distributed ratably among holders of the
Company's common stock.

Preferred Stock Redemption Rights. Holders of Series A and Series B
Preferred Stock may, after four years and five years, respectively, from the
date of issuance, redeem their shares at the acquisition price of the shares,
plus 10% per annum since the date of issuance. The recorded amounts are
accreted to the redemption price using the effective interest method. The
accretion is charged to retained earnings and deducted in arriving at net loss
applicable to common stockholders.

Preferred Stock Conversion Rights. Shares of both Series A and Series B
Preferred Stock may at any time be converted into common stock on a one-for-one
basis, subject to anti-dilution provisions. All preferred shares will
automatically convert upon the earlier of: (1) the closing of an underwriting
of common stock in which the aggregate price paid by the public is at least
$5.0 million and the offering price is at least 150% of the then applicable
redemption value or (2) the written consent of holders of at least two thirds
of the shares of each series of Preferred Stock with respect to that series.

F-37
<PAGE>

Warrants

In December 1999 and January 2000, the Company issued 2,009,592 and
2,000,000 warrants, respectively, to note holders in conjunction with issuance
of debt on those dates (see Note 3).

6. INCOME TAXES:

Effective January 1, 1996 the Company became a C corporation. As of
December 31, 1999, federal net operating loss carry-forwards generated since
January 1, 1996 are approximately $11,600,000.

A tax benefit has not been recognized in 1999 or 1998 due to the
establishment of valuation allowances.

The components of the net deferred income tax asset were as follows:

<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 4,335,000 $ 3,419,000
Inventory valuation allowances................ 155,000 --
----------- -----------
4,490,000 3,419,000
Valuation allowance............................. (4,490,000) (3,419,000)
----------- -----------
$ -- $ --
=========== ===========

The provision for income taxes includes the following:

<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current: $ -- $ --
Federal....................................... -- --
State......................................... -- --
----------- -----------
Total current................................. -- --
Deferred:
Federal....................................... (946,000) (880,000)
State......................................... (125,000) (136,000)
----------- -----------
Total deferred benefit...................... (1,071,000) (1,016,000)
Increase in valuation allowance................. 1,071,000 1,016,000
----------- -----------
Total provision............................. $ -- $ --
=========== ===========

Income taxes computed using the federal statutory income tax rate differ
from the Company's effective tax rate primarily as a result of state taxes and
the increase in the valuation allowance as follows:

<CAPTION>
December 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Federal......................................... 34.0% 34.0%
State........................................... 3.3 3.3
Other........................................... 5.4 --
Increase in valuation allowance................. (42.7) (37.3)
----------- -----------
Effective tax rate............................ 0.0% 0.0%
=========== ===========
</TABLE>

F-38
<PAGE>

Deferred income taxes primarily result from basis differences in
inventories, certain accruals not currently deductible for tax purposes and net
operating loss carry-forwards. The deferred tax asset has been fully offset by
a valuation allowance, due to the Company's history of operating losses.

The Company's net operating loss carry-forwards expire at various dates
beginning in 2005 and continuing through 2019. The Tax Reform Act of 1986
contains provisions that may limit the net operating loss carry-forwards
available for use in any given year if certain events occur, including changes
in ownership interests.

7. COMMITMENTS AND CONTINGENCIES:

Operating Leases

As of December 31, 1999, the Company occupied approximately 24,000 square
feet of manufacturing and office space under a lease that extends until March
2004. Effective August 1, 2000, the Company reduced the square feet leased to
10,745. Including its pro rata share of operating expenses, the Company paid
approximately $313,000 and $206,000 during 1999 and 1998, respectively, under
terms of this lease. Future minimum lease payments (excluding operating
expenses, and reflective of the August 1, 2000 amendment) are as follows:

<TABLE>
<S> <C>
2000............................................................. $209,587
2001............................................................. 123,236
2002............................................................. 126,933
2003............................................................. 130,741
2004............................................................. 21,896
--------
Total........................................................ $612,393
========
</TABLE>

Purchase Commitments

In the normal course of business, the Company enters into various long-term
commitments with vendors to provide customized components for use in the
Company's products. Dependence on vendors as sole source suppliers or the
Company's inability to meet minimum volume requirements under purchase
commitments could have a materially adverse effect on the Company's results of
operations or financial condition.

In 1996, the Company entered into an agreement for the development and
supply of a micro-electromechanical system for use in its next generation of
optical switches. Under the agreement, the Company must purchase all of its
requirements for this component from this vendor. Further, to retain exclusive
rights to this technology in optical switch applications, the Company must meet
as yet to be determined minimum volume commitments.

Royalty and License Agreement

Under a royalty and license agreement with a former key employee and
current consultant and stockholder, royalties accrue and are payable on a
monthly basis at a rate of 2 1/2% of net sales, as defined, subject to a
minimum royalty of $100,000 per year. This minimum royalty was paid in 1999 and
1998. This agreement provides that there will be no royalty during any period
when the individual is an employee. Since March 1997, this individual has been
a consultant to the Company, under terms of a consulting agreement that was
terminated on June 2, 2000.

F-39
<PAGE>

Litigation

From time to time, the Company is involved in certain litigious actions in
the ordinary course of business. Management believes that resolution of such
actions would not have a significant adverse effect on the Company's financial
position or results of operations.

8. SUBSEQUENT EVENTS:

On June 19, 2000, the Company borrowed $300,000 under a line of credit,
which bears interest at 9.5%, and is secured by a certificate of deposit in the
name of a related party. The note is further secured by all of the Company's
accounts receivable. The loan matures on October 13, 2000.

On October 3, 2000, the Company licensed certain of its technology to a
major company in the optical networking industry for $10 million. These funds
were used to pay off existing indebtedness, including certain taxes and other
liabilities associated with the transaction. The remainder was distributed to
the stockholders. The Company and its successor retain ownership and use of
this technology. The transaction also provides for additional payments
contingent upon future outcomes with respect to other intellectual property of
the Company. In September 2000, this other intellectual property as well as the
rights to receive any additional payments with respect thereto was transferred
to a limited liability company, the ownership of which has been distributed to
the stockholders, at its then net book value of zero. The Company and its
successor retain a paid-up, non-exclusive license for use of this technology.

On September 11, 2000 holders of at least two-thirds of the shares of
Series A and Series B Preferred Stock, separately with respect to each series,
consented to the conversion of their shares into common stock on a one-for-one
basis. Under such conversion, 35,436,075 shares of Series A and 23,594,398
shares of Series B Preferred Stock were converted into 59,030,473 shares of
common stock.

As of September 13, 2000, options to purchase 4,891,541 shares of common
stock, previously granted to employees under the Employee Stock Option plan and
through other option awards, were exercised. Also as of that date, warrants to
purchase 4,009,592 shares of common stock, issued in conjunction with the
interim financing by related parties, were exercised. To facilitate such
exercise, substantially all of such exercises were financed through the
issuance of notes receivable. Subsequent to September 30, 2000, such notes were
repaid from the distribution of a portion of the proceeds from the licensing
transaction referred to above.

F-40
<PAGE>

Unaudited Pro Forma Condensed Financial Data

On September 1, 2000, the Company acquired intellectual property from AT&T
by issuing 3 million shares of its common stock. On October 10, 2000, the
Company completed its acquisition of Astarte Fiber Networks, Inc. ("Astarte")
by issuing 7.5 million shares of its common stock. All outstanding preferred
stock, warrants, and stock options of Astarte were converted to common stock of
Astarte in conjunction with closing of our purchase of Astarte.

The following Unaudited Pro Forma Condensed Financial Data consists of an
Unaudited Pro Forma Condensed Balance Sheet as of June 30, 2000 and Unaudited
Pro Forma Condensed Statements of Operations for the year ended December 31,
1999 and the six months ended June 30, 2000 (collectively, the "Pro Forma
Statements"). The Unaudited Pro Forma Condensed Balance Sheet gives effect to
the acquisition of Astarte and to the license of intellectual property from
AT&T, as if they occurred on June 30, 2000. The Unaudited Pro Forma Condensed
Statements of Operations give effect to the acquisition of Astarte and to the
license of intellectual property from AT&T, as if they occurred on January 1,
1999.

A preliminary allocation of the purchase price for the above transactions
has been made to major categories of assets and liabilities in the accompanying
Pro Forma Statements based on currently available information. The actual
allocation of purchase price and the resulting effect on income from operations
are not expected to differ materially from the pro forma amounts included
herein. These pro forma adjustments represent management's preliminary
determination of purchase accounting adjustments and are based upon available
information and certain assumptions that management believes to be reasonable.

The pro forma financial data is presented for informational purposes only
and does not purport to represent what the Company's financial position or
results of operations would have been had the Astarte acquisition and the
license of intellectual property from AT&T, in fact occurred on the dates
assumed or that may result from future operations. The pro forma data should be
read in conjunction with the Company's Financial Statements and Astarte's
financial statements and related notes thereto, both of which are included
elsewhere in the Prospectus.

F-41
<PAGE>

Unaudited Pro Forma Condensed Balance Sheet

<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------------------
The Company Astarte Adjustments Pro Forma
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS A
CURRENT ASSETS:
Cash and cash
equivalents........... $ 30,228,378 $ 300,206 $ $ 30,528,584
Accounts receivable.... 7,073,575 30,909 7,104,484
Inventories............ 6,203,265 442,099 6,645,364
Prepaid expenses and
other current assets.. 2,850,785 2,850,785
------------ ----------- ------------ ------------
Total current
assets............. 46,356,003 773,214 47,129,217
PROPERTY AND EQUIPMENT--
Net.................... 6,723,755 168,809 6,892,564
GOODWILL................ 78,686,641 (B) 78,686,641
INTANGIBLE ASSETS....... 45,000,000 (C) 81,000,000
36,000,000 (B)
OTHER ASSETS............ 332,540 58,068 390,608
------------ ----------- ------------ ------------
TOTAL ASSETS............ $ 53,412,298 $ 1,000,091 $159,686,641 214,099,030
============ =========== ============ ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Trade accounts
payable............... $ 5,958,786 $ 181,198 $ $ 6,139,984
Accrued expenses and
other current
liabilities........... 2,520,700 513,651 1,000,000 (B) 4,034,351
Current portion of
notes payable......... 2,609,143 1,433,438 4,042,581
Current portion of
capital lease
obligations 638,906 22,280 661,186
------------ ----------- ------------ ------------
Total current
liabilities........ 11,727,535 2,150,567 1,000,000 14,878,102
LONG-TERM PORTION OF
NOTES PAYABLE.......... 912,808 912,808
LONG-TERM PORTION OF
CAPITAL LEASE
OBLIGATIONS............ 1,080,160 36,165 1,116,325
OTHER LONG-TERM
LIABILITIES............ 5,627 5,627
------------ ----------- ------------ ------------
Total liabilities... 13,726,130 2,186,732 1,000,000 16,912,862
------------ ----------- ------------ ------------
COMMITMENTS AND
CONTINGENCIES
MANDATORILY REDEEMABLE
SERIES A
CONVERTIBLE PREFERRED
STOCK.................. 17,306,995 (17,306,995)(B)
WARRANTS--SERIES A
CONVERTIBLE
PREFERRED STOCK........ 157,743 (157,743)(B)
MANDATORILY REDEEMABLE
SERIES B
CONVERTIBLE PREFERRED
STOCK.................. 9,999,532 (9,999,532)(B)
STOCKHOLDERS' EQUITY:
Common stock........... 45,931 2,826 4,674 (B)
1,500 (C) 54,931
Series A Preferred
Stock................. 10,091 10,091
Series B Preferred
Stock................. 233 233
Series C Preferred
Stock................. 2,565 2,565
Series D Preferred
Stock................. 6,011 6,011
Additional paid-in
capital............... 150,242,582 429,059 112,063,441 (B)
44,998,500 (C) 307,733,582
Notes receivable....... (37,995,430) (37,995,430)
Accumulated deficit.... (65,019,587) (29,082,796) 29,082,796 (B) (65,019,587)
Deferred employee
compensation.......... (7,606,228) (7,606,228)
------------ ----------- ------------ ------------
Total stockholders'
equity (deficit)... 39,686,168 (28,650,911) 186,150,911 197,186,168
------------ ----------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY:................ $ 53,412,298 $ 1,000,091 159,686,641 $214,099,030
============ =========== ============ ============
</TABLE>

F-42
<PAGE>

Unaudited Pro Forma Condensed Statement of Operations

<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
------------------------------------------------
The Company Astarte Adjustments Pro Forma
----------- ---------- ----------- -----------
D E
<S> <C> <C> <C> <C>
REVENUE..................... $ 7,585,160 $ 683,798 $ $ 8,268,958
Non-cash charges related to
equity issuances.......... 370,925 370,925
----------- ---------- ----------- -----------
REVENUE, net of non-cash
charges related to equity
issuances.................. 7,214,235 683,798 7,898,033
COST OF REVENUE............. 5,061,390 504,510 5,565,900
----------- ---------- ----------- -----------
Gross profit............ 2,152,845 179,288 2,332,133
----------- ---------- ----------- -----------

OPERATING EXPENSES:
Research and development... 12,741,418 1,271,314 14,012,732
Sales and marketing........ 4,246,602 51,032 4,297,634
General and
administrative............ 6,236,444 823,545 7,059,989
Amortization expense....... 15,968,664 15,968,664
----------- ---------- ----------- -----------
Total operating
expenses............... 23,224,464 2,145,891 15,968,664 41,339,019
----------- ---------- ----------- -----------
OPERATING LOSS.............. 21,071,619 1,966,603 15,968,664 39,006,886
----------- ---------- ----------- -----------

OTHER (INCOME) EXPENSE:
Interest income............ (1,806,173) (150) (1,806,323)
Interest expense........... 179,374 184,724 364,098
----------- ---------- ----------- -----------
Total other (income)
expense................ (1,626,799) 184,574 (1,442,225)
----------- ---------- ----------- -----------
NET LOSS.................... $19,444,820 $2,151,177 $15,968,664 $37,564,661
=========== ========== =========== ===========
BASIC AND DILUTED LOSS PER
SHARE...................... $ (1.00) $ (1.25)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING................ 19,453,460 29,953,460
=========== ===========
</TABLE>

F-43
<PAGE>

Unaudited Pro Forma Condensed Statement of Operations

<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------------
The Company Astarte Adjustments Pro Forma
----------- ---------- ----------- -----------
D E
<S> <C> <C> <C> <C>
REVENUE..................... $ 5,226,735 $1,909,820 $ $ 7,136,555
Non-cash charges related to
equity issuances.......... 558,961 558,961
----------- ---------- ----------- -----------
REVENUE, net of non-cash
charges related to equity
issuances.................. 4,667,774 1,909,820 6,577,594
COST OF REVENUE............. 3,881,637 1,787,173 5,668,810
----------- ---------- ----------- -----------
Gross profit............ 786,137 122,647 908,784
----------- ---------- ----------- -----------

OPERATING EXPENSES:
Research and development... 10,119,508 1,708,179 11,827,687
Sales and marketing........ 4,113,571 127,275 4,240,846
General and
administrative............ 6,189,714 742,393 6,932,107
Amortization expense....... 31,937,328 31,937,328
----------- ---------- ----------- -----------
Total operating
expenses............... 20,422,793 2,577,847 31,937,328 54,937,968
----------- ---------- ----------- -----------
OPERATING LOSS.............. 19,636,656 2,455,200 31,937,328 54,029,184
----------- ---------- ----------- -----------

OTHER (INCOME) EXPENSE:
Interest income............ (359,685) (14,861) (374,546)
Interest expense........... 522,323 66,779 589,102
----------- ---------- ----------- -----------
Total other (income)
expense................ 162,638 51,918 214,556
----------- ---------- ----------- -----------
NET LOSS.................... $19,799,294 $2,507,118 $31,937,328 $54,243,740
=========== ========== =========== ===========
BASIC AND DILUTED LOSS PER
SHARE...................... $ (3.71) $ (3.43)
=========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING................ 5,335,230 15,835,230
=========== ===========
</TABLE>

F-44
<PAGE>

Notes to Unaudited Pro Forma Condensed Financial Statements

The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Balance Sheet:

A. To reflect the historical balance sheet of Astarte.

B. To reflect the Astarte acquisition, which closed on October 10, 2000. We
have issued 7,500,000 shares of our common stock to the stockholders of
Astarte Fiber Networks.

We will account for the acquisition using the purchase method whereby the
net tangible and identifiable assets acquired and liabilities assumed are
recognized at their estimated fair market values at the date of acquisition.
The allocation of purchase price to the fair value of the assets acquired and
liabilities assumed is preliminary and will be finalized following the
completion of a definitive valuation of the assets and liabilities of Astarte,
although the actual allocation of purchase price is not expected to differ
materially from amounts included herein. The excess of the aggregate purchase
price over the fair value of net assets acquired of approximately $78.7
million, based upon the preliminary purchase price allocation, will be
amortized on a straight-line basis over five years. Acquired core technology
will also be amortized on a straight-line basis over five years.

<TABLE>
<S> <C>
Current assets.............................................. $ 773,214
Fixed assets and other non-current assets................... 226,877
Current liabilities......................................... (2,150,567)
Long-term liabilities....................................... (36,165)
Goodwill.................................................... 78,686,641
Core technology............................................. 36,000,000
Accrued transaction and exit costs.......................... (1,000,000)
------------
Total purchase price.................................... $113,500,000
============
</TABLE>

C. To reflect the license of intellectual property from AT&T in a transaction
that closed September 1, 2000. We issued 3,000,000 shares of our common
stock to AT&T Corp.

The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Statements of Operations:

D. To reflect the historical results of operations of Astarte for the periods
presented.

E. To reflect the incremental amortization of goodwill and other intangible
assets resulting from the acquisition of Astarte and the license of
intellectual property from AT&T. An amortization period of five years will
be used by the Company for goodwill and intangible assets. The acquisition
of Astarte will be accounted for using the purchase method whereby the net
tangible and identifiable intangible assets acquired and liabilities
assumed are recognized at their estimated fair values at the date of
acquisition.

F-45
<PAGE>

[Back Inside Cover:

Photograph of Tellium's Aurora Optical Swith(TM).

At the bottom of the page is

"Tellium : Smarter, Faster Optical Networks(TM)."]
<PAGE>

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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 23
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 36
Management............................................................... 49
Certain Relationships and Transactions................................... 58
Principal Stockholders................................................... 64
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 74
Validity of Common Stock................................................. 77
Experts.................................................................. 77
Change in Independent Auditors........................................... 77
Where You Can Find Additional Information................................ 78
Index to Financial Statements............................................ F-1
</TABLE>

-----------

Through and including , 2000, the 25th day after the date of this
prospectus, all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.

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17,500,000 Shares

Tellium, Inc.

Common Stock

-----------

[logo]

-----------

Goldman, Sachs & Co.

Thomas Weisel Partners LLC

J.P. Morgan & Co.

CIBC World Markets

Wit SoundView

Representatives of the Underwriters

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<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth expenses and costs payable by the Registrant
(other than underwriting discounts and commissions) expected to be incurred in
connection with the issuance and distribution of the securities described in
this registration statement. All amounts are estimated except for the
Securities and Exchange Commission's registration fee and the National
Association of Securities Dealers' filing fee.

<TABLE>
<CAPTION>
Amount
-------------
<S> <C>
Registration fee under Securities Act......................... $ 69,300.00
NASD filing fee............................................... 25,500.00
Nasdaq National Market listing fee............................ 95,000.00
Legal fees and expenses....................................... 1,300,000.00
Road show expenses............................................ 150,000.00
Accounting fees and expenses.................................. 500,000.00
Blue Sky fees and expenses.................................... 10,000.00
Printing and engraving expenses............................... 400,000.00
Registrar and transfer agent fees and expenses................ 50,000.00
Miscellaneous expenses........................................ 400,200.00
-------------
Total....................................................... $3,000,000.00
=============
</TABLE>
--------
* To be filed by amendment.

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and specific other persons
to the extent and under the circumstances set forth therein.

Under Section 102(b)(7) of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation, as amended and restated upon the
closing of this offering, eliminates the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liabilities arising (a) from any
breach of the director's duty of loyalty to the corporation or its
stockholders; (b) from acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (c) under Section 174 of
the Delaware General Corporation Law; or (d) from any transaction from which
the director derived an improper personal benefit.

The Registrant's Certificate of Incorporation, as amended and restated upon
the closing of this offering, requires the Registrant to indemnify the
Registrant's directors and officers to the extent permitted under Section 145
of the Delaware General Corporation Law.

The Registrant's Certificate of Incorporation, as amended and restated upon
the closing of this offering, also provides that the Registrant shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or officer of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, in
accordance with provisions corresponding to Section 145 of the Delaware General
Corporation Law. Further, the Registrant's Certificate of Incorporation, as
amended and restated upon the closing

II-1
<PAGE>

of this offering, provides that any person, other than an officer or director,
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was an
employee or agent of the Registrant, or was serving at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, and who desires
indemnification shall make written application for such indemnification to the
Board of Directors for its determination that indemnification is appropriate,
and if so, to what extent.

The Registrant's Bylaws, as amended and restated upon the closing of this
offering, also provide that the Registrant may indemnify, to the extent of the
provisions set forth therein, any person other than an officer or director who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was an
employee or agent of the Registrant, or was serving at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person makes
written application for such indemnification to the Registrant's Board of
Directors and the Registrant's Board determines that indemnification is
appropriate and the extent thereof. The Registrant's Bylaws, as amended and
restated upon the closing of this offering, further provide that the
indemnification described therein is not exclusive and shall not exclude any
other rights to which the person seeking to be indemnified may be entitled
under statute, any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and to his
action in another capacity while holding such office.

The above discussion of Section 145 and of the Registrant's Certificate of
Incorporation and Bylaws, both as amended and restated upon the closing of this
offering, is not intended to be exhaustive and is respectively qualified in its
entirety by such statute, the Certificate of Incorporation and the Bylaws, both
as amended and restated upon the closing of this offering.

The Registrant intends to obtain primary and excess insurance policies
insuring its directors and officers and those of its subsidiaries against some
liabilities they may incur in their capacity as directors and officers. Under
such policies, the insurer, on behalf of the Registrant, may also pay amounts
for which the Registrant has granted indemnification to the directors or
officers.

Item 15. Recent Sales of Unregistered Securities.

Since its inception, the Registrant has issued securities in the following
transactions, each of which was exempt from the registration requirements of
the Securities Act of 1933, as amended, under Section 4(2) of the Securities
Act, as transactions by an issuer not involving any public offering, or under
Rules 701, 504 and 506 thereunder. All of the below-referenced securities are
deemed restricted securities for the purposes of the Securities Act. The common
stock share numbers summarized below have been adjusted to reflect a three-for-
one stock split of the Registrant's common stock that became effective on
August 11, 2000 and a two-for-one stock split of the Registrant's common stock
that became effective on November 6, 2000. No underwriters were involved in any
of the below-referenced sales of securities. For the sale of the Registrant's
Series E preferred stock in September 2000, Goldman Sachs & Co. and Thomas
Weisel Partners LLC served as placement agents.

On May 8, 1997, June 18, 1997, July 11, 1998 and August 10, 1998, the
Registrant issued an aggregate of 5,208,000 shares of its common stock to its
founders in the following amounts and for the following consideration: (1)
300,000 shares to Krishna Bala for an aggregate purchase price of $50; (2)
1,200,000 shares to Charles Brackett for an aggregate purchase price of $200;
(3) 48,000 shares to Lyn Curtis for an aggregate purchase price of $8; (4)
300,000 shares to John Gamelin for an aggregate purchase price of $50; (5)
48,000 shares to Chris Gibbons for an aggregate purchase

II-2
<PAGE>

price of $8; (6) 90,000 shares to Paul Grabbe for an aggregate purchase price
of $15; (7) 150,000 shares to Sarry Habiby for an aggregate purchase price of
$25; (8) 48,000 shares to Andrew Rajhel for an aggregate purchase price of $8;
(9) 72,000 shares to Jim Ringo for an aggregate purchase price of $12; (10)
48,000 shares to Howard Shirokmann for an aggregate purchase price of $8; (11)
90,000 shares to Julian Soole for an aggregate purchase price of $15; (12)
210,000 shares to W. John Tomlinson for an aggregate purchase price of $35;
(13) 54,000 shares to Elizabeth Van Pelt for an aggregate purchase price of $9;
(14) 210,000 shares to Rich Vodhanel for an aggregate purchase price of $35;
(15) 240,000 shares to Michael Koblentz for an aggregate purchase price of $40;
(16) 600,000 shares to William J. Kelly for an aggregate purchase price of
$100; and (17) 1,500,000 shares to Farouque Mesiya for an aggregate purchase
price of $250.

On May 8, 1997, the Registrant issued an aggregate of 8,766,667 shares of
Series A preferred stock to 14 investors in the following amounts and for the
following consideration: (1) 392,882 shares to Bell Communications Research in
exchange for intellectual property with an aggregate value of $942,917; (2)
3,523,785 shares to Science Applications International Corporation in exchange
for equipment with an aggregate value of $8,457,084; (3) 572,260 shares to
Accel V L.P. for an aggregate purchase price of $1,373,424; (4) 76,680 shares
to Accel Internet/Strategic Technology Fund L.P. for an aggregate purchase
price of $184,032; (5) 11,360 shares to Accel Keiretsu V L.P. for an aggregate
purchase price of $27,264; (6) 34,080 shares to Accel Investors '96 L.P. for an
aggregate purchase price of $81,792; (7) 15,620 shares to Ellmore C. Patterson
Partners for an aggregate purchase price of $37,488; (8) 333,333 shares to Blue
Rock Capital, L.P. for an aggregate purchase price of $799,999; (9) 1,500,000
shares to Oak Investment Partners VII Limited Partnership for an aggregate
purchase price of $3,600,000; (10) 1,850,000 shares to Ortel Corporation, for
an aggregate purchase price of $4,440,000; (11) 40,000 shares to John Wallace
for an aggregate purchase price of $96,000; (12) 282,316 shares to Worldview
Technology Partners I, L.P. for an aggregate purchase price of $677,558; (13)
110,034 shares to Worldview Technology International I, L.P. for an aggregate
purchase price of $264,082; and (14) 24,317 shares to Worldview Strategic
Partners I, L.P. for an aggregate purchase price of $58,361.

On May 8, 1997, the Registrant issued an aggregate of 233,333 shares of
Series B preferred stock to one of its stockholders, Ortel Corporation, for an
aggregate purchase price of $559,999.

On May 20, 1998, the Registrant issued an aggregate of 416,667 shares of
its Series A preferred stock to 5 of its stockholders in the following amounts
and for the following consideration: (1) 335,834 shares to Accel V L.P. for an
aggregate purchase price of $806,002; (2) 45,000 shares to Accel
Internet/Strategic Technology Fund, L.P. for an aggregate purchase price of
$108,000; (3) 6,667 shares to Accel Keiretsu V L.P. for an aggregate purchase
price of $16,001; (4) 20,000 shares to Accel Investors '96 L.P. for an
aggregate purchase price of $48,000; and (5) 9,166 shares to Ellmore C.
Patterson Partners for an aggregate purchase price of $21,998.

On December 30, 1998, the Registrant issued senior convertible notes in the
aggregate principal amount of $16,000,000 to 14 of its stockholders as follows:
(1) Oak Investment Partners VII, Limited Partnership ($2,893,244); (2) Oak VII
Affiliates Fund, Limited Partnership ($72,665); (3) Accel Investors '96 L.P.
($106,931); (4) Accel V L.P. ($1,795,548); (5) Accel Internet/Strategic
Technology Fund L.P. ($240,595); (6) Accel Keiretsu V L.P. ($35,644); (7)
Science Applications Research Inc. ($7,744,318); (8) Worldview Technology
International I, L.P. ($217,567); (9) Worldview Technology Partners I, L.P.
($558,215); (10) Worldview Strategic Partners I ($48,082); (11) Blue Rock
Capital, L.P. ($659,090); (12) Ellmore C. Patterson Partners ($49,010); (13)
Ortel Corporation ($1,500,000); and (14) John Wallace ($79,091). All of these
notes were converted into shares of Series C preferred stock as of February 11,
1999, at a conversion price of $9.15 per share as described below.

On February 9, 1999, the Registrant issued warrants to purchase an
aggregate of 1,000,000 shares of its Series A preferred stock to 14 of its
stockholders at an exercise price of $4.58 per share

II-3
<PAGE>

in the following amounts: (1) 180,828 shares to Oak Investment Partners VII,
Limited Partnership; (2) 4,542 shares to Oak VII Affiliates Fund, Limited
Partnership; (3) 6,683 shares to Accel Investors '96 L.P., (4) 112,222 shares
to Accel V L.P., (5) 15,037 shares to Accel Internet/Strategic Technology Fund
L.P.; (6) 2,228 shares to Accel Keiretsu V L.P.; (7) 484,020 shares to Science
Applications Research Inc.; (8) 13,598 shares to Worldview Technology
International I, L.P.; (9) 34,888 shares to Worldview Technology Partners I,
L.P.; (10) 3,005 shares to Worldview Strategic Partners I; (11) 41,193 shares
to Blue Rock Capital, L.P.; (12) 3,063 shares to Ellmore C. Patterson Partners;
(13) 93,750 shares to Ortel Corporation; and (14) 4,943 shares to John Wallace.
All of these warrants, except the warrant issued to Ortel Corporation, were
subsequently exercised for shares of its Series A preferred stock at an
exercise price of $2.40 per share.

On February 11, 1999, the Registrant issued an aggregate of 2,545,339
shares of Series C preferred stock to 15 of its stockholders in the following
amounts and for the following consideration: (1) 765,027 shares to Cisco
Systems for an aggregate purchase price of $6,999,997 in cash; (2) 322,104
shares to Oak Investment Partners VII, Limited Partnership in exchange for the
conversion of a senior promissory note in the aggregate amount of $2,947,252;
(3) 8,090 shares to Oak VII Affiliates Fund, Limited Partnership in exchange
for the conversion of a senior promissory note in the aggregate amount of
$74,024; (4) 11,905 shares to Accel Investors '96 L.P. in exchange for the
conversion of a senior promissory note in the aggregate amount of $108,931; (5)
199,898 shares to Accel V L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $1,829,067; (6) 26,785 shares to
Accel Internet/Strategic Technology Fund L.P. in exchange for the conversion of
a senior promissory note in the aggregate amount of $245,083; (7) 3,968 shares
to Accel Keiretsu VI in exchange for the conversion of a senior promissory note
in the aggregate amount of $36,307; (8) 5,456 shares to Ellmore C. Patterson
Partners in exchange for the conversion of a senior promissory note in the
aggregate amount of $49,922; (9) 861,961 shares to Science Applications
International Corporation in exchange for the conversion of a senior promissory
note in the aggregate amount of $7,886,943; (10) 24,162 shares to Worldview
Technology International I, L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $221,082; (11) 61,993 shares to
Worldview Technology Partners I, L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $567,236; (12) 5,340 shares
to Worldview Strategic Partners I, L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $48,861; (13) 73,374 shares
to Blue Rock Capital, L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $671,372; (14) 166,475 shares to
Ortel Corporation in exchange for the conversion of a senior promissory note in
the aggregate amount of $1,523,246; and (15) 8,801 shares to John Wallace in
exchange for the conversion of a senior promissory note in the aggregate amount
of $80,529.

On June 30, 1999, the Registrant issued senior convertible notes in the
aggregate principal amount of $5,000,000 to 14 of its stockholders in the
following amounts: (1) Oak Investment Partners VII, Limited Partnership
($805,418); (2) Oak VII Affiliates Fund, Limited Partnership ($20,228);
(3) Accel Investors '96 L.P. ($29,767); (4) Accel V L.P. ($499,843); (5) Accel
Internet/Strategic Technology Fund L.P. ($66,976); (6) Accel Keiretsu V L.P.
($9,922); (7) Science Applications International Corporation ($2,155,853); (8)
Worldview Technology International I, L.P. ($60,566); (9) Worldview Technology
Partners I, L.P. ($155,395); (10) Worldview Strategic Partners I ($13,385);
(11) Blue Rock Capital, L.P. ($183,476); (12) Ellmore C. Patterson Partners
($13,643); (13) Ortel Corporation ($960,231); and (14) John Wallace ($25,296).
All of these notes were converted into shares of its Series D preferred stock
as of December 2, 1999 at a conversion price of $9.15 per share.

On September 21, 1999, the Registrant issued a warrant to purchase an
aggregate of 10,452,000 shares of its common stock to Extant, with an exercise
price of $1.53 per share, as consideration for the transactions contemplated by
the Purchase Agreement dated as of September 21, 1999 between Tellium and
Extant.

II-4
<PAGE>

On November 11, 1999, the Registrant issued two warrants to purchase an
aggregate of 29,509 shares of its Series C preferred stock to Comdisco, Inc.
with an exercise price of $9.15 per share as consideration for an equipment
lease line of credit.

On December 2, 1999, December 8, 1999, December 15, 1999 and January 14,
2000, the Registrant issued an aggregate of 6,010,926 shares of Series D
preferred stock to 22 investors and stockholders in the following amounts and
for the following consideration: (1) 1,684,522 shares to Thomas Weisel Capital
Partners, L.P. in exchange for $15,413,376 in cash; (2) 203,364 shares to TWP
CEO Founders' Circle (AI), L.P. in exchange for $1,860,781 in cash; (3) 787,251
shares to TWP CEO Founders' Circle (QP), L.P. in exchange for $7,203,347 in
cash; (4) 57,104 shares to Thomas Weisel Partners Group LLC in exchange for
$522,502 in cash; (5) 54,645 shares to RB Investment Partners II, LLC in
exchange for $500,002 in cash; (6) 27,322 shares to Comdisco, Inc. in exchange
for $249,996 in cash; (7) 466,871 shares to Oak Investment Partners VII,
Limited Partnership in exchange for $3,432,859 in cash and for the conversion
of a senior promissory note in the aggregate amount of $839,011; (8) 11,725
shares to Oak VII Affiliates Fund, Limited Partnership in exchange for $86,212
in cash and for the conversion of a senior promissory note in the aggregate
amount of $21,072; (9) 3,388 shares to Accel Investors '96 L.P. in exchange for
the conversion of a senior promissory note in the aggregate amount of $31,009;
(10) 56,906 shares to Accel V L.P. in exchange for the conversion of a senior
promissory note in the aggregate amount of $520,691; (11) 7,625 shares to Accel
Internet/Strategic Technology Fund L.P. in exchange for the conversion of a
senior promissory note in the aggregate amount of $69,769; (12) 1,129 shares to
Accel Keiretsu VI in exchange for the conversion of a senior promissory note in
the aggregate amount of $10,336; (13) 518,663 shares to Science Applications
International Corporation in exchange for $2,500,000 in cash and for the
conversion of a senior promissory note in the aggregate amount of $2,245,770;
(14) 33,093 shares to Worldview Technology International I, L.P. in exchange
for $239,709 in cash and for the conversion of a senior promissory note in the
aggregate amount of $63,092; (15) 84,907 shares to Worldview Technology
Partners I, L.P. in exchange for $615,023 in cash and for the conversion of a
senior promissory note in the aggregate amount of $161,876; (16) 7,314 shares
to Worldview Strategic Partners I, L.P. in exchange for $52,980 in cash and for
the conversion of a senior promissory note in the aggregate amount of $13,943;
(17) 100,282 shares to Blue Rock Capital, L.P. in exchange for $726,452 in cash
and for the conversion of a senior promissory note in the aggregate amount of
$191,128; (18) 1,553 shares to Ellmore C. Patterson Partners in exchange for
the conversion of a senior promissory note in the aggregate amount of $14,212;
(19) 524,736 shares to Ortel Corporation in exchange for $3,801,054 in cash and
for the conversion of a senior promissory note in the aggregate amount of
$1,000,281; (20) 12,406 shares to John Wallace in exchange for $87,164 in cash
and for the conversion of a senior promissory note in the aggregate amount of
$26,351; (21) 819,672 shares to Pequot Private Equity Fund II, L.P. in exchange
for $7,499,999 in cash; and (22) 546,448 shares to SJJ LLC in exchange for
$4,999,999 in cash.

On April 4, 2000, the Registrant issued an aggregate of 13,200,000 shares
of its common stock to Harry J. Carr under exercises of options for an
aggregate purchase price of $14,102,000.

On May 1, 2000, the Registrant issued an aggregate of 19,126 shares of
Series C preferred stock to Taylor Winfield Inc. in cash for an aggregate
purchase price of $175,003 to the Registrant.

On June 30, 2000, the Registrant issued an aggregate of 906,250 shares of
Series A preferred stock to its stockholders upon the exercise of warrants to
purchase 906,250 shares of Series A preferred stock at an exercise price of
$4.58 per share, in the following amounts and for the following consideration:
(1) 180,828 shares to Oak Investment Partners VII, Limited Partnership for an
aggregate purchase price of $828,192; (2) 4,542 shares to Oak VII Affiliates
Fund, Limited Partnership, for an aggregate purchase price of $20,802; (3)
6,683 shares to Accel Investors '96 L.P. for an aggregate purchase price of
$30,608; (4) 112,222 shares to Accel V L.P. for an aggregate

II-5
<PAGE>

purchase price of $513,977; (5) 15,037 shares to Accel Internet/Strategic
Technology Fund L.P. for an aggregate purchase price of $68,869; (6) 2,228
shares to Accel Keiretsu V L.P. for an aggregate purchase price of $10,204, (7)
484,020 shares to Science Applications Research Inc. for an aggregate purchase
price of $2,216,812; (8) 13,598 shares to Worldview Technology International I,
L.P. for an aggregate purchase price of $62,279; (9) 34,888 shares to Worldview
Technology Partners I, L.P. for an aggregate purchase price of $159,787; (10)
3,005 shares to Worldview Strategic Partners I for an aggregate purchase price
of $13,763; (11) 41,193 shares to Blue Rock Capital, L.P. for an aggregate
purchase price of $188,664; (12) 3,063 shares to Ellmore C. Patterson Partners
for an aggregate purchase price of $14,029; and (13) 4,943 shares to John
Wallace for an aggregate purchase price of $22,639.

On September 1, 2000, the Registrant issued an aggregate of 3,000,000
shares of its common stock to AT&T Corp. in consideration for a license of
intellectual property.

On September 18, 2000, as part of our agreement with Qwest, the Registrant
issued two warrants to purchase a total of 4,000,000 shares of its common stock
to U.S. Telesource, Inc., a wholly-owned subsidiary of Qwest, with an exercise
price of $15.00 per share. On September 18, 2000, the Registrant also issued an
aggregate of 666,666 shares of common stock to seven officers and affiliates of
Qwest for an aggregate purchase price of $9,999,990.

On September 20, 2000, the Registrant issued an aggregate of 7,274,413
shares of its Series E preferred stock to 57 qualified institutional buyers and
other accredited investors for an aggregate purchase price of $218.0 million.

On October 10, 2000, the Registrant issued an aggregate of 7,500,000 shares
of its common stock to the former stockholders of Astarte Fiber Networks, Inc.
in consideration of its acquisition of Astarte.

From May 8, 1997 (inception) to October 31, 2000, the Registrant granted
stock options to purchase 73,226,374 shares of common stock at exercise prices
ranging from $.04 to $1.55 per share to employees under its Amended and
Restated 1997 Employee Stock Incentive Plan. During this time period, the
Registrant also granted options to purchase: (1) 300,000 shares of common stock
at an exercise price of $1.53 per share to consultants; (2) 13,200,000 shares
of common stock at an exercise price of $1.07 per share to an employee; and (3)
400,000 shares of common stock to directors at an exercise price of $1.55 per
share outside of its Amended and Restated 1997 Employee Stock Incentive Plan.

From April 1, 2000 through October 31, 2000, the Registrant issued an
aggregate of 38,196,200 shares of its common stock to some of its executive
officers under exercises of options granted under and outside of its Amended
and Restated 1997 Employee Stock Incentive Plan for an aggregate purchase price
of $38,676,296.

From May 8, 1997 (inception) to October 31, 2000, the Registrant issued an
aggregate of 3,884,598 shares of its common stock to other employees for
aggregate consideration of $.04 to $1.55 per share under exercises of options
granted under its Amended and Restated 1997 Employee Stock Incentive Plan and
an aggregate of 150,000 shares of its common stock to a consultant for
aggregate consideration of $1.53 per share under an exercise of options granted
outside of its Amended and Restated 1997 Employee Stock Incentive Plan.

II-6
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

The following documents are filed as exhibits to this registration
statement:

<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement

3.1* Form of Amended and Restated Certificate of Incorporation of Tellium,
Inc. to be effective upon completion of this offering

3.2* Form of Amended and Restated Bylaws of Tellium, Inc. to be effective
upon completion of this offering

4.1* Specimen common stock certificate

4.2 Amended and Restated Stockholders' Agreement dated as of September
19, 2000 by and among Tellium, Inc. and certain stockholders of
Tellium, Inc.

4.3 Supplemental Stockholders' Agreement dated as of August 29, 2000 by
and among Tellium, Inc. and certain former stockholders of Astarte
Fiber Networks, Inc.

5.1* Opinion of Fried, Frank, Harris, Shriver & Jacobson

10.1** Amended and Restated Securities Purchase Agreement dated as of
February 10, 1999, among Tellium, Inc. and the purchasers named
therein

10.2** Stock Purchase Agreement dated as of February 11, 1999 by and among
Tellium, Inc., Cisco Systems, Inc. and other investors, as amended
pursuant to Amendment No. 1 dated May 5, 1999 to the Stock Purchase
Agreement

10.3** Stock Purchase Agreement dated as of December 2, 1999 by and among
Tellium, Inc. and certain investors

10.4+** Purchase Agreement dated as of September 21, 1999 between Tellium,
Inc. and Extant, Inc.

10.5+** Agreement dated as of August 7, 2000 between Tellium, Inc. and Cable
& Wireless Global Networks Limited

10.6+** Contract Manufacturing Agreement dated as of August 1, 2000 between
Tellium, Inc. and Solectron Corporation

10.7** Business Loan Agreement dated June 1, 2000 by and among Tellium, Inc.
and Commerce Bank/Shore N.A.

10.8 Amended and Restated 1997 Employee Stock Incentive Plan

10.9** Executive Employment Agreement dated as of December 31, 1999 between
Tellium, Inc. and Harry J. Carr

10.10** Restricted Stock Agreement (Time Vested Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr

10.11** Restricted Stock Agreement (Performance Shares) dated as of April 4,
2000 by and between Tellium, Inc. and Harry J. Carr, and Amendment
Number 1 to the Restricted Stock Agreement dated September 18, 2000

10.12** Form of Restricted Stock Agreement for Executives

10.13+** Restated and Amended Intellectual Property Agreement dated December
30, 1998 between Bell Communications Research Inc. and Tellium, Inc.

10.14+** Procurement Agreement between Qwest Communications Corporation and
Tellium, Inc.

10.15** Form of Supplemental Stockholders Agreement, dated as of September
18, 2000, by and among Tellium, Inc. and U.S. Telesource, Inc.

</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.16** Form of Supplemental Stockholders Agreement, dated as of September
18, 2000, by and among Tellium, Inc. and the Holders listed therein

10.17+** "A" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000

10.18+** "B" Warrants to Purchase Common Stock granted to U.S. Telesource,
Inc., dated as of September 18, 2000

10.19 Lease Agreement dated February 9, 1998 between Tellium, Inc. and G.B.
Ltd., L.L.C. (as amended)

10.20** Lease Agreement dated August 3, 2000 between 185 Monmouth Parkway
Associates, L.P. and Tellium, Inc.

10.21** Stock Purchase Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.

10.22 Agreement and Plan of Merger dated as of August 29, 2000 by and among
Tellium, Inc., Astarte Acquisition Corporation, Astarte Fiber
Networks, Inc., AFN LLC and Aron B. Katz

10.23+** Warrant to Purchase Common Stock granted to Extant, Inc. dated
September 21, 1999, and Side Letter to Annex I to the Warrant dated
December, 1999

10.24** Patent License Agreement dated September 1, 2000 by and between
Tellium, Inc. and AT&T Corp.

10.25** Stock Purchase Agreement dated as of September 19, 2000 by and among
Tellium, Inc. and certain investors

10.26+* Amendment to Warrant to Purchase Common Stock dated as of September
21, 1999 Between Tellium, Inc. and Dynegy Global Communications, Inc.
(as successor to Extant, Inc.), made as of November 2, 2000

16.1** Letter re: change in certifying accountant

21.1** Subsidiaries of Tellium, Inc.

23.1 Consent of Deloitte & Touche LLP

23.2 Consent of Ernst & Young LLP

23.3 Consent of Arthur Andersen LLP

23.4* Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1 above)

23.5** Consent of RHK, Inc.

24.1** Power of Attorney (included on signature page of this registration
statement)

27.1 Financial data schedule
</TABLE>
--------
* To be filed by amendment.

**Previously filed.
+ Subject to a confidential treatment request.

II-8
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of

Tellium, Inc.

We have audited the financial statements of Tellium, Inc. as of December
31, 1999, and for the year then ended, and have issued our report thereon dated
April 28, 2000 (November 1, 2000 as to Note 12) (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule listed in Item 16 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion,
such financial statement schedule as of and for the year ended December 31,
1999, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey

November 6, 2000

II-9
<PAGE>

SCHEDULE II

TELLIUM, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Period from May 8, 1997 (Inception) to December 31, 1997

and for the Years Ended December 31, 1998 and 1999

<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and Write-offs End of
of Period Expenses (Deductions) Period
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
For the period from May 8,
1997 (Inception) to December
31, 1997..................... $ -- $ -- $ -- $ --
For the year ended December
31, 1998..................... -- -- -- --
For the year ended December
31, 1999..................... -- 60,000 -- 60,000
Deferred Tax Valuation
Allowance
For the period from May 8,
1997 (Inception) to December
31, 1997..................... $ -- $2,105,000 $ -- $ 2,105,000
For the year ended December
31, 1998..................... 2,105,000 9,054,000 -- 11,159,000
For the year ended December
31, 1999..................... 11,159,000 9,385,000 -- 20,544,000
</TABLE>

II-10
<PAGE>

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered
in such names as required by the underwriters to permit proper delivery to
each purchaser.

(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(3) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-11
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Oceanport, State of New Jersey, on November 7, 2000.

TELLIUM, INC.

/s/ Harry J. Carr
By: _________________________________
Harry J. Carr
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Harry J. Carr Chief Executive Officer November 7, 2000
______________________________________ and Chairman of the Board
Harry J. Carr of Directors (Principal
Executive Officer)

/s/ Richard W. Barcus President and Chief November 7, 2000
______________________________________ Operating Officer
Richard W. Barcus

* Director November 7, 2000
______________________________________
Michael M. Connors

* Director November 7, 2000
______________________________________
William B. Bunting

* Director November 7, 2000
______________________________________
Jeffrey A. Feldman

* Director November 7, 2000
______________________________________
Edward F. Glassmeyer
</TABLE>

II-12
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director November 7, 2000
______________________________________
Richard C. Smith

* Director November 7, 2000
______________________________________
William A. Roper, Jr.

* Chief Financial Officer November 7, 2000
______________________________________ (Principal Financial and
Michael J. Losch Accounting Officer)

*By: /s/ Harry J. Carr November 7, 2000
________________________________
Harry J. Carr Attorney-In-Fact

</TABLE>
II-13
<PAGE>

INDEX TO EXHIBITS