Edgar Filing: CORVIS CORP

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

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FORM 10-K

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

for fiscal year ended December 29, 2001

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

for the transition period from __________ to __________

Commission file number: 0-30989

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

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

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

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

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

None

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

Common Stock, $.01 par value per share

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

Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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TABLE OF CONTENTS

Page
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PART I

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

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

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

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

PART I

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

Item 1. Business.

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

Overview

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

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

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

Industry Background

Increase in Data Traffic on Carrier Networks

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

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

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

The Existing Network Infrastructure

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

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

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

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

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

Limitations of the Existing Network Infrastructure

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

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

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

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

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

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

The Corvis Solution

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

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

Reduced Capital Expenditures

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

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

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

Compatibility with Existing Networks

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

Speed to Deploy and Increase Capacity

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

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

Rapid Delivery of Services

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

Reduced Operating Expenses

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

Corvis Strategy

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

Develop and Introduce Leading Optical Network Products

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

Maintain and Extend Technology Leadership

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

Penetrate and Expand Customer Base

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

Optimize Manufacturing Capabilities

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

Pursue Strategic Relationships and Acquisitions

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

Corvis Technology and Products

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

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

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

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

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

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

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

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

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

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

Corvis ON

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

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

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

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

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

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

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

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

Corvis OCS

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

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

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

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

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

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

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

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

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

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

Corvis XL/XF

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

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

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

Corvis OP

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

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

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

Corvis Software Tools

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

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

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

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

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

Research and Development

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

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

Customers

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

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

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

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

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

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

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

Sales, Marketing and Customer Support

Sales

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

Marketing

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

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

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

. communicate with market research firms and various industry organizations;

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

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

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

Customer Service and Support

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

Competition

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

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

. speed and cost of deployment;

. speed and cost of service provisioning;

. ability to reconfigure or increase network capacity;

. integrated network management under software control;

. compatibility with existing equipment;

. ongoing customer service and support; and

. willingness to offer product financing.

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

Manufacturing

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

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

Intellectual Property

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

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

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

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

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

Employees

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

Item 2. Properties.

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

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

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

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

Item 3. Legal Proceedings.

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

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

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

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

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

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

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

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

None.

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES OF THE REGISTRANT

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

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

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

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

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

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

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

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

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

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

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

PART II

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

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

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

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

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

Dividend Policy

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

Item 6. Selected Financial Data.

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

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

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

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

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

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

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

Overview

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

If cash on hand and cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. To the extent that we raise additional capital through the
sale of equity or debt securities, the issuance of such securities could result
in dilution to our existing shareholders. If additional funds are raised
through the issuance of debt securities, the terms of such debt could impose
additional restrictions on our operations. Additional capital, if required, may
not be available on acceptable terms, or at all. If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results. Increasingly, as a result
of the financial demands of major network deployments, carriers are looking to
their suppliers for financing assistance. From time to time, we may provide or
commit to extend credit or credit support to our customers as we consider
appropriate in the course of our business.

Algety Telecom S.A.

On July 1, 2000, we acquired Algety Telecom S.A., a French company that
develops and markets high capacity, high speed optical transmission equipment.
Algety, based in Lannion, France, was formed in April 1999, and was a
development stage company with no revenue.

At the initial closing on July 1, 2000, we delivered to the Algety
shareholders 1,301,822 shares of our Series I convertible preferred stock,
which converted into 15,621,858 shares of common stock upon the closing of our
initial public offering. We also delivered 348,402 shares of Series I
convertible preferred stock to our escrow agent to secure potential warranty
claims, which converted into 4,180,824 shares of common stock upon the closing
of our initial public offering. In addition, we placed into escrow 2,275,032
shares of common stock that will be released contingent upon satisfaction of
certain minimum employment terms for certain Algety employees. We incurred
approximately $1.0 million of transaction costs relating to the transaction.

On November 3, 2000, consistent with the terms of the acquisition agreement,
the Company completed a second closing in which an additional 11,385,358 shares
of common stock were delivered to the former Algety stockholders. Total value
of all shares delivered in the first and second closings was $947.1 million.

We accounted for the acquisition using the purchase method whereby the net
tangible and identifiable intangible assets acquired and liabilities assumed
are recognized at their estimated fair market values at the date of
acquisition. The excess of the aggregate purchase price over the estimated fair
value of net assets acquired of

$876.7 million, based upon the purchase price allocation, was being amortized
on a straight-line basis over five years. In addition, $42.2 million of the
purchase price was allocated to in-process research and technology and was
expensed immediately. During 2001, the Company recorded restructuring and other
charges of approximately $710.7 million associated with the impairment of the
goodwill. Under SFAS 142, described below, the remaining balance of $2.3
million will no longer be amortized on a straight-line basis, but rather
goodwill will be tested at least annually for impairment.

Subsequent Event

On January 29, 2002, we announced that we had signed a definitive merger
agreement to acquire Dorsal Networks, Inc., a privately held provider of
next-generation transoceanic and regional undersea optical network solutions.
Subject to the satisfaction of various closing conditions, including the
approval by our shareholders and the shareholders of Dorsal, we will acquire
Dorsal in a stock transaction for approximately 40,923,500 shares of common
stock. The shareholders meeting is expected to take place in the first half of
2002. The acquisition will be accounted for under the "purchase" method of
accounting. Under the purchase method, the purchase price of Dorsal will be
allocated to identifiable assets and liabilities acquired from Dorsal, with the
excess being treated as goodwill. We preliminarily estimate that the
acquisition will result in an in-process research and development charge of
approximately $33.8 million as well as the recognition of certain intangible
assets of $30.8 million, which will be amortized over an estimated life of five
years. In addition, the acquisition will result in goodwill of approximately
$7.6 million, which will have an indefinite life, but will be subject to
periodic impairment tests. Dr. David R. Huber, our President and Chief
Executive Officer, owns, directly or indirectly, approximately 31 percent of
the outstanding stock of Dorsal. Effective upon the completion of the Dorsal
transaction, Jim Bannantine, the current President and CEO or Dorsal Networks,
will become the new President of Corvis Corporation, responsible for the
day-to-day operations of the Company. Prior to completion of the Dorsal merger,
Jim will lead the transition and integration planning efforts for both
companies.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations". This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations" and FASB Statement No. 38, "Accounting for
Reacquisition Contingencies of Purchased Enterprises". The provisions of this
statement apply to all business combinations initiated after June 30, 2001. The
application of this accounting standard is not expected to have a material
effect on our consolidated financial statements.

SFAS No. 142 addresses how intangible assets that are acquired individually
or with a group of other assets should be accounted for in financial statements
upon their acquisition. This statement requires goodwill to be periodically
reviewed for impairment, for fiscal years beginning after December 15, 2001.
SFAS No. 142 supercedes APB Opinion No. 1, "Intangible Assets". We will adopt
the provisions of this standard for our first quarter of fiscal 2002. We have
recorded goodwill amortization expense of $0.2 million in fiscal 1999,
$41.9 million in fiscal 2000 and $114.3 million in fiscal 2001, which will no
longer be recorded in subsequent fiscal years. The application of this
accounting standard is not expected to have a material effect on our
consolidated financial statements.

In August 2001, the Financial Accounting Standard Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
infrequently Occurring Events and Transactions", for the disposal of segments
of a business (as previously defined in that opinion). The adoption of SFAS No.
144 is not expected to have a material adverse effect on our results of
operations.

Factors that May Affect Our Future Results

Risks Related to Our Financial Results

We have incurred significant losses since inception, and we expect losses to
continue in the future.

We have incurred significant net losses since inception. As of December 29,
2001, We had an accumulated deficit of approximately $1.8 billion. We expect to
incur significant losses in the near-term. We cannot be certain that we will
ever achieve profitability. We will need to generate significant revenue and
control costs to achieve profitability.

Our limited operating history makes financial forecasting and evaluation of
our business difficult.

Our limited operating history makes it difficult to forecast our future
operating results. We have only a limited history selling our optical network
products. Although we began operations in 1997, we began generating revenue in
the second half of 2000. Because we have a limited history upon which to base
forecasts of future operating results, you should not rely on our past
financial performance to evaluate our future financial performance and any
predictions about our future revenues and expenses may not be as accurate as
they would be if we had a longer, more stable business history.

The unpredictability of our quarterly results may adversely affect the
trading price of our common stock.

Our revenue and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause the price of our common stock to fluctuate. The
primary factors that may affect our quarterly results include the following:

. loss of customers or the ability to attract new customers;

. satisfaction of contractual customer acceptance criteria;

. cancellation of or delays in customer orders;

. demand for optical networking products and services;

. the length and variability of the sales cycle for our products and
services;

. the timing and size of sales of our products and services;

. our ability to maintain production volumes and quality levels for our
products and services;

. our ability to obtain sufficient supplies of sole or limited source
components;

. changes in our pricing policies or the pricing policies of our competitors;

. increases in the prices of the components that we purchase;

. new product introductions and enhancements by our competitors;

. our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;

. the timing and magnitude of product development expenses;

. our ability to attract and retain key personnel;

. issuances or sales by us of common stock or other securities in the future;

. costs related to acquisitions of technology or businesses; and

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

A delay in generating or recognizing revenue could cause significant
variations in our operating results from quarter to quarter and could result in
substantial operating losses. It is possible that in some future quarters our

results may be below the expectations of analysts and investors. In this event,
the price of our common stock will likely decrease.

The long and variable sales cycles for our products may cause our revenue
and operating results to vary significantly from quarter to quarter, which
may adversely affect the trading price of our common stock.

Certain of our products are designed to enable all-optical transmission and
switching of data traffic over long distances. We expect that customers who
purchase these products will do so as part of a large-scale deployment of these
products across their networks. We also offer point-to-point solutions which we
expect to be purchased by customers to cover high-traffic routes. In each case,
a customer's decision to purchase our all-optical network products will involve
a significant commitment of its resources. A lengthy testing and product
qualification process, a portion of which is funded by us, will precede any
final decision to purchase our products. Throughout this sales and
qualification cycle, we will spend considerable time and expense educating and
providing information to prospective customers about the uses and features of
our products.

The timing of deployment of our products may vary widely and will depend on
the specific network deployment plan of the customer, the installation skills
of the customer, the complexity of the customer's network environment and the
degree of hardware and software configuration necessary. Customers with
substantial or complex networks have traditionally expanded their networks or
upgraded their systems in large increments on a periodic basis. Accordingly, we
may receive purchase orders for significant dollar amounts on an irregular and
unpredictable basis. In addition, customers may request the cancellation of
purchase orders.

Because of our limited operating history and the nature of our business, we
cannot predict the timing or size of these sales and deployment cycles. Long
sales cycles, as well as our expectation that customers will tend to place
large orders sporadically with short lead times, may cause our revenue and
results of operations to vary significantly and unexpectedly from quarter to
quarter.

We currently have five customers and we expect that substantially all of our
revenue will be generated from a limited number of customers.

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

publicly available financial information, we determined that no allowance for
uncollectible amounts was necessary. Subsequent to year end, Williams has
disclosed certain recent events that may potentially adversely affect its
financial condition. Based on these events, in late February 2002, Williams
announced that it is considering restructuring options, which may include
filing a petition for Chapter 11 bankruptcy protection. If Williams files for
bankruptcy protection under chapter 11, we cannot be certain when we will
receive these outstanding payments, and if we do, how much will actually be
received. In addition, there may be other provisions under bankruptcy laws that
would impact our ability to collect these amounts and that may affect some
payments that we have already received. Bankruptcy laws may also allow
Williams, under certain circumstances, to reject purchase agreement with us. We
cannot give any assurances or make any predictions as to whether Williams will
file for bankruptcy and what effect that, or any other decisions that they
make, will have on our business.

We expect that in the future substantially all of our revenue will depend on
sales of our optical network products to a limited number of potential
customers. The rate at which customers purchase products from us will depend,
in part, on the increasing demand for bandwidth by carriers' customers. Any
failure of carriers to purchase products from us for any reason, including any
downturn in their business, may seriously harm our business, financial
condition and results of operations.

We depend on our key personnel to manage our business effectively. If we are
unable to retain our key personnel, our business, financial condition and
results of operations could be harmed.

Our future success depends upon the continued services of our executive
officers and other key engineering, manufacturing, operations, sales, marketing
and support personnel who have critical industry experience and relationships
that we rely on to implement our business plan. The loss of the services of any
of our key employees, including Dr. David Huber, our founder, President and
Chief Executive Officer, could delay the development and production of our
products and negatively impact our ability to maintain customer relationships,
which would harm our business, financial condition and results of operations.

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

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
have developed a sales and marketing staff outside of the United States.
International operations may be subject to certain risks and challenges that
could harm our results of operations, including:

. difficulties and costs of staffing and managing foreign operations;

. longer sales cycles for our products;

. reduced protection for intellectual property rights;

. difficulty in accounts receivable collection and longer collection periods;

. longer sales cycles for our products;

. compliance with international standards that differ from domestic
standards;

. political and economic instability;

. fluctuations in exchange rates;

. changes in regulatory requirements in the communications industry;

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

. tariffs, quotas and other import restrictions on communications products;
and

. potentially adverse tax consequences.

Risks Related to the Industry

Our Business Has Been Adversely Affected by Recent Developments in the
Communications Industry and the Economy in General.

For much of the last five years the market for our equipment has been
influenced by the entry into the communications services business of a
substantial number of new companies. In the United States that was due largely
to changes in the regulatory environment, in particular those brought about by
the Telecommunications Act of 1996. These new companies raised billions of
dollars in capital, much of which they invested in new equipment, causing an
acceleration in the growth of the market for telecommunications equipment.

Recently, we have seen a reversal of this trend, including the failure of a
large number of the new entrants and a sharp contraction of the availability of
capital to the industry. This, in turn, has caused a substantial reduction in
demand for telecommunications equipment, including our products.

This industry trend has been compounded by the slowing not only of the
United States economy, but the economies in virtually all of the countries in
which we are marketing our products. The combination of these factors has
caused customers to become more conservative in their capital investment plans
and more uncertain about their future purchases. As a consequence, we are
facing a market that is both reduced in absolute size and more difficult to
predict and plan for.

We expect the factors described above to affect our business, for at least
several more quarters, if not longer, in several significant ways compared to
the recent past:

. it is likely that our markets will be characterized by reduced capital
expenditures by our customers; and

. our ability to forecast the volume and product mix of our sales will be
substantially reduced.

We are exposed to the credit risk of our customers.

Industry and economic conditions have weakened the financial position of
some of our customers and potential customers. To sell to some of these
customers, we may be required to extend favorable payment terms. While we
monitor these situations carefully and attempt to take appropriate measures to
protect ourselves, it is possible that we may have to write-down or write-off
doubtful accounts. Such write-downs or write-offs, if large, could have a
material adverse effect on our operating results and financial condition. We
have provided extended credit terms to some of our customers. While we have
done only a limited amount of this type of financing in the past, the
increasingly competitive environment in which we operate may require us to
engage in more competitive financing arrangements. Our ability to recognize
revenue from financed sales will depend on the relative financial condition of
the specific customer, among other factors. Any change in the financial
condition of our customers could have a material adverse effect on our
operating results and financial condition.

The markets for optical networking products are evolving and uncertain and
our business will suffer if they do not develop as we expect.

Most carriers have made substantial investments in their current network
infrastructure, and may have announced significant reductions in their capital
expenditures. It is uncertain when these reductions in capital expenditures
will be reversed. In addition, carriers may elect to remain with current
network architectures or to adopt new architectures in limited stages or over
extended periods of time. A decision by a customer to purchase our optical
networking solutions will involve a significant capital investment. We will
need to convince these carriers of the benefits of our solutions for future
network deployment. We cannot be certain that a viable market for our products
will further develop or be sustainable. If this market does not develop
further, or develops more slowly than we expect, our business, financial
condition and results of operations would be harmed.

The markets we serve are highly competitive and we may not be able to
achieve or maintain profitability.

Competition in optical networking markets is intense. These markets have
historically been dominated by large companies, such as Alcatel, Cisco, Lucent,
NEC and Nortel. We may face competition from other large communications
equipment companies that are currently in or that may enter our market. In
addition, a number of private companies have announced plans for new
all-optical products to address the same network needs that our products
address. Due to several factors including the lengthy sales cycle, 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 an early provider of all-optical network products prior to achieving
market penetration. Many of our competitors have longer operating histories,
greater name recognition, larger customer bases and greater financial,
technical and sales and marketing resources than we do and may be able to
undertake more extensive marketing efforts, adopt more aggressive pricing
policies and provide more vendor financing than we can. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could develop new technologies that compete with our products or
render our products obsolete. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources may enter our markets, further intensifying competition.

In order to compete effectively, we must deliver products that:

. provide high reliability;

. provide an overall cost-effective solution for carriers;

. reduce operating costs;

. increase network capability easily and efficiently with minimal disruption;

. operate with existing equipment and network designs;

. reduce the complexity of the network in which they are installed by
decreasing the amount of equipment required; and

. provide effective network management.

In addition, we believe that a knowledge of the infrastructure requirements
applicable to carriers, experience in working with carriers to develop new
services for their customers, and an ability to provide vendor financing are
important competitive factors in our market. We have limited knowledge of
carriers' infrastructure requirements and limited experience in working with
carriers to develop new services. We currently provide only a limited
vendor-sponsored financing program. Many of our competitors, however, are able
to offer more complete financing programs, which may influence prospective
customers to purchase from our competitors rather than from us.

If we are unable to compete successfully against our current and future
competitors, we may have difficulty obtaining customers, and could experience
price reductions, order cancellations, increased expenses and reduced gross
margins, any one of which would harm our business, financial condition and
results of operations.

The communications industry is subject to government regulations that could
harm our business.

The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products and our
customers' products are subject to FCC rules and regulations. Current and
future FCC rules and regulations affecting communications services, our
products 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 carriers in the future. Delays
caused by our compliance with regulatory requirements could result in
postponements or cancellations of product orders, which would harm our
business, results of operations and financial condition. Further, we cannot be
sure that we will be successful in obtaining or maintaining any regulatory
approvals that may, in the future, be required to operate our business.

Risks Related to Product Manufacturing

We have limited manufacturing experience and unproven manufacturing
capabilities. If we are unable to adjust our manufacturing capacity in a
timely manner or if we do not accurately project demand, we may not achieve
or maintain profitability.

Our future operating results will depend on our ability to develop and
manufacture our products cost-effectively. To do so, we will have to develop
manufacturing processes that will allow us to produce sufficient quantities of
products at competitive prices. We have limited manufacturing experience and
have only used our current facilities for limited quantities of commercial
products. Due to the complexities of the optical product manufacturing process,
we may not be able to supplement our internal manufacturing capability by
outsourcing manufacturing of our products to meet demand.

If we are unable to adjust our manufacturing capacity in a timely manner or
if we do not accurately project demand, we will have insufficient capacity or
excess capacity, either of which will seriously harm our business. There are
numerous risks associated with adjusting manufacturing capabilities, including
the following:

. the inability to purchase and install the necessary manufacturing
equipment;

. the scarcity and cost of manufacturing personnel;

. difficulties in achieving adequate yields from new manufacturing lines; and

. the scarcity and cost of certain components.

Our manufacturing facilities and related capital expenditures assume a level
of customer orders that we may not realize or, if we do realize, may not be
sustained over multiple quarters. If we do not receive anticipated levels of
customer orders, our gross margins will decline and we will not be able to
reduce our operating expenses quickly enough to prevent a decline in our
operating results.

We depend on sole source and limited source suppliers for several key
components. If we are unable to obtain these components on a timely basis,
we will be unable to meet our customers' product delivery requirements,
which would harm our business.

We currently purchase several key components from single or limited sources.
From time to time, there have been industry-wide shortages of some optical
components. If any of our sole or limited source suppliers experiences capacity
constraints, work stoppages or any other reduction or disruption in output,
they may be unable to meet our delivery schedule. 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, and we may be unable to develop alternative sources for
the components.

Even if alternate suppliers are available, identifying them is often
difficult and time consuming. We have key components that are available from
only one qualified supplier. The process of qualifying vendors can take a
significant amount of time and is not always successful. If we do not qualify
multiple vendors or receive critical components in a timely manner, we will be
unable to manufacture our products in a timely manner and would, therefore, be
unable to meet customers' product delivery requirements. Any failure to meet a
customer's delivery requirements could harm our reputation and decrease our
sales, which would harm our business, financial condition and results of
operations.

Some of our competitors are also our suppliers and if our supply
relationship with them deteriorates, it could harm our business.

Some of our component suppliers are both our primary source for those
components and major competitors in the market for communications equipment.
For example, we buy some of our key components from Lucent

and Alcatel, each of which offers communications systems and equipment that
compete with our products. Our business, financial condition and results of
operations could be harmed if these supply relationships were to change in any
manner adverse to us.

Risks Related to Our Products

Because optical networking products are complex and are deployed in complex
environments, our products may have defects that we discover only after full
deployment, which could seriously harm our business.

Optical products are complex and are designed to be deployed in large
quantities across complex networks. Because of the nature of the products, they
can only be fully tested when completely deployed in large networks with high
amounts of traffic. Our customers may discover errors or defects in the
hardware or the software, or our products may not operate as expected, after
they have been fully deployed. If we are unable to fix defects or other
problems that may be identified in full deployment, we would experience:

. loss of, or delay in, revenue and loss of market share;

. loss of existing customers;

. failure to attract new customers or achieve market acceptance;

. diversion of development resources;

. increased service and warranty costs;

. legal actions by our customers; and

. increased insurance costs.

The occurrence of any of these problems would seriously harm our business,
financial condition and results of operations. Defects, integration issues or
other performance problems in our products could result in financial or other
damages to our customers or could negatively affect market acceptance for our
products. Our customers could also seek damages for losses from us, which, if
the customers were successful, would seriously harm our business, financial
condition and results of operations. A product liability claim brought against
us, even if unsuccessful, would likely be time consuming and costly and would
put a strain on our management and resources.

Our business will suffer if we do not respond rapidly to technological
changes.

The market for network communications equipment is characterized by rapid
technological change, frequent new product introductions and changes in
customer requirements. We may not be able to respond quickly or effectively to
these developments. We may experience design, manufacturing, marketing and
other difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. The constant introduction of new
products by competitors, market acceptance of products based on new or
alternative technologies or the emergence of new industry standards has led to
significant inventory write-downs and could render our existing or future
products obsolete, which may harm our business, financial condition and results
of operations.

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 potential customers. If the standards adopted are different from those that
we have chosen to support, market acceptance of our products may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the introduction of products incorporating new technologies and the
emergence of new industry standards could render our existing products
obsolete. In order to introduce products incorporating new technologies and new
industry standards, we must be able to gain access to the latest technologies
of our suppliers, other network vendors and our potential customers. Any
failure to gain access to the latest technologies may seriously harm our
business, financial condition and results of operations.

Our business will suffer if our current and future products do not meet
specific customer requirements.

Customers may require product features and capabilities that our products do
not have. To achieve market acceptance for our products, we must anticipate and
adapt to customer requirements and offer products and services that meet
customer demands. Our failure to develop products or offer services that
satisfy customer requirements may seriously harm our business, financial
condition and results of operations.

We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older to newer products in order to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products can be delivered to meet anticipated customer demand. Our
inability to effectively manage this transition may harm our business,
financial condition and results of operations.

Our business will be adversely affected if we are unable to protect our
intellectual property rights from third-party challenges.

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our technology is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.

We are involved in an intellectual property dispute and in the future we may
become involved in similar disputes, which could subject us to significant
liability, divert the time and attention of our management and prevent us from
selling our products.

On July 19, 2000, Ciena filed a lawsuit in the United States District Court
for the District of Delaware alleging that we are willfully infringing three of
Ciena's patents. Ciena is seeking injunctive relief, monetary damages including
treble damages, as well as costs of the lawsuit, including attorneys' fees. On
September 8, 2000, we filed an answer to the complaint, as well as
counter-claims alleging, among other things, invalidity and/or unenforceability
of the three patents in question. On March 5, 2001, a motion was granted,
allowing Ciena to amend its complaint to include allegations that we are
willfully infringing two additional patents. We are currently in the pre-trial
phase of the litigation and a trial date had originally been set for April 1,
2002; however, it has recently been postponed by the court. We intend to defend
ourselves vigorously against these claims. An adverse determination in, or
settlement of, the Ciena litigation could involve the payment of significant
amounts by us, or could include terms in addition to payments, such as an
injunction, preventing us from selling some of our products until we are able
to implement a non-infringing design to any portion of our products to which
such determination applied. An adverse determination could have a material
adverse effect on our business, financial condition and results of operations.
If we are required to redesign our products, we may have to stop selling our
current products until they have been redesigned. We believe that defense of
the lawsuit may be costly and may divert the time and attention of some members
of our management.

We or our customers may be a party to additional litigation in the future to
protect our intellectual property or to respond to allegations that we infringe
others' intellectual property. Any parties asserting that our products infringe
upon their proprietary rights would force us to defend ourselves and possibly
our customers against the alleged infringement. If we are unsuccessful in any
intellectual property litigation, we could be subject to

significant liability for damages and loss of our proprietary rights.
Intellectual property litigation, regardless of its success, would likely be
time consuming and expensive to resolve and would divert management time and
attention. In addition, we could be forced to do one or more of the following:

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

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

. redesign those products that use the technology, which may be
time-consuming or impossible.

If we are forced to take any of these actions, our business may be seriously
harmed.

If necessary licenses of third-party technology are not available to us or
are very expensive, our business would be seriously harmed.

We currently license technology, and from time to time we may be required to
license additional technology, from third parties to sell or develop our
products and product enhancements. Our existing and future third-party licenses
may not be available to us on commercially reasonable terms, if at all. Our
inability to maintain or obtain any third-party license required to sell or
develop our products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, any of which could seriously harm our business, financial condition and
results of operations.

Risks Related to the Development of Our Business

Our products and services require a sophisticated sales effort targeted at a
limited number of key individuals within our prospective customers'
organizations.

Our success will depend, in part, on our ability to develop and manage these
relationships. This effort requires specialized sales personnel as well as
experienced sales engineers. Competition for these individuals is intense
because there are a limited number of people available with the necessary
business background and understanding of our market. When we hire them or
contract for these personnel, they may require extensive training in our
network products. We might not be able to hire the kind and number of sales
personnel and sales engineers required for us to be successful. If we are
unable to adjust our sales, customer service and support operations, we may not
be able to effectively market our products, which may prevent us from achieving
and maintaining profitability.

We have previously offered warrants to purchase our common stock to three of
our customers. We may be unable to attract new customers unless we continue
to offer similar equity arrangements.

Two of our customers purchased an equity interest in us, and a third
customer holds a warrant to purchase our common stock. Although these customers
purchased the equity interests at fair value and the warrant has an exercise
price equal to the fair value on the date of grant, the opportunity to invest
in us provided these customers with an additional incentive to purchase our
products. We may be unable to attract new customers, unless we offer equity to
them. It is not our intention to offer equity to customers in the future.

Our business will suffer if we fail to properly manage our size and
continually improve our internal controls and systems.

We continue to adjust the scope of our operations, as well as our in-house
manufacturing and customer support capabilities, develop new distribution
channels and fund research and development. Our ability to

successfully offer our products and implement our business plan in a rapidly
evolving market requires an effective planning and management process. In order
to manage our size properly, we must:

. retain existing personnel;

. hire, train, manage and retain additional qualified personnel, including
engineers and research and development personnel;

. manage our manufacturing operations, controls and reporting systems;

. effectively manage multiple relationships with our customers, suppliers
and other third parties; and

. implement additional operational controls, reporting and financial systems
and procedures.

Failure to do any of the above in an efficient and timely manner could
seriously harm our business, financial condition and results of operations.

If we become subject to unfair hiring claims we could incur substantial
costs in defending ourselves or management's attention could be diverted
away from our operations.

Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring
practices. We have received claims of this kind in the past, and we may receive
claims of this kind in the future as we seek to hire qualified personnel or
that those claims will not result in material litigation. We could incur
substantial costs in defending ourselves or our employees against such claims,
regardless of the merits of the claims. In addition, defending ourselves from
such claims could divert the attention of management away from our operations.

We may need additional capital to fund our existing and future operations.
If we are unable to obtain additional capital, we may be required to reduce
the scope of our planned product development and marketing and sales
efforts, which would harm our business, financial condition and results of
operations.

The development, marketing and sales of new products is expected to require
a significant commitment of resources. We may incur significant operating
losses or expend significant amounts of capital if:

. the market for our products develops more slowly than anticipated;

. we fail to establish market share or generate revenue;

. our capital expenditure forecasts change or prove inaccurate; and

. we need to respond to unforeseen challenges or take advantage of
unanticipated opportunities.

As a result, we may need to raise additional capital. To the extent that we
raise additional capital through the sale of equity or debt securities, the
issuance of such securities could result in dilution to our existing
stockholders. If additional funds are raised through the issuance of debt
securities, the terms of such debt could impose additional restrictions on our
operations. Additional capital, if required, may not be available on acceptable
terms, or at all. If we are unable to obtain additional capital, we may be
required to reduce the scope of our planned product development and marketing
and sales efforts, which would harm our business, financial condition and
results of operations.

Risks Related to the Dorsal Acquisition.

We may not realize any benefits from the merger.

Although there can be no assurance that the merger will be completed, we and
Dorsal entered into the merger agreement with the expectation that the merger
will result in benefits to each company, including:

. significantly broadening our addressable market opportunities;

. positioning us as one of the few end-to-end vendors of next-generation
terrestrial and undersea optical networking solutions;

. accelerating sales to global carriers;

. leveraging the two companies' complementary technologies and enhancing
their competitive strengths;

. leveraging both companies' sales and marketing resources to provide
opportunities to increase market penetration and revenue growth;

. realizing cost savings in operations and new product development;

. addressing an attractive market opportunity in light of the current
competitive landscape and compared to other areas of potential acquisition
for us in the terrestrial space;

. expanding new product development opportunities through the integration of
existing products and services;

. having greater capacity to respond to competition, market demands and
technological change; and

. increasing management breadth and depth.

Achieving the benefits of the merger will depend in part on the successful
integration of our and Dorsal's operations and personnel in a timely and
efficient manner. Integrating Corvis and Dorsal will be a complex and
time-consuming process. Employees and management of each of Corvis and Dorsal
have played a key role in creating each company. The successful integration of
these two companies will alter prior relationships and may affect productivity.
In addition, the merger is likely to divert the attention of management of each
company and could negatively affect the combined company's ability to operate
and retain key employees after the merger. We cannot assure you that the
operations of the companies can be successfully integrated or that any of the
anticipated benefits will be realized, and the failure to do so could have a
material adverse effect on our business and common stock price.

If we and Dorsal cannot quickly and efficiently make our technology,
products and services operate together, many of the potential benefits of
the merger may not be realized.

We intend to make Dorsal's technology, products and services operate
together with our own products and services, as well as to offer Dorsal's
technology, products and services separately. We cannot assure you that we will
be able to do so quickly and effectively. In order to obtain the benefits of
the merger, we must make Dorsal's technology, products and services operate
together with our technology, products and services. We may be required to
spend additional time and money on integration, which would otherwise be spent
on developing our own products and services. If we do not integrate the
technology effectively or if our management spends too much time on integration
issues, it could harm the combined company's business, financial condition and
results of operations.

Merger related accounting charges may delay and reduce our profitability.

We will account for the merger under the "purchase" method of accounting.
Under the purchase method, the purchase price of Dorsal will be allocated to
identifiable assets and liabilities acquired from Dorsal with any excess being
treated as goodwill. As a result, we will incur accounting charges from the
merger that may delay our profitability. These charges are currently
preliminarily estimated to include an in-process research and development
charge of approximately $33.5 million to be expensed in the period in which the
merger is consummated. In addition, the merger will generate certain intangible
assets of approximately $30.5 million which will be amortized over varying
periods and estimated goodwill and other intangible assets with indefinite
lives of approximately $8.2 million, which will be subject to periodic
impairment tests and could result in potential write-down charges in future
periods. These estimates may change based on a final independent valuation.

The market price of our common stock may decline as a result of the merger.

The market price of our common stock may decline as a result of the merger
if:

. the integration of Corvis and Dorsal is unsuccessful or takes longer than
expected;

. the perceived benefits of the merger are not achieved as rapidly or to the
extent anticipated by financial analysts or investors;

. the effect of the merger on our financial results is not consistent with
the expectations of financial analysts or investors; or

. dilution from the stock issued for the merger.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. We maintain instruments subject to
interest rate and foreign currency exchange rate risk. We categorize all of our
market risk sensitive instruments as non-trading or other instruments.

Interest Rate Sensitivity

We maintain a portfolio of cash equivalents in a variety of securities
including: commercial paper, certificates of deposit, money market funds and
government and non-government debt securities. Substantially all amounts are in
money market funds as well as high grade, short-term commercial paper and
certificates of deposit, the value of which is generally not subject to
interest rate changes. We believe that a 10% increase or decline in interest
rates would not be material to our investment income or cash flows. Our
long-term debt obligations bear fixed interest rates. As such, we have minimal
cash flow exposure due to general interest rate changes associated with our
long-term debt obligations.

Foreign Rate Sensitivity

We primarily operate in the United States; however, we have expanded
operations to include research and development and sales offices in various
European countries. As a result, we may have sales in foreign currencies
exposing us to foreign currency rate fluctuations. For the fiscal year ended
December 29, 2001, we recorded no sales in a foreign currency. We are exposed
to the impact of foreign currency changes, associated with the Euro, for our
European subsidiaries, financial instruments, which are limited to cash and
cash equivalents. It is the policy of management to fund foreign operations on
a monthly basis, thus minimizing average cash and overnight investments in the
Euro. At December 29, 2002, our European subsidiaries maintained cash and cash
equivalents of approximately (Euro)1.8 million. We believe that a 10% increase
or decline in the Euro exchange ratio would not be material to cash and cash
equivalent balances, interest income, or cash flows from consolidated
operations.

Item 8. Financial Statements and Supplementary Data.

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Corvis Corporation and subsidiaries:

We have audited the accompanying consolidated balance sheets of Corvis
Corporation and subsidiaries as of December 30, 2000 and December 29, 2001, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years ended January 1, 2000, December 30, 2000
and December 29, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits 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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corvis
Corporation and subsidiaries as of December 30, 2000 and December 29, 2001, and
the results of their operations and their cash flows for the years ended
January 1, 2000, December 30, 2000 and December 29, 2001, in conformity with
accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

McLean, Virginia
January 29, 2002, except as to
Note 14 which is as of
February 25, 2002

F-1

CORVIS CORPORATION

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

December 30, December 29,
2000 2001
------------ ------------

ASSETS
------
Current assets:
Cash and cash equivalents.................................................... $1,024,758 $ 638,872
Short-term investments....................................................... -- 21,907
Trade accounts receivable.................................................... 16,085 33,676
Inventory, net............................................................... 219,414 96,426
Other current assets......................................................... 26,802 17,486
---------- -----------
Total current assets..................................................... 1,287,059 808,367
Restricted cash, long-term...................................................... 46,292 2,417
Property and equipment, net..................................................... 106,681 134,393
Goodwill and other intangible assets, net....................................... 929,204 21,429
Other long-term assets, net..................................................... 12,600 12,219
---------- -----------
Total assets............................................................. $2,381,836 $ 978,825
========== ===========

LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
------------------------------------------------------
Current liabilities:
Notes payable, current portion............................................... $ 1,438 $ 126
Capital lease obligations, current portion................................... 1,841 6,796
Accounts payable............................................................. 90,995 14,488
Accrued expenses............................................................. 20,745 36,402
Provision for restructuring charge........................................... -- 24,050
---------- -----------
Total current liabilities................................................ 115,019 81,862
Noncurrent liabilities:
Notes payable, net of current portion........................................ 44,529 2,959
Capital lease obligations, net of current portion............................ 1,380 1,743
Other long-term liabilities.................................................. 4,315 3,408
---------- -----------
Total liabilities........................................................ 165,243 89,972
Commitments and contingencies
Redeemable stock................................................................ 30,000 --
Stockholders' equity:
Preferred stock--$0.01 par value; 200,000,000 shares authorized; zero shares
issued and outstanding as of December 30, 2000 and December 29, 2001....... -- --
Common stock--$0.01 par value; 1,900,000,000 shares authorized;
348,039,489 shares and 362,687,909 shares issued and outstanding as of
December 30, 2000 and December 29, 2001, respectively...................... 3,478 3,621
Additional paid-in capital................................................... 2,497,773 2,648,955
Accumulated other comprehensive income (loss):
Foreign currency translation............................................... 60,176 (10,796)
Accumulated deficit.......................................................... (374,834) (1,752,927)
---------- -----------
Total stockholders' equity............................................... 2,186,593 888,853
---------- -----------
Total liabilities, redeemable stock and stockholders' equity............. $2,381,836 $ 978,825
========== ===========

See accompanying notes to consolidated financial statements.

F-2

CORVIS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)

Year Ended
-----------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------

Revenue.......................................................... $ -- $ 68,898 $ 188,450
Costs of revenue
Product sales................................................. -- 42,943 116,952
Inventory write-downs, contract losses and other.............. -- -- 216,535
-------- --------- -----------
Gross profit (loss).............................................. -- 25,955 (145,037)
Operating expenses:
Research and development, exclusive of equity-based expense... 41,565 88,874 149,882
Sales and marketing, exclusive of equity-based expense........ 3,422 30,871 56,002
General and administrative, exclusive of equity-based expense. 18,993 31,127 34,344
Equity-based expense:
Research and development...................................... 126 28,050 45,409
Sales and marketing........................................... 4,845 52,417 17,756
General and administrative.................................... -- 17,891 35,642
Amortization of intangible assets................................ 173 46,746 125,940
Purchased in-process research and development.................... -- 42,230 --
Restructuring, impairment and other charges...................... -- -- 789,242
-------- --------- -----------
Total operating expenses.................................. 69,124 338,206 1,254,217
-------- --------- -----------
Operating loss............................................ (69,124) (312,251) (1,399,254)
Interest income (expense), net................................... (2,146) 28,640 21,161
-------- --------- -----------
Net loss.................................................. (71,270) (283,611) (1,378,093)
Other comprehensive income (loss):
Foreign exchange adjustment................................... -- 60,176 (70,972)
-------- --------- -----------
Comprehensive loss............................................... $(71,270) $(223,435) $(1,449,065)
======== ========= ===========
Basic and diluted net loss per common share...................... $ (2.33) $ (1.80) $ (3.94)
Weighted average number of common shares outstanding............. 30,599 157,349 349,652

See accompanying notes to consolidated financial statements.

F-3

CORVIS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)

Convertible
Preferred Stock
------------------ Accumulated
All Series Common Stock Additional Stockholder Other
------------------ ------------------ Paid-in Note Comprehensive
Shares Amount Shares Amount Capital Receivable Income (Loss)
----------- ------ ----------- ------ ---------- ----------- -------------

Balance at December 31, 1998.................. 7,878,955 $ 78 23,946,012 $ 237 $ 16,671 $ -- $ --
Private Placement--Series C preferred stock... 3,075,736 31 -- -- 28,103 -- --
Private Placement--Series D preferred stock... 211,928 2 -- -- 1,936 -- --
Private Placement--Series F preferred stock... 1,898,406 19 -- -- 46,017 -- --
Private Placement--Series G preferred stock... 292,825 3 -- -- 9,997 -- --
Private Placement--Series H preferred stock... 2,685,954 27 -- -- 216,273 -- --
Exercise of stock options and warrants........ 44,382 1 37,168,008 372 2,604 (1,224) --
Issuance of warrants.......................... -- -- -- -- 9,576 -- --
Equity-based expense.......................... -- -- -- -- 126 -- --
Net loss...................................... -- -- -- -- -- -- --
----------- ----- ----------- ------ ---------- ------- --------
Balance at January 1, 2000.................... 16,088,186 161 61,114,020 609 331,303 (1,224) --
Exercise of stock options and warrants........ 352,576 4 6,111,073 61 47,244 -- --
Private Placement--Series H preferred stock... 496,710 5 -- -- 40,000 -- --
Acquisition of Algety Telecom S.A............. 1,301,822 13 11,385,358 114 916,942 -- --
Initial public offering and concurrent private
placement, net............................... -- -- 31,902,778 319 1,066,118 -- --
Equity-based expense.......................... 213,633 2 -- -- 98,356 -- --
Conversion of preferred stock................. (18,452,927) (185) 237,526,260 2,375 (2,190) -- --
Collection of shareholder note................ -- -- -- -- -- 1,224 --
Foreign exchange adjustment................... -- -- -- -- -- -- 60,176
Net loss...................................... -- -- -- -- -- -- --
----------- ----- ----------- ------ ---------- ------- --------
Balance at December 30, 2000.................. -- -- 348,039,489 3,478 2,497,773 -- 60,176
Exercise of stock options and warrants........ -- -- 14,648,420 143 5,950 -- --
Equity-based expense.......................... -- -- -- -- 115,232 -- --
Expiration of put right....................... -- -- -- -- 30,000 -- --
Foreign exchange adjustment................... -- -- -- -- -- -- (70,972)
Net loss...................................... -- -- -- -- -- -- --
----------- ----- ----------- ------ ---------- ------- --------
Balance at December 29, 2001.................. -- $ -- 362,687,909 $3,621 $2,648,955 $ -- $(10,796)
=========== ===== =========== ====== ========== ======= ========

Total
Accumulated Stockholders'
Deficit Equity
----------- -------------

Balance at December 31, 1998.................. $ (19,953) $ (2,967)
Private Placement--Series C preferred stock... -- 28,134
Private Placement--Series D preferred stock... -- 1,938
Private Placement--Series F preferred stock... -- 46,036
Private Placement--Series G preferred stock... -- 10,000
Private Placement--Series H preferred stock... -- 216,300
Exercise of stock options and warrants........ -- 1,753
Issuance of warrants.......................... -- 9,576
Equity-based expense.......................... -- 126
Net loss...................................... (71,270) (71,270)
----------- -----------
Balance at January 1, 2000.................... (91,223) 239,626
Exercise of stock options and warrants........ -- 47,309
Private Placement--Series H preferred stock... -- 40,005
Acquisition of Algety Telecom S.A............. -- 917,069
Initial public offering and concurrent private
placement, net............................... -- 1,066,437
Equity-based expense.......................... -- 98,358
Conversion of preferred stock................. -- --
Collection of shareholder note................ -- 1,224
Foreign exchange adjustment................... -- 60,176
Net loss...................................... (283,611) (283,611)
----------- -----------
Balance at December 30, 2000.................. (374,834) 2,186,593
Exercise of stock options and warrants........ -- 6,093
Equity-based expense.......................... -- 115,232
Expiration of put right....................... -- 30,000
Foreign exchange adjustment................... -- (70,972)
Net loss...................................... (1,378,093) (1,378,093)
----------- -----------
Balance at December 29, 2001.................. $(1,752,927) $ 888,853
=========== ===========

See accompanying notes to consolidated financial statements.

F-4

CORVIS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

Year Ended
-----------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------

Cash flows used in operating activities:
Net loss...................................................................... $(71,270) $ (283,611) $(1,378,093)
Adjustments to reconcile net loss to net cash used in operating activities:...
Depreciation and amortization................................................ 4,937 54,301 154,965
Equity-based expense......................................................... 4,971 98,358 98,807
Purchased in process research and development................................ -- 42,230 --
Non-cash restructuring, goodwill impairment, inventory write-downs and
other charges............................................................... -- -- 942,653
Asset impairment and other non-cash expenses................................. -- -- 12,301
Changes in operating assets and liabilities:.................................
Increase in accounts receivable............................................ -- (16,085) (17,591)
Increase in inventory, net................................................. (15,869) (195,384) (35,154)
Decrease (increase) in other current assets................................ (1,465) (24,926) 9,316
Increase in other long-term assets......................................... -- -- (5,005)
Increase (decrease) in accounts payable.................................... 4,737 79,725 (76,507)
Increase in other accrued expenses......................................... 2,207 14,591 38,791
-------- ---------- -----------
Net cash used in operating activities................................... (71,752) (230,801) (255,517)
-------- ---------- -----------
Cash flows used in investing activities:
Purchase of property and equipment............................................ (14,180) (90,659) (97,702)
Cash acquired in business combination......................................... 37 22,496 --
Minority equity investments................................................... -- (4,199) (11,891)
Purchase of investments....................................................... -- -- (21,907)
Decrease in deposits and other long-term assets............................... 167 -- --
-------- ---------- -----------
Net cash used in investing activities................................... (13,976) (72,362) (131,500)
-------- ---------- -----------
Cash flows from financing activities:
Decrease (increase) in restricted cash........................................ (17,103) (29,189) 43,875
Proceeds from issuance of note payable........................................ 49,091 43,500 --
Proceeds from stockholder note payable........................................ 8,347 -- --
Proceeds from equity offerings................................................ 290,470 1,071,443 --
Proceeds from stock options and warrants exercised............................ 1,752 47,309 6,092
Proceeds from repayment of shareholder note................................... -- 1,224 --
Payment of notes payable and capital lease obligations........................ (6,272) (49,958) (48,484)
-------- ---------- -----------
Net cash provided by financing activities............................... 326,285 1,084,329 1,483
-------- ---------- -----------
Cash effect of foreign exchange adjustment.............................. -- (1,004) (352)
-------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.................... 240,557 780,161 (385,886)
Cash and cash equivalents--beginning.............................................. 4,040 244,597 1,024,758
-------- ---------- -----------
Cash and cash equivalents--ending................................................. $244,597 $1,024,758 $ 638,872
======== ========== ===========
Supplemental disclosure of cash flow information:
Interest paid................................................................. $ 564 $ 7,220 $ 3,831
Supplemental disclosure of noncash activities:
Financed leasehold improvements............................................... $ 3,164 $ 2,105 $ 10,919
Obligations under capital lease............................................... 3,000 -- --
Issuance of warrants under capital lease obligation........................... 94 -- --
Receipt of warrants in association with purchase commitment................... -- -- 2,361
Conversion of stockholder note payable........................................ 10,000 -- --
Stockholder note received for exercise of stock options....................... 1,224 -- --
Purchase business combinations consideration paid with preferred and
common stock................................................................. 1,888 947,069 --
Issuance of stock for intellectual property................................... -- 35,000 --
======== ========== ===========

See accompanying notes to consolidated financial statements.

F-5

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies and Practices

(a) Nature of Business and Basis of Presentation

Corvis Corporation (the "Company") was incorporated on June 2, 1997 to
design, manufacture and market products that enable a fundamental shift in the
design and efficiency of backbone communications networks by allowing for the
transmission, switching and management of traffic entirely in the optical
domain. In July 2000, the Company commenced its planned principal operations,
including production, shipment and delivery of its commercial products. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. In 1999, the Company changed
its year end from a calendar year end to a year ending on the Saturday closest
to December 31.

On February 8, 2000 and July 21, 2000, the Company declared a 3-for-1 and a
4-for-1 split of its common stock, respectively. All share and per share
amounts of common stock in the accompanying consolidated financial statements
have been retroactively adjusted to reflect the stock splits.

(b) Cash and Cash Equivalents

The Company considers short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include cash in banks and investments in overnight repurchase
agreements, certificates of deposit, money market funds and government and
non-government debt securities. As of December 30, 2000 and December 29, 2001,
investments in overnight repurchase agreements totaled $0.8 million and $4.9
million, respectively, and investments in commercial paper totaled $1,011.5
million and $632.2 million, respectively. The Company considers these
investments as available-for-sale. As such, the securities are stated at their
fair market value and unrealized gains and losses, net of related tax effect,
on these securities are recognized as a component of other comprehensive income
(loss). As of December 30, 2000 and December 29, 2001, the fair value of these
marketable securities approximated the carrying value.

As of December 29, 2001, restricted cash of $2.4 million is supporting
outstanding letters of credit.

As of December 30, 2000, restricted cash of $46.3 million is comprised of
approximately $2.8 million supporting outstanding letters of credit and $43.5
million is pledged as collateral under the terms of a long-term note, which was
repaid in 2001.

Short-term investment securities at December 29, 2001 consist of U.S.
corporate obligations. The Company classifies these securities as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses, net of the related tax
effect, on these securities are excluded from earnings and are reported as a
separate component of other comprehensive income (loss) until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on specific identification basis.

A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts are amortized or
accreted over the life of the related available-for sale security as an
adjustment to yield using the effective interest method. Dividend and interest
income are recognized when earned.

F-6

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 29, 2001, all of the Company's available-for-sale securities
were made up of U.S. corporate securities and are contractually due in one year
or less. Amortized cost approximates fair value at December 29, 2001. Expected
maturities may differ from contractual maturities because the issuer of the
securities may have the right to repay obligations without prepayment penalties.

(d) Strategic Equity Investments

During 2000 and 2001, the Company made strategic equity investments in
certain startup companies for a total of $4.2 million and $11.9 million,
respectively. During 2001, the Company recorded charges totaling $12.3 million
associated with the permanent impairment of these investments resulting from
the impact of economic conditions on certain of these investees. Because the
Company does not have significant influence over any one of these entities, the
Company accounts for these investments using the cost method.

(e) Revenue and Cost of Revenue

Revenue from product sales is recognized upon execution of a contract and
the completion of all delivery obligations provided that there are no
uncertainties regarding customer acceptance and collectibility is deemed
probable. If uncertainties exist, revenue is recognized when such uncertainties
are resolved.

Revenue from installation services is recognized as the services are
performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage
of costs incurred to date compared to estimated total costs for each
installation contract. Amounts received in excess of revenue recognized are
included as deferred revenue in the accompanying consolidated balance sheets.

Costs of revenues include the costs of manufacturing the Company's products
and other costs associated with warranty and other contractual obligations,
inventory obsolescence costs and overhead related to the Company's
manufacturing, engineering, finishing and installation operations. Warranty
reserves are determined based upon actual warranty cost experience, estimates
of component failure rates and management's industry experience.

(f) Inventory

Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value). The Company records a provision for excess and obsolete
inventory whenever such an impairment has been identified.

(g) Property and Equipment

Internal network equipment, test and manufacturing equipment, furniture and
fixtures, and leasehold improvements are stated at cost or estimated fair
market value if acquired in a purchase business combination. Depreciation is
calculated using the straight-line method over estimated useful lives ranging
between three and seven years for internal network equipment, test and
manufacturing equipment, and furniture and fixtures. Leasehold improvements and
assets acquired under capital leases are amortized over the shorter of the
lease term or the estimated useful life of the assets.

F-7

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(h) Goodwill and Other Intangible Assets

The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase business combinations.
Goodwill is being amortized using the straight-line method over five years.

(i) Recovery of Long-lived Assets

The Company's policy is to review its long-lived assets, including goodwill
and other intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company recognizes an impairment loss when the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset. The measurement of the impairment losses to be recognized is based upon
the difference between the fair value, using discounted cash flows, using a
discount rate considering the Company's cost of capital and the commensurate
risks associated with the projected cash flows, and the carrying amount of the
asset.

(j) Research and Development

Research and development costs are expensed as incurred.

(k) Income Taxes

The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting and
tax basis of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

(l) Foreign Currency Translation

The assets and liabilities of the Company's self-contained foreign
operations for which the functional currency is the local currency are
generally translated into U.S. dollars at current exchange rates and revenue
and expenses are translated using average exchange rates for the period.
Resulting translation adjustments are reflected as a component of other
comprehensive income (loss).

(m) Earnings (Loss) Per Common Share

The computations of basic and diluted earnings (loss) per common share are
based upon the weighted average number of common shares outstanding during the
period. Dilutive earnings per share give effect to all potentially dilutive
common securities. Potentially dilutive securities include convertible
preferred stock (prior to the Company's initial public offering), stock options
and warrants.

(n) Uses of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the

F-8

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

(o) Stock Options and Warrants

The Company accounts for its stock options in accordance with the provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair market value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to apply the provisions of APB Opinion No. 25 and provide
pro forma net income (loss) disclosures for employee stock options granted as
if the fair value based method defined in SFAS No. 123 had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25, as
interpreted by FIN 44, and provide the pro forma disclosures of SFAS No. 123.
Stock options and warrants granted to other than employees are recognized at
fair value.

(p) Reclassifications

Certain reclassifications have been made in the January 1, 2000 and December
30, 2000 consolidated financial statements to conform to the December 29, 2001
presentation. Such reclassifications had no effect on net loss or total
stockholders' equity.

(2) Inventory write-downs, Restructuring and Other Charges

During 2001, unfavorable economic conditions have resulted in reduced
capital expenditures by telecommunications service providers. In response to
these conditions, the Company implemented in the second and fourth quarters of
2001 restructuring plans, approved by the Company's Board of Directors,
designed to decrease the Company's operating expenses and to align resources
for long-term growth opportunities. These plans included the closure of our
Canadian operations. Additionally, the Company evaluated the recoverability of
the carrying value of its long-lived assets in light of the new economic
environment and the loss of key customer and projected sales. As a result of
these initiatives, the Company recorded the following restructuring and other
charges during 2001:

Costs of
Revenue Interest
---------------- Income and
Special Charges, Restructuring and Other Charges Other
Inventory ------------------------------------------------ --------------
Write-Down, Total
Contract Losses Write-down Restructuring
and Purchase Workforce Facility of Impaired and Other Impairment
Commitments Reduction Consolidation Goodwill Charges of Investments Total
---------------- --------- ------------- ----------- ------------- -------------- ----------

2001 Restructuring
and Other
Charges:
Second quarter...... $ 99,166 $ 9,409 $ 9,031 $ 588,295 $ 606,735 $ 8,682 $ 714,583
Third quarter....... -- 603 28 -- 631 -- 631
Third quarter
change in
estimate........... -- (500) -- -- (500) -- (500)
Fourth quarter...... 117,369 15,017 44,131 123,228 182,376 3,619 303,364
--------- -------- -------- --------- --------- -------- ----------
Total
restructuring
charge........... 216,535 24,529 53,190 711,523 789,242 12,301 1,018,078
Cash payments....... (27,187) (6,952) (4,935) -- (11,887) -- (39,074)
Non-cash
expenses........... (174,035) (16,431) (40,664) (711,523) (768,618) (12,301) (954,954)
--------- -------- -------- --------- --------- -------- ----------
Restructuring
liability as of
December 29,
2001............. $ 15,313 $ 1,146 $ 7,591 $ -- $ 8,737 $ -- $ 24,050
========= ======== ======== ========= ========= ======== ==========

F-9

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(a) Cost of Revenue; Special Charges

The restructuring plans, approved by the Company's Board of Directors during
the second and fourth quarters of 2001, included discontinuance of certain
product lines and reduction of planned production levels that resulted in total
charges of approximately $216.5 million, which have been classified as a
component of costs of revenues. These charges include approximately $174.0
million associated with the write-down of excess inventory and $42.5 million in
incremental costs associated with the cancellation of certain open purchase
commitments, which are expected to be paid in 2002.

(b) Workforce Reduction

The Company's restructuring plans also included workforce reduction programs
that resulted in the reduction of approximately 650 employees or a 50% decrease
from the Company's North American employee base at December 30, 2000. As a
result, the Company recorded total restructuring charges of approximately $24.5
million in the second, third and fourth quarters of 2001 of which approximately
$24.4 million was associated with termination plans within the United States
and $0.6 million recorded in the third quarter associated with termination
plans in the Company's Canadian operations, net of approximately $0.5 million
of reductions in estimates for second quarter restructuring charges.
Restructuring charges recorded during the year ended December 29, 2001
consisted of $8.1 million for severance and benefits and $16.4 million for
equity-based compensation.

To reduce costs and improve productivity, the restructuring plans approved
in the second, third and fourth quarters of 2001 included the consolidation of
excess facilities and equipment. Total losses on excess facility exit plans
include $53.2 million in incremental lease exit costs and write-off of idle
equipment. Consolidation of facilities is expected to be completed in early
2002.

(d) Impairment of Goodwill and Other Assets

When events and circumstances warrant a review, management evaluates the
carrying value of long-lived assets to be held and used in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment and for Long-Lived Assets to be Disposed Of." In the second
quarter, unfavorable economic conditions resulted in a reduction in capital
expenditures by telecommunications service providers. In light of the business
environment and uncertain telecommunications spending, during the second and
fourth quarters Corvis evaluated its long-lived assets in accordance with SFAS
No. 121 and determined that the carrying value exceeded the estimated fair
value of goodwill recorded in association with the acquisition of Algety
Telecom S.A., resulting in a total impairment charge of approximately $711.5
million. In addition in the second and fourth quarters, the Company recorded an
impairment charge of approximately $12.3 million associated with the write-down
of certain investments carried at cost, resulting from the impact of economic
conditions on the investees.

F-10

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(3) Inventory

Inventories are comprised of the following (in thousands):

December 30, December 29,
2000 2001
------------ ------------

Raw materials..................................... $131,983 $ 197,549
Work-in-process................................... 50,161 17,037
Finished goods.................................... 51,119 52,268
-------- ---------
233,263 266,854
Less reserve for excess inventory and obsolescence (13,849) (170,428)
-------- ---------
Inventory, net................................. $219,414 $ 96,426
======== =========

(4) Property and Equipment

Property and equipment consist of the following (in thousands):

December 30, December 29,
2000 2001
------------ ------------

Test and manufacturing equipment.................. $ 78,855 $136,828
Furniture, fixtures and internal network equipment 20,209 25,049
Leasehold improvements............................ 23,650 26,333
-------- --------
Total.......................................... 122,714 188,210
Less accumulated depreciation and amortization.... (16,033) (53,817)
-------- --------
Property and equipment, net.................... $106,681 $134,393
======== ========

(5) Notes Payable

A summary of notes payable as of December 30, 2000 and December 29, 2001 is
as follows (in thousands):

December 30, December 29,
2000 2001
------------ ------------

Note payable, repaid in 2001............ $43,500 $ --
Leasehold improvements loan due May 2009 1,102 1,014
Other................................... 1,365 2,071
------- ------
45,967 3,085
Less current portion.................... (1,438) (126)
------- ------
Notes payable, net of current portion... $44,529 $2,959
======= ======

During 1999, the Company executed long-term notes for equipment financing
with a lender for approximately $6.1 million. The notes bore interest at the
rate of 14.91%, and were collateralized by the underlying equipment. The debt
was repayable in 36 monthly installments of principal and interest beginning
June 1999. In connection with the issuance of the notes during 1999, the
Company issued 19,679 warrants to purchase Series C convertible preferred stock
to the lender. The warrants had an exercise price of $9.147 per share and
expired three years from issuance, or upon an initial public offering. The fair
market value of the warrants, approximately $0.1 million, was recognized as
deferred financing fees. In August 2000, this note was repaid in full without
penalty or premium.

F-11

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In January 1999, the Company executed a long-term collateralized equipment
note with another lender for $3.0 million. The note bore interest at a rate of
11%. The debt was repayable in 36 monthly installments of principal and
interest beginning June 1, 1999. In connection with the issuance of the notes,
the Company issued 32,798 warrants to purchase Series C convertible preferred
stock to the lender. The warrants had an exercise price of $9.147 per share.
The fair value of the warrants, approximately $0.2 million, was recognized as
deferred financing fees. In November 2000, this note was repaid in full without
penalty or premium.

In July 1999, the Company entered into a loan agreement with a landlord for
tenant improvements associated with the lease of a new building in the amount
of $1.2 million. As of December 30, 2000, the Company had drawn the entire $1.2
million commitment. The debt bears interest at a rate of 10.0%. The debt is
repayable in 120 monthly installments of principal and interest which began in
June 1999.

During 1999, the Company obtained a commitment for an aggregate of $40.0
million of debt financing from a syndicate of lenders. As of January 1, 2000,
the Company had drawn the entire $40.0 million commitment. The debt bore
interest at a rate of 8.5%. The debt was repayable in 36 monthly installments
of principal and interest beginning September 1999 and with aggregate balloon
payments of 14% at maturity. In connection with the issuance of the debt, the
Company issued 641,121 warrants to purchase Series E convertible preferred
stock to the lender. The warrants have an exercise price of $9.147 per share.
The fair value of the warrants, approximately $3.7 million, was recognized as
deferred financing fees. In November 2000, this facility was repaid in full
without penalty or premium.

In November 2000, the Company executed a long-term note payable with a
lender for approximately $43.5 million. Interest associated with the note was
due monthly while associated principal was due November 2002. The note bore
interest at 6.5% so long as the Company maintained a minimum cash balance with
the lender of $347.0 million through November 2001 and $231.0 million through
November 2002. If cash balances deposited with the lender drop below these
minimum levels, the note bore interest at LIBOR plus .80%. In addition, the
Company pledged a certificate of deposit with a carrying value of $43.5 million
as collateral under the agreement. In November 2001, this facility was repaid
in full without penalty or premium.

(6) Equity

In December 1999, the Company issued 292,825 shares of Series G Convertible
Preferred Stock for an aggregate purchase price of $10.0 million in a private
placement transaction with a strategic investor. If certain minimum purchase
commitments were not met by the holder of the Series G Convertible Preferred
Stock on or before March 2000, the Company had the right to repurchase the
shares at a price of $44.40 per share. In May 2000, the Company waived its
right to repurchase the shares.

On August 2, 2000, the Company sold 31,625,000 of common stock in an initial
public offering ("IPO") and 277,778 shares of common stock in a concurrent
private placement for proceeds of $1,066.4 million after deducting underwriting
discounts and commissions and offering expenses. Upon completion of the IPO,
all outstanding shares of convertible preferred stock automatically converted
into 237,526,260 shares of common stock at the following ratios: Series A
Preferred, 24-to-1; all other Preferred Stock, 12-to-1.

(7) Acquisitions

(a) Baylight Networks, Inc.

On May 19, 2000, the Company acquired Baylight Networks, Inc. ("Baylight"),
a company that designs network systems and subsystems. Baylight, based in Palo
Alto, California, was formed in February 2000 and was a development stage
company with no revenue. In consideration for all of the outstanding shares of
Baylight, the

F-12

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company assumed $0.1 million of Baylight's liabilities and agreed to issue
2,400,012 shares of common stock over the term of three-year employment
agreements with the former Baylight shareholders. The Company accounted for the
acquisition as a purchase. Accordingly, the operating results of Baylight are
included in the Company's financial results from the date of acquisition. The
allocation of the purchase price to the fair value of the assets acquired and
liabilities assumed has been based on an internal analysis of the fair value of
the assets and liabilities of Baylight. The excess of the aggregate purchase
price over the fair value of net assets acquired of approximately $0.1 million
is being amortized on a straight-line basis over five years. The Company is
recognizing compensation expense over the term of the employment agreements
equal to the fair value of the shares to be issued.

(b) Algety Telecom S.A.

On July 1, 2000, the Company acquired Algety Telecom S.A. ("Algety"), a
French company that develops and markets high-capacity, high-speed optical
transmission equipment. Algety, based in Lannion, France, was formed in April
1999, and was a development stage company with no revenue. The acquisition
price on the initial closing date equaled 1,301,822 shares of Series I
convertible preferred stock. On November 3, 2000, consistent with the terms of
the acquisition agreement, the Company completed a second closing at which time
an additional 11,385,358 shares of common stock were delivered to the former
Algety stockholders. The total value of all shares delivered in the first and
second closing was $947.1 million. In addition, 2,275,032 shares of common
stock have been placed into escrow to be released contingent upon satisfaction
of certain minimum employment terms primarily over three years for certain
Algety employees. The Company incurred approximately $1.0 million of
transaction costs related to the acquisition.

The Company accounted for the acquisition as a purchase. Accordingly, the
operating results of Algety are included in the Company's financial results
from the date of acquisition. The allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed was based upon an
independent third-party valuation. Based upon the results of the valuation, the
Company allocated $20.1 million to tangible assets, $6.0 million to liabilities
and $1.3 million to identifiable intangible assets. In addition, the Company
allocated $42.2 million of the purchase price to in-process technology, which
is included in operating expenses in the accompanying consolidated statement of
operations. The excess of the aggregate purchase price over the fair value of
net assets acquired of $876.7 million is being amortized on a straight-line
basis over five years. As discussed in Note 2 above, the Company recorded
$710.7 million in restructuring charges associated with goodwill for the year
ended December 29, 2001. The remaining balance of goodwill at December 29, 2001
associated with Algety approximates $2.3 million.

When events and circumstances indicate a potential impairment, the Company
evaluates the carrying value of long-lived assets to be held and used in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment and for Long-Lived Assets to be Disposed Of." In
the second quarter, unfavorable economic conditions resulted in a reduction in
capital expenditures by telecommunications carriers. In light of the business
environment and uncertain telecommunications spending, during the second
quarter the Company evaluated its long-lived assets in accordance with SFAS No.
121 and determined that the carrying value exceeded the estimated fair value of
goodwill recorded in association with the acquisition of Algety Telecom S.A.,
resulting in an impairment charge of approximately $588.3 million. As a result
of continued losses, negative operating cash flows, continued unfavorable
economic conditions and additional reductions in projected carrier capital
expenditures over future periods, during the fourth quarter the Company
reevaluated its long-lived assets under an analysis similar to that used in the
second quarter and in accordance with SFAS No. 121, resulting in an impairment
charge of $122.4 million.

F-13

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the terms of the acquisition agreement, the Company granted certain
former Algety shareholders the right to put certain shares of common stock back
to the Company at the stock's then fair market value. The put right were
available during a period from June 2001 to November 2001 and was enforceable
only if no other liquidity sources were available to those shareholders. The
fair market value of the common stock put to the Company could not exceed $30
million. Stock associated with this put right has been classified as redeemable
stock in the consolidated balance sheet as of December 30, 2000. Since this
right had lapsed as of December 29, 2001, the amount of previously redeemable
stock was recognized as additional paid-in capital.

The following unaudited pro forma data summarizes the results of operations
for the period indicated as if the Algety acquisition had been completed as of
January 1, 1999. The unaudited pro forma data gives effect to actual operating
results prior to the acquisition, adjusted to include the pro forma effect of
amortization of intangibles, but excluding the impact of the impairment charges
discussed above. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisition occurred as
of the beginning of the periods presented or that may be obtained in the future
(in thousands, except per share data).

January 1, December 30,
2000 2000
- ---------- ------------

Revenues............................ $ -- $ 68,898
Net loss............................ (198,110) (385,148)
Basic and diluted net loss per share $ (6.47) $ (2.45)

(8) Stock Options

In July 1997, the Company adopted the 1997 Stock Option Plan (the "Plan")
pursuant to which the Company's Board of Directors may grant options to
purchase common stock to employees, officers, directors and consultants. The
Company has reserved 103,600,000 shares of common stock for issuance under the
Company's Stock Option Plan. Stock options are granted with an exercise price
equal to the estimated fair value of the common stock at the date of grant. The
stock options have a 10-year term and ownership vests over four years from the
date of grant. Common stock associated with the exercise of options prior to
vesting is placed into escrow and released to the employee as the shares vest.
Prepayments made by employees are not refundable in the event of termination
prior to vesting. As of December 29, 2001, 49,317,299 shares of common stock
have been issued through the exercise of options under the Plan, of which
8,425,869 shares have vested.

In June 2000, the Company adopted the 2000 Long Term Incentive Plan (the
"2000 Plan") pursuant to which the Company may grant options to purchase common
stock to employees, officers, directors and consultants. Under the 2000 Plan,
20,000,000 shares of the Company's shares of common stock are reserved for
options issuable under the 2000 Plan. The number of shares authorized for
issuance increases annually on January 1, by the lesser of five percent of
outstanding shares on that date or such other number of shares as determined by
the Board; however, incentive stock options issuable under the 2000 Plan are
not to exceed 40,000,000 shares. These options vest over a four-year period and
are exercisable once vested. Under the 2000 Plan, options may be incentive
stock options or non-qualified options, and the exercise price shall not be
less than the fair market value for incentive stock options and not less than
par value for non-qualified options.

F-14

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company applies APB Opinion No. 25. Had compensation cost for the
Company's option plans been determined based on the fair value at the date of
grant, consistent with the method of SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below (in thousands):

Year Ended
----------------------------------
January 1, December 30 December 29,
2000 2000 2001
---------- ----------- ------------

Net loss:
As reported.................................... $(71,270) $(283,611) $(1,378,093)
Pro forma...................................... (71,953) (290,634) (1,402,857)
-------- --------- -----------
Pro forma basic and diluted net loss per share. $ (2.35) $ (1.85) $ (4.01)
======== ========= ===========

The per share weighted-average fair value of stock options granted during
1999, 2000 and 2001 was $0.49, $10.62 and $2.45, respectively, on the date of
grant with the following weighted-average assumptions:

Year Ended
-----------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------

Expected dividend yield.......................... 0% 0% 0%
Risk-free interest rate.......................... 6.33% 5.00% 3.49%
Expected life.................................... 4 years 3 years 3 years
Volatility....................................... 70% 130% 128%

The following is a summary of options granted:

Weighted
Average Number
Number Exercise Vested and
Outstanding Price Exercisable
----------- -------- -----------

December 31, 1998 31,922,388 $ .02
Granted.......... 21,583,800 .40
Exercised........ (37,168,008) .07
Canceled......... (68,400) .06
----------- -----
January 1, 2000.. 16,269,780 .39 14,131,876
Granted.......... 43,744,848 8.18
Exercised........ (5,560,183) .52
Canceled......... (2,212,506) 4.64
----------- -----
December 30, 2000 52,241,939 6.72 33,486,884
Granted.......... 22,052,676 3.25
Exercised........ (5,436,500) .55
Canceled......... (15,263,206) 7.93
----------- -----
December 29, 2001 53,594,909 $5.56 16,683,076
=========== =====

F-15

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about outstanding and exercisable
stock options at December 29, 2001:

Options Outstanding Options Exercisable
----------------------------------- --------------------------
Actual Weighted Weighted Number Weighted
Actual Options Average Avg. Vested and Avg.
Price Range Outstanding Life Exercise Price Exercisable Exercise Price
----------- ----------- -------- -------------- ----------- --------------

$ 0.01-$ 0.34 5,523,429 4.41 $ 0.15 3,727,371 $ 0.12
$ 1.01-$ 3.36 36,522,760 8.62 2.55 9,483,482 3.19
$ 3.49-$ 9.03 7,751,419 8.41 8.84 2,702,200 9.01
$10.06-$99.00 3,797,301 8.66 35.73 770,023 43.46
---------- ----------
53,594,909 8.16 5.56 16,683,076 5.31
========== ==========

The following table summarizes information about weighted-average grant date
fair value of options granted during the year.

Fair Market Value Number of Grant Fair
at Grant vs. Grant Price Shares Price Value
------------------------ ---------- ----- -----

In-the-money........ 3,235,803 $0.23 $0.38
At-the-money........ 16,755,802 $4.04 $3.03
Out-of-the-money.... 2,061,071 $1.63 $1.02
---------- ----- -----
Totals........... 22,052,676 $3.25 $2.45
========== ===== =====

In-the-money-grants were issued in association with restructuring actions
taken in the second and fourth quarter of fiscal year 2001. Out-of-the-money
grants were issued to comply with individual tax law applicable to grants to
employees of our foreign subsidiaries.

(9) Employee Stock Purchase Plan

During 2000, the Company established the Corvis Employee Stock Purchase Plan
(the "Plan"). Under the Plan, the Company may issue up to 2,000,000 shares of
common stock in each Purchase Plan year, up to a total of 10,000,000 shares
during the life of the Plan. Eligible employees choose to participate in the
Plan during offering periods by authorizing payroll deductions of up to 15% of
their salaries, subject to limitations imposed by the Internal Revenue Code.
The first offering period began in July 2000. Subsequent periods will be six
months long, with the first subsequent period beginning on January 1, 2001. As
of the last business day of each offering period, called an "exercise date,"
the participant's accumulated payroll deductions as of that date are used to
purchase shares of common stock. The purchase price per share of common stock
purchased as of this date is the lower of either (1) 85% of the fair market
value of a share of common stock on the first business day of the offering
period or (2) 85% of the fair market value of a share of common stock on the
exercise date. During fiscal year 2001, 394,511 shares were purchased under the
plan, resulting in aggregate proceeds of $3.3 million.

F-16

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The per share weighted average fair value of stock options granted under the
ESPP during 2000 and 2001 was $16.61 and $3.80, respectively, on the date of
grant with the following weighted average assumptions:

Year Ended
------------------------
December 30, December 29,
2000 2001
------------ ------------

Expected dividend yield............................... 0% 0%
Risk-free interest rate............................... 6.27% 3.91%
Expected life......................................... .5 years .5 years
Volatility............................................ 130% 128%

(10) Warrants

During 1999, the Company issued warrants to purchase 140,497 shares of
Series B preferred stock and Series C preferred stock in association with
certain lease agreements. During 2001, all of these warrants were exercised
resulting in the issuance of 1,659,615 shares of common stock for proceeds of
$0.5 million.

During 1999, in connection with certain debt facilities, the Company issued
warrants to purchase 1,052,683 shares of Series B preferred stock, Series C
preferred stock and Series E preferred stock. During 2001, warrants to purchase
6,371,295 shares of common stock were exercised resulting in proceeds of $3.0
million. The warrants are immediately exercisable and expire between three and
seven years from the date of issuance. On December 29, 2001, associated
warrants to purchase 2,322,864 shares of common stock with a weighted average
exercise price of $0.76 remain outstanding.

In September 1999, the Company entered into a series of agreements with a
strategic investor. Under a stock purchase agreement, the Company agreed to
issue 164,948 shares of Series F convertible preferred stock for aggregate
proceeds of approximately $4.0 million. Concurrently with the stock issuance,
the Company entered into an exclusive license agreement with the investor for
the use of certain intellectual property and a non-exclusive license for
certain other technology. As consideration for the license, the Company agreed
to make quarterly payments of $0.3 million over a four-year period. In
addition, the Company granted the strategic investor a warrant to receive
common stock valued at $35.0 million upon the consummation of a qualifying IPO.
As part of the agreement, the Company had the right to accept ownership in the
license in full if the qualifying IPO took place. After the Company's initial
public offering in July 2000, the Company accepted ownership of the license and
recorded an intangible asset valued at $35.0 million, which is being amortized
ratably over a three-year life.

In November 1999, the Company issued warrants to purchase up to 5,270,856
shares of common stock at $2.85 per share to a strategic investor. A certain
percent of the warrants were immediately exercisable, with the remaining amount
contingent upon certain future purchases of the Company's products by the
strategic investor. These warrants were to expire in June 2001 if these
conditions were not met. Of the total 5,270,856 shares of common stock
committed in this warrant, the rights to purchase 2,635,428 shares expire on
December 31, 2004 and the rights to purchase the remaining 2,635,428 shares
expire on June 30, 2006. In 1999, the Company recorded equity-based sales and
marketing expense of approximately $1.8 million for the estimated fair value at
grant date of the warrants which were immediately exercisable. In June 2000,
the Company waived the purchase requirements associated with the remaining
warrants, resulting in an equity-based sales and marketing expense of
approximately $19.5 million for the estimated fair value at the date the
warrants became exercisable. As of December 29, 2001, all warrants associated
with the agreement remain outstanding.

F-17

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In December 1999, the Company issued warrants to purchase 281,162 shares of
Series G convertible preferred stock at $32.01 per share to another strategic
investor. The warrants were immediately exercisable and would have expired upon
the IPO. In December 1999, the Company recorded equity-based sales and
marketing expense of approximately $3.1 million for the estimated fair value at
grant date of the warrants issued. These warrants were exercised in full during
2000. Also, in December 1999, the Company issued to this strategic investor the
right to purchase up to an additional $30.0 million of stock at a price equal
to the most recently completed financing round subject to meeting certain
minimum purchase commitments of the Company's product, and an additional $5.0
million of common stock in the event of a qualified IPO. In June 2000, the
Company waived the minimum purchase commitments associated with the additional
stock purchase rights and recorded equity-based sales and marketing expense of
$10.5 million. These stock purchase rights were fully exercised in 2000.

In December 1999, the Company issued to another strategic investor the right
to purchase 124,177 shares of Series H Convertible Preferred Stock at a price
equal to $80.53 per share subject to meeting certain purchase commitments and
an additional $5.0 million of common stock in the Company's IPO. In May 2000,
the Company waived the minimum purchase commitments associated with the Series
H stock purchase rights and recorded equity-based sales and marketing expense
of $3.5 million. Both stock purchase rights were fully exercised in 2000.

(11) Basic and Diluted Net Loss Per Common Share

Basic and diluted net loss per common share are computed as follows (in
thousands, except per share data):

Year Ended
-----------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------

Net loss........................................ $(71,270) $(283,611) $(1,378,093)
Basic and diluted weighted average common shares 30,599 157,349 349,652
Basic and diluted net loss per common share..... $ (2.33) $ (1.80) $ (3.94)

Convertible Preferred Stock outstanding as of January 1, 2000, convertible
into 211,658,232 shares of common stock, options and warrants to purchase
16,269,780 and 17,598,770 shares of common stock, respectively, and 25,556,484
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the year ended January 1, 2000 as
their inclusion would be anti-dilutive.

Options and warrants outstanding as of December 30, 2000 to purchase
52,241,939 and 15,810,732 shares of common stock, respectively, and 14,546,488
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the year ended December 30, 2000
as their inclusion would be anti-dilutive.

Options and warrants outstanding as of December 29, 2001 to purchase
53,594,909 and 7,593,684 shares of common stock, respectively, and 4,306,755
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the year ended December 29, 2001
as their inclusion would be anti-dilutive.

F-18

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(12) Income Taxes

The Company has incurred operating losses since its inception and has
recognized no current or deferred tax provision or benefit. The provision for
income taxes is different from that which would be obtained by applying the
statutory federal income tax rate to loss before income taxes. The items
causing this difference are as follows (in thousands):

Year Ended
-----------------------------------
January 1, December 30, December 29,
2000 2000 2001
---------- ------------ ------------

Expected tax benefit at statutory rate............ $ 24,944 $ 99,264 $ 482,333
State tax, net of federal benefit................. 3,198 9,026 23,393
Non-deductible goodwill amortization and purchased
in-process research and development............. -- (29,400) (289,023)
Research and development tax credits.............. 1,030 4,055 3,436
Other, net........................................ (440) (1,697) (4,534)
Increase in valuation allowance................... (28,732) (81,248) (215,605)
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========

Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows (in thousands):

December 30, December 29,
2000 2001
------------ ------------

Deferred tax assets:
Capitalized start-up and organization costs.................. $ 28,860 $ 13,144
Domestic net operating loss carryforward..................... 55,147 139,807
Foreign net operating loss carryforward...................... 7,007 22,855
Accrued expenses............................................. 7,872 93,642
Research and development tax credit carryforwards............ 6,776 10,261
Non-cash stock compensation.................................. 24,867 70,700
Property and equipment....................................... -- 5,689
--------- ---------
Total gross deferred tax assets.......................... 130,529 356,098
Valuation allowance.......................................... (128,462) (356,098)
--------- ---------
Net deferred tax assets.................................. 2,067 --
Deferred tax liabilities--property and equipment, net due to
depreciation............................................... (2,067) --
--------- ---------
Net deferred tax......................................... $ -- $ --
========= =========

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or the entire amount of
deferred tax assets will not be realized. The ultimate realization of the
deferred tax asset is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible and credit
carryforwards are available. Management considers scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies which can be implemented by the Company in making this assessment.
Based upon the lack of historical taxable income, scheduled reversal of
deferred tax liabilities, and projections for future taxable income over the
periods in which the temporary differences are deductible and tax credits are
available to reduce taxes payable, the Company has established a valuation
allowance of $356.1 million as of December 29, 2001.

F-19

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The net change in the valuation allowance for the years ended January 1,
2000, December 30, 2000 and December 29, 2001 was an increase of approximately
$28.7 million, $90.8 million and $227.6 million, respectively. The valuation
allowances at December 30, 2000 and December 29, 2001 are a result of the
uncertainty regarding the ultimate realization of the tax benefits related to
the deferred tax assets. The domestic net operating loss carryforwards of
$349.5 million will expire commencing in 2017 through the year 2021. Foreign
net operating loss carryforwards of $62.2 million expire commencing in 2004.
Further, as a result of certain financing and capital transactions, an annual
limitation on the future utilization of a portion of the net operating loss
carryforward may have occurred. As a result, the net operating loss
carryforward may not be fully utilized before expiration.

The Company's domestic net operating loss carryforward has been increased
for tax benefits associated with exercises of stock options and warrants. The
Company receives an income tax benefit calculated as the difference between the
fair value of the stock issued at the time of the exercise and the option
price, tax effected. The tax benefits attributable to the exercise of stock
options and warrants in excess of the compensation recorded for financial
statement purposes will be credited directly to shareholders' equity when the
net operating loss carryforwards are utilized against current tax liability.
The benefits increasing gross deferred tax assets amounted to $33.1 million and
$12.5 million for the years ended December 30, 2000 and December 29, 2001.

No deferred income taxes have been provided for the income tax liability, if
any, which would be incurred on repatriation of the undistributed earnings of
the Company's foreign subsidiaries because the Company intends to reinvest
these earnings indefinitely outside of the United States.

(13) Related Party Transactions

(a) Joint Venture

The Company has a 99% economic interest and a 49% voting interest in ACME
Grating Ventures, LLC ("ACME LLC"). The remaining economic interest and voting
interest are owned by ACME Gratings, Inc. ("ACME Corp."). An officer of the
Company owns 100% of ACME Corp. ACME Corp. has contributed to ACME LLC certain
licensed intellectual property and the Company has contracted with ACME LLC for
its use of the Company's facilities, personnel, equipment and certain
intellectual property. ACME LLC makes gratings that the Company purchases at a
unit cost that is consistent with the requirements of the licensed intellectual
property, which require that the gratings made with the licensed technology be
sold for no less than the fair market value of comparable gratings that are
available in the commercial marketplace.

According to the operating agreement of ACME LLC, the Company receives 99%
of the profits and losses from the business, and ACME Corp. receives the
remaining 1%; however, $0.3 million of ACME LLC-related start up costs incurred
by ACME Corp. will be returned to ACME Corp. out of the net profits of ACME LLC
before any distributions of net profits are made to the Company. Further, ACME
Corp. is responsible for paying royalties to the licensor of the licensed
technology contributed by ACME Corp., which vary in amounts ranging from 0.5%
to 2.0% of the net invoice cost of each grating sold by ACME LLC. In addition
to 1% of the profits, ACME LLC is obligated to pay to ACME Corp. an amount
sufficient to pay the royalty obligations of ACME Corp.

(b) Strategic Relationships

During 2000, the Company purchased a non-controlling equity interest in
Redfern Broadband Network, Inc. ("Redfern") for $1.2 million. The Company also
entered into a strategic development agreement and a call option agreement with
Redfern which, among other things, provides the Company with a two-year option
to acquire all of the outstanding shares of Redfern at a specified price.
Certain officers and directors of the Company also own a non-controlling
interest in Redfern.

F-20

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has purchased approximately $1.0 million and $0.5 million of
components from Nufern during 2000 and 2001, respectively. Certain officers and
directors of the Company own a non-controlling interest in Nufern.

During 2000, the Company purchased approximately $6.7 million of components
from Wavesplitter Technologies. In addition, the Company has made a
non-controlling equity investment in Wavesplitter Technologies totaling $2.0
million. As of December 30, 2000, amounts owed by the Company to Wavesplitter
totaled $0.6 million. The Company has committed to purchases from Wavesplitter
totaling $50.0 million over the next three years, which if not fulfilled, would
result in cancellation penalties.

The Company purchased approximately $2.9 million and $2.7 million of
components during 2000 and 2001, respectively, from ITF Optical Technologies
("ITF"). Certain officers and directors of the Company own a non-controlling
interest in ITF.

In 2001, the Company purchased approximately $0.1 million of components from
Codeon Corporation, but has cancelled all commitments to purchase additional
components from Codeon. In total, certain officers and directors indirectly own
a non-controlling interest in Codeon.

In 2001, the Company purchased approximately $0.2 million of components from
Lightconnect, Inc. certain officers and directors own a non-controlling
interest in Lightconnect.

(14) Concentrations

Substantially all of the Company's cash and cash equivalents are custodied
at two major U.S. financial institutions. Deposits held with banks exceed the
amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand and, therefore, in the opinion of management, bear minimal
risk.

During 2001, the Company has relied on two customers, both of which are also
shareholders, for all of its revenue. The Company expects that a significant
portion of its future revenue will continue to be generated by a limited number
of customers. The loss of any one of these customers or any substantial
reduction in orders by any one of these customers could materially adversely
affect the Company's financial condition or operating results.

At December 29, 2001, $29.0 million or 86 percent of the Company's trade
accounts receivable are due from Williams Communications, with the balance due
from Broadwing. Subsequent to the end of fiscal year 2001, Williams has paid
the Company approximately $4 million of the December 29, 2001 accounts
receivable as it became due. At December 29, 2001, all amounts due from
Williams were current and, based on our historical collections from Williams
and all publicly available financial information, the Company determined that
no allowance for uncollectible amounts was necessary. Subsequent to year end,
Williams has disclosed certain recent events that may potentially adversely
affect its financial condition. Based on these events, on February 25, 2002,
Williams announced that it is considering restructuring options, which may
include filing a petition for Chapter 11 bankruptcy protection. If Williams
files for bankruptcy protection under Chapter 11, the Company cannot be certain
when it will receive these outstanding payments, and if the Company does, how
much will be actually received. In addition, there may be other provisions
under bankruptcy laws that would impact the Company's ability to collect these
amounts and that may affect some payments that the Company has already
received. Bankruptcy laws may also allow Williams, under certain circumstances,
to reject the purchase agreement. The Company cannot give any assurance or make
any predictions as to whether Williams will file for bankruptcy and what effect
that, or any other decisions that they make, will have on the Company's
business.

F-21

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(15) Commitments and Contingencies

(a) Leases

Minimum annual rental payments under noncancellable operating leases,
primarily for the rent of office space and manufacturing facilities, are as
follows (in thousands):

Fiscal year ending
------------------

2002............................................................ 8,054
2003............................................................ 7,994
2004............................................................ 7,577
2005............................................................ 7,253
2006............................................................ 5,591
Thereafter...................................................... 8,151
-------
Total........................................................ $44,620
=======

Rent expense under operating leases was approximately $1.7 million, $3.5
million and $10.1 million for the years ended January 1, 2000, December 30,
2000 and December 29, 2001, respectively.

The Company has equipment under capital lease which require payments of
principal and interest as follows (in thousands):

Fiscal year ending Amount
------------------ ------

2002............................................................ $7,431
2003............................................................ 1,803
------
Total payments............................................... 9,234
Less--amount attributable to interest........................... (695)
------
Capital lease obligation..................................... 8,539
Less--current portion........................................... 6,796
------
Long-term lease obligation................................... $1,743
======

At December 29, 2001, property and equipment includes the following net
assets under capital lease:

Plant, Property,
Accumulated and Equipment
Cost Depreciation Net
------- ------------ ----------------

Test and manufacturing equipment.................. $13,876 $4,662 $ 9,214
Furniture, fixtures and internal network equipment 1,790 420 1,370
------- ------ -------
Total.......................................... $15,666 $5,082 $10,584
======= ====== =======

(b) Legal Matters

In July 2000, Ciena Corporation ("Ciena") informed the Company of its belief
that there is significant correspondence between products that the Company
offers and several U.S. patents held by Ciena relating to optical networking
systems and related dense wavelength division multiplexing communications
systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United
States District Court for the District of Delaware alleging that the Company is
willfully infringing three of Ciena's patents. Ciena is seeking injunctive

F-22

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

relief, an unspecified amount of damages including treble damages, as well as
costs of the lawsuit, including attorneys' fees. On September 8, 2000, the
Company filed an answer to the complaint, as well as counter-claims alleging,
among other things, invalidity and/or unenforceability of the three patents in
question. On March 5, 2001, a motion was granted, allowing Ciena to amend its
complaint to include allegations that the Company is willfully infringing two
additional patents. The litigation is currently in the pre-trial phase. Based
on the status of the litigation, the Company cannot reasonably predict the
likelihood of any potential outcome.

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

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

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

It is the position of Company's management that, at this time, it is not
possible to estimate the amount of a probable loss, if any, that might result
from this matter. Accordingly, no provision for this matter has been made in
the Company's consolidated financial statements.

(16) Subsequent Event

On January 29, 2002, the Company announced that it had signed a definitive
merger agreement to acquire Dorsal Networks, Inc., a privately held provider of
next-generation transoceanic and regional undersea optical network solutions.
Subject to the satisfaction of various closing conditions, including the
approval by the Company's shareholders and the shareholders of Dorsal, the
Company will acquire Dorsal in a stock transaction

F-23

CORVIS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

for approximately 40,923,500 shares of common stock. Shareholder meetings are
expected to take place in the first half of 2002. The acquisition will be
accounted for under the "purchase" method of accounting. Under the purchase
method, the purchase price of Dorsal will be allocated to identifiable assets
and liabilities acquired from Dorsal, with the excess being treated as
goodwill. Certain officers and directors of Corvis own, directly or indirectly,
31 percent of the outstanding stock of Dorsal. There can be no assurance that
this acquisition will be completed.

(17) Summary of Quarterly Data (Unaudited):

The following is a summary of the quarterly results of operations of the
Company for the years ended December 30, 2000 and December 29, 2001 (in
millions, except per share amounts):

Fiscal Quarter
---------------------------------------
First Second Third Fourth Total
------- ------- ------ ------- ---------

2000:
Revenue............................................ $ -- $ -- $ 22.9 $ 46.0 $ 68.9
Gross profit....................................... -- -- 8.4 17.6 26.0
Net loss........................................... (26.8) (100.7)(a) (66.4) (89.7) (283.6)
Basic and diluted net loss per share............... $ (0.65) $ (2.51) $(0.29) $ (0.27) $ (1.80)
2001:
Revenue............................................ $ 84.1 $ 65.0 $ 24.2 $ 15.2 $ 188.5
Gross profit....................................... 31.2 (74.7) 8.6 (110.1) (145.0)
Net loss........................................... (100.8) (821.8)(b) (80.6)(c) (374.8)(d) (1,378.0)(e)
Basic and diluted net loss per share............... $ (0.29) $ (2.36) $(0.23) $ (1.05) $ (3.94)

--------
(a) Includes purchased in-process research and development charges totaling
$42.2 million.
(b) Includes total restructuring and other charges of $714.6 million. These
charges were comprised of $99.2 million in cost of revenue charges
associated with write-downs and losses on open purchase commitments; $9.4
million associated with workforce reduction; $9.0 million associated with
the consolidation of excess facilities and write-downs of idle equipment;
$588.3 million associated with the write-down of goodwill generated in the
acquisition of Algety; and $8.7 million associated with permanent
impairment charges on investment carried at cost.
(c) Includes total restructuring and other charges of $0.1 million. These
charges were comprised of $0.6 million associated with workforce reduction
and consolidation of excess facilities, net of a $0.5 million reduction in
second quarter estimates.
(d) Includes total restructuring and other charges of $303.4 million. These
charges were comprised of $117.4 million in cost of revenue charges
associated with write-downs and losses on open purchase commitments; $15.0
million associated with workforce reduction; $44.1 million associated with
the consolidation of excess facilities and write-downs of idle equipment;
$123.2 million associated principally with the write-down of goodwill
generated in the acquisition of Algety; and $3.6 million associated with
permanent impairment charges on investments carried at cost.
(e) Includes total restructuring and other charges of $1.0 billion. The charges
were comprised of $216.5 million in cost of revenue charges associated with
write-downs and losses on open purchase commitments; $24.5 million
associated with workforce reduction; $53.2 million associated with the
consolidation of excess facilities and write-downs of idle equipment;
$711.5 million associated principally with the write-down of goodwill
generated in the acquisition of Algety; and $12.3 million associated with
permanent impairment on investments carried at cost.

F-24

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information called for by this Item 10 with respect to our directors is
set forth under the caption "Election of Directors" in our definitive Proxy
Statement which will be furnished to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 10, 2002, and is hereby incorporated
by reference. The information called for with respect to our executive officers
is included in Part I of this Annual Report on Form 10-K under the caption
"Executive Officers, Directors and Key Employees of the Registrant."

Item 11. Executive Compensation.

The information called for by this Item 11 is set forth under the caption
"Executive Compensation" in our definitive Proxy Statement which will be
furnished to stockholders in connection with the Annual Meeting of Stockholders
to be held on May 10, 2002, and is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

(a) The information called for by this Item 12 with respect to security
ownership of more than five percent of our Common Stock is set forth under the
caption "Principal Stockholders" in our definitive Proxy Statement which will
be furnished to stockholders in connection with the Annual Meeting of
Stockholders scheduled to be held on May 10, 2002, and is hereby incorporated
by reference.

(b) The information called for by this Item 12 with respect to the security
ownership of our directors and of management is set forth under the caption
"Principal Stockholders" in our definitive Proxy Statement, which will be
furnished to stockholders in connection with the Annual Meeting of Stockholders
to be held on May 10, 2002, and is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions.

Information called for by this Item 13 is set forth under the caption
"Certain Relationships and Related Transactions" in our definitive Proxy
Statement which will be furnished to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 10, 2002, and is hereby incorporated
by reference.

F-25

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents filed as part of this report.

1. Consolidated Financial Statements. Our consolidated financial
statements listed below are contained in our Annual Report to Stockholders
for the fiscal year ended December 29, 2001, and are incorporated by
reference in Item 8 of this Annual Report on Form 10-K.

Independent Auditors' Report........................................................ F-1

Consolidated Balance Sheets as of December 30, 2000 and December 29, 2001........... F-2

Consolidated Statements of Operations for the years ended January 1, 2000,
December 30, 2000 and December 29, 2001........................................... F-3

Consolidated Statements of Stockholders Equity (Deficit) for the years ended January
1, 2000, December 30, 2000 and December 29, 2001.................................. F-4

Consolidated Statements of Cash Flows for the years ended January 1, 2000,
December 30, 2000 and December 31, 2001........................................... F-5

Notes to consolidated financial statements.......................................... F-6

Independent Auditors' Report on Schedule............................................ F-28

Schedule of Valuation and Qualifying Accounts....................................... F-29

2. Exhibits. The exhibits required to be filed by Item 601 of Regulation
S-K are listed in the Exhibit Index which is attached hereto, and
incorporated by reference herein.

(b) Reports on Form 8-K.

We did not file any Current Reports on Form 8-K during the quarter ended
December 29, 2001.

F-26

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Corvis Corporation:

Under date of January 29, 2002, except as to Note 14, which is as of
February 25, 2002, we reported on the consolidated balance sheets of Corvis
Corporation as of December 30, 2000 and December 29, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended January 1, 2000, December 30, 2000 and December 29,
2001, which are included in this Annual Report on Form 10-K. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

McLean, Virginia
January 29, 2002, except as to
Note 14 to the Consolidated
Financial Statements which is
as of February 25, 2002

F-27

CORVIS CORPORATION

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Balance at Balance at
Beginning End of
of Period Provisions Deductions Period
---------- ---------- ---------- ----------

Year ended January 1, 2000
Deferred tax valuation allowance................ $ 8,903 $ 28,732 $ -- $ 37,635
Allowance for excess inventory and obsolescence. -- 1,771 -- 1,771

Year ended December 30, 2000
Deferred tax valuation allowance................ $ 37,635 $ 90,827 $ -- $128,462
Allowance for excess inventory and obsolescence. 1,771 22,565 10,487 13,849

Year ended December 29, 2001
Deferred tax valuation allowance................ $128,462 $227,636 $ -- $356,098
Allowance for excess inventory and obsolescence. 13,849 190,008 33,429 170,428

F-28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

CORVIS CORPORATION

By: /s/ DAVID R. HUBER
-----------------------------
David R. Huber
Chairman of the Board,
President
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ DAVID R. HUBER Chairman of the Board, March 12, 2002
----------------------------- President and Chief
David R. Huber Executive Officer

/s/ LYNN D. ANDERSON Senior Vice President, Chief March 12, 2002
----------------------------- Financial Officer and
Lynn D. Anderson Treasurer

/s/ TIMOTHY C. DEC Vice President, Chief March 12, 2002
----------------------------- Accounting Officer and
Timothy C. Dec Corporate Controller

/s/ FRANK M. DRENDEL Director March 12, 2002
-----------------------------
Frank M. Drendel

/s/ JOSEPH R. HARDIMAN Director March 12, 2002
-----------------------------
Joseph R. Hardiman

/s/ DAVID S. OROS Director March 12, 2002
-----------------------------
David S. Oros

S-1

EXHIBIT INDEX

Exhibit
Number Description
------ -----------

2.1 Merger Agreement between Corvis Corporation and Corvis Acquisition Company, Inc. and Dorsal
Networks, Inc., dated January 29, 2002 (incorporated by reference herein to Exhibit 2.1 to Corvis
Corporation's registration statement on Form S-1, File No. 333-36238)

Registrant hereby agrees to provide a copy of omitted Schedules to the above exhibit to the Securities
and Exchange Commission upon request

3.1 Amended and Restated Certificate of Incorporation of Corvis Corporation (incorporated by reference
herein to Exhibit 3.1 to Corvis Corporation's registration statement on Form S-1, File
No. 333-36238)

3.2 Amended and Restated By-laws of Corvis Corporation (incorporated by reference herein to
Exhibit 3.2 to Corvis Corporation's registration statement on Form S-1, File No. 333-36238)

10.1 Amended and Restated Loan Agreement, dated as of June 30, 1999, among Corvis Corporation,
Venture Lending & Leasing II, Inc., as Agent, and Venture Lending & Leasing II, Inc. and the
other Lenders signatory thereto (incorporated by reference herein to Exhibit 10.1 to Corvis
Corporation's registration statement on Form S-1, File No. 333-36238)

10.2* Corvis Corporation Second Amended 1997 Stock Option Plan (incorporated by reference herein to
Exhibit 10.2 to Corvis Corporation's registration statement on Form S-1, File No. 333-36238)

10.3* Form of Corvis Corporation 2000 Long Term Incentive Plan (incorporated by reference herein to
Exhibit 10.3 to Corvis Corporation's registration statement on Form S-1, File No. 333-36238)

10.4* Form of Corvis Corporation Employee Stock Purchase Plan (incorporated by reference herein to
Exhibit 10.4 to Corvis Corporation's registration statement on Form S-1, File No. 333-36238)

10.5* Employment Agreement, dated as of September 30, 1998, by and between Corvis Corporation and
Terence F. Unter (incorporated by reference herein to Exhibit 10.6 to Corvis Corporation's
registration statement on Form S-1, File No. 333-36238)

10.6+ Procurement Agreement, dated March 17, 2000, by and between Broadwing Communication
Services, Inc. and Corvis Corporation (incorporated by reference herein to Exhibit 10.7 to Corvis
Corporation's registration statement on Form S-1, File No. 333-36238)

10.7+ Amended and Restated Procurement Agreement and Field Trial Agreement, dated June 23, 2000, by
and between Williams Communications Inc. and Corvis Corporation (incorporated by reference
herein to Exhibit 10.8 to Corvis Corporation's registration statement on Form S-1, File
No. 333-36238)

10.8+ Amendment No. 3 to Procurement Agreement, dated January 9, 2001, by and between Williams
Communications Inc. and Corvis Corporation (incorporated by reference herein to Exhibit 10.1 to
Corvis Corporation's Current Report on Form 8-K, dated January 9, 2001, File No. 0-30989)

10.9+ Amendment No. 4 to Procurement Agreement, dated April 23, 2001, by and between Williams
Communications Inc. and Corvis Corporation

10.10+ Amendment No. 6 to Procurement Agreement, dated September 25, 2001, by and between Williams
Communications Inc. and Corvis Corporation

10.11+ Procurement Agreement, dated June 5, 2000, by and between Qwest Communications Corporation
and Corvis Corporation (incorporated by reference herein to Exhibit 10.9 to Corvis Corporation's
registration statement on Form S-1, File No. 333-36238)

21.1 Subsidiaries

23.1 Consent of KPMG LLP

--------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
+ Confidential treatment requested for portions of this exhibit.