<PAGE>

     As filed with the Securities and Exchange Commission on July 22, 1999
                                                      Registration No. 333-

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                               ----------------
                               CERENT CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)
                               ----------------
                                      3661
         Delaware             (Primary Standard             77-0447327
     (State or Other              Industrial             (I.R.S. Employer
     Jurisdiction of         Classification Code      Identification Number)
     Incorporation or              Number)
      Organization)

                           1450 North McDowell Blvd.
                               Petaluma, CA 94954
                                 (707) 793-9055
       (Address, Including Zip Code, and Telephone Number, Including Area
               Code, of Registrant's Principal Executive Offices)
                               ----------------
                                   Carl Russo
                     President and Chief Executive Officer
                               Cerent Corporation
                           1450 North McDowell Blvd.
                               Petaluma, CA 94954
                                 (707) 793-9055
 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
                               ----------------
                                   COPIES TO:
           Joshua L. Green                          Jeffrey D. Saper
           Keith A. Miller                            Selim B. Day
          Kevin G. Montler                            Robert G. Day
          VENTURE LAW GROUP                            Ava M. Hahn
     A Professional Corporation             WILSON SONSINI GOODRICH & ROSATI
         2800 Sand Hill Road                    Professional Corporation
        Menlo Park, CA 94025                       650 Page Mill Road
           (650) 854-4488                          Palo Alto, CA 94304
                                                     (650) 493-9300
                               ----------------
        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
                               ----------------

   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE
<TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
                                                         Proposed
                                                         Maximum
                                                        Aggregate    Amount Of
                Title Of Each Class Of                   Offering   Registration
             Securities To Be Registered                 Price(1)       Fee
--------------------------------------------------------------------------------
<S>                                                    <C>          <C>
Common stock, par value $0.001.......................  $100,000,000   $27,800
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of computing the
    amount of the registration fee.

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


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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   SUBJECT TO COMPLETION, DATED JULY 22, 1999

                                        Shares

                                     [LOGO]

                               Cerent Corporation

                                  Common Stock

                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $    and $    per
share. We have made application to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "CERE."

  The underwriters have an option to purchase a maximum of     additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 7.

<TABLE>
<CAPTION>
                                                        Underwriting
                                                         Discounts     Proceeds
                                             Price to       and           to
                                              Public    Commissions     Cerent
                                             --------   ------------   --------
<S>                                          <C>        <C>            <C>
Per Share..................................   $            $            $
Total......................................   $            $            $
</TABLE>

  Delivery of the shares of common stock will be made on or about     , 1999.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

Credit Suisse First Boston

         BancBoston Robertson Stephens

                    Dain Rauscher Wessels
                     a division of Dain Rauscher Incorporated

                                                         Warburg Dillon Read LLC

                  The date of this prospectus is      , 1999.
<PAGE>

       Illustrations of the Cerent 454 in several network configurations
<PAGE>

                                 ------------

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    4
Risk Factors........................    7
Note Regarding Forward-Looking
 Statements.........................   17
Use of Proceeds.....................   18
Dividend Policy.....................   18
Capitalization......................   19
Dilution............................   20
Selected Consolidated Financial Da-
 ta.................................   21
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   22
Business............................   29
Management..........................   43
</TABLE>
<TABLE>
<CAPTION>
                                     Page
                                     ----
<S>                                  <C>
Related Party Transactions.........   52
Principal Stockholders.............   54
Description of Capital Stock.......   57
Shares Eligible for Future Sale....   59
Underwriting.......................   61
Notice to Canadian Residents.......   63
Legal Matters......................   63
Experts............................   64
Change in Independent Accountants..   64
Where You Can Find More
 Information.......................   64
Index to Consolidated Financial
 Statements........................  F-1
</TABLE>

                                 ------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.

   Cerent(TM) and Cerent 454(TM) are trademarks of Cerent. This prospectus also
contains additional trade names, trademarks and service marks of Cerent and of
other companies.

                     Dealer Prospectus Delivery Obligation

   Until       , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.


                                       3
<PAGE>


                               PROSPECTUS SUMMARY

   This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully. Except as otherwise indicated,
all information in this prospectus is based on the following assumptions: (a) a
three-for-one stock split of the common stock effected on July 16, 1999, (b)
the conversion of each outstanding share of convertible preferred stock into
one share of common stock immediately prior to the completion of this offering,
(c) the automatic conversion of our convertible promissory notes into
shares of common stock upon the completion of this offering, assuming an
initial public offering price of $     per share, (d) no exercise of the
underwriters' over-allotment option and (e) the filing of our amended and
restated certificate of incorporation.

                               Cerent Corporation
                                  ------------
   We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth of data and voice communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our high-speed solution, the
Cerent 454, is designed to support any traffic interface at any transmission
rate up to an aggregate of 240 gigabits per second, or Gbps, in a single,
compact system. The Cerent 454 provides a cost-effective solution for our
service provider customers and enables them to rapidly deploy a wide range of
applications and revenue generating services. We are currently able to deliver
our 454 on the customer request date, which is typically within ten days of
receiving an order. As of June 30, 1999, we had shipped our 454 to 86
customers, including ALLTEL, Buckeye Telesystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, QWest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.

   We use a direct sales force to sell our products to service providers that
we believe will move quickly to adopt new technologies. Accordingly, we believe
it is important to take a targeted approach in our sales efforts and have
focused initially on emerging inter-exchange carriers, or IXCs, competitive
local exchange carriers, or CLECs, independent carriers and cable companies. We
also intend to pursue incumbent IXCs, regional Bell operating companies, or
RBOCs, and international carriers.

   We believe that communications traffic will continue to grow at significant
rates and network service providers will deploy new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks. While new equipment and
technologies have been introduced to address the increases in data traffic over
the access and backbone networks, the optical transport network has not yet
been similarly addressed with new broadband optimized technologies and
equipment. The optical transport network, which aggregates multiple traffic
types from the access network and interconnects them to the backbone network,
currently consists primarily of legacy, voice-based technologies. This
situation has created the need for a transport solution that can accommodate
multiple services and addresses the demand for both high-bandwidth data and
voice communications.

   Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:

  . continue developing products that provide scalable, flexible and cost-
    effective optical transport solutions;

  . penetrate a large base of customers with targeted direct sales and
    support;

  . continue developing products that are designed to support multiple forms
    of broadband access and all leading network technologies;

  . enable fast and cost-effective deployment of our products; and

  . continue developing optical transport products that will expand the
    traditional reach of the optical transport network and create demand for
    our products in new markets.

                                       4
<PAGE>


Recent Developments

   On July 21, 1999, we issued $30,000,000 of convertible notes to certain
entities affiliated with MSD Capital, L.P., the private investment firm for
Michael S. Dell. The convertible promissory notes will be automatically
convertible into      shares of our common stock upon completion of this
offering, assuming an initial public offering price of $    per share.

                                  ------------

   We were originally incorporated in Delaware under the name "Fiberlane
Communications, Inc." in January 1997 and changed our name to "Cerent
Corporation" in June 1998. Our principal executive offices are located at 1450
North McDowell Blvd., Petaluma, CA 94954, and our telephone number is (707)
793-9055. The address of our Web site is "www.cerent.com." Information
contained on our Web site is not a part of this prospectus.

                                  The Offering

<TABLE>
<S>                                 <C>
Common stock offered...............      shares
Common stock to be outstanding af-
 ter this offering.................      shares
Use of proceeds.................... For general corporate purposes, including
                                    working capital, capital expenditures, and
                                    potential acquisitions.
Proposed Nasdaq National Market
 symbol............................ CERE
</TABLE>

                                ----------------

   The above table is based on shares outstanding as of June 30, 1999. This
table includes     shares of common stock issuable upon automatic conversion of
convertible promissory notes upon the completion of this offering, assuming an
initial public offering price of $     per share. This table excludes:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.


                                ----------------


                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                 Period from
                               January 27, 1997              Six Months Ended
                                (inception) to   Year Ended      June 30,
                                 December 31,   December 31, -----------------
                                     1997           1998      1998      1999
                               ---------------- ------------ -------  --------
                                                               (unaudited)
<S>                            <C>              <C>          <C>      <C>
Consolidated Statement of Op-
 erations Data:
 Revenue......................     $    --        $    220   $    --  $  9,917
 Gross profit (loss)..........          --            (841)       --     1,974
 Operating loss...............      (7,629)        (21,943)   (8,396)  (27,869)
 Net loss.....................     $(7,858)       $(22,550)  $(8,664) $(29,304)
                                   =======        ========   =======  ========
 Pro forma basic and diluted
  net loss per share(1).......                    $  (0.67)           $  (0.54)
                                                  ========            ========
 Shares used in computing pro
  forma basic and diluted net
  loss per share(1)...........                      33,850              54,026
                                                  ========            ========
</TABLE>

<TABLE>
<CAPTION>
                                                         June 30, 1999
                                               ---------------------------------
                                                          Pro       Pro Forma
                                               Actual  Forma(2)   As Adjusted(3)
                                               ------  --------   --------------
                                                      (unaudited)
<S>                                            <C>    <C>         <C>
Consolidated Balance Sheet Data:
 Cash and cash equivalents.................... $5,794   $35,794
 Working capital..............................  1,453    31,453
 Total assets................................. 33,628    63,628
 Long-term debt, net of discount..............  5,001    22,144
 Total stockholders' equity................... 13,484    26,341
</TABLE>
--------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
    of the determination of the number of shares used to compute per share
    data.
(2) The pro forma amounts in the table above are adjusted to give effect to the
    proceeds of $30.0 million received from the issuance of convertible
    promissory notes on July 21, 1999, and recorded the obligation net of a
    $12.9 million discount.
(3) The pro forma as adjusted amounts in the table above are adjusted to give
    effect to the automatic conversion of the convertible promissory notes into
        shares of common stock upon completion of this offering, assuming an
    initial public offering price of $    per share and to the receipt of the
    net
    proceeds from the sale of        shares of common stock offered by us at an
    assumed initial public offering price of $    per share, after deducting
    the estimated underwriting discounts and commissions and estimated offering
    expenses payable by us.


                                       6
<PAGE>

                                  RISK FACTORS

   You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us. Additional risks and uncertainties, such as those that
generally apply to our industry or to companies undertaking initial public
offerings, also may impair our business operations. You should also refer to
the other information set forth in this prospectus, including the discussions
set forth in "Note Regarding Forward-Looking Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as our consolidated financial statements and the related
notes.

Our failure to increase our revenues would prevent us from achieving and
maintaining profitability.

   We cannot assure you that our revenue will continue to grow, or that we will
generate sufficient revenue to achieve profitability. We have incurred
significant net losses since inception and expect to continue to incur
significant losses in the future. As of June 30, 1999, we had an accumulated
deficit of $59.7 million. Further, we expect to incur negative operating cash
flow in the future. We have large fixed expenses and we expect to continue to
incur significant and increasing sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues to achieve and maintain profitability. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements for more
information on our results of operations.

Our limited operating history makes it difficult to evaluate our business and
prospects.

   We were incorporated in January 1997, commenced operations in April 1997 and
began shipping the Cerent 454 in December 1998. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. Further, due to our limited operating history, we have difficulty
accurately forecasting our revenues, and we have limited meaningful historical
financial data upon which to base planned operating expenses. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in a relatively new and rapidly-evolving industry. If we do not
achieve our expected level of revenues or if our operating results are below
the expectations of securities analysts and investors, the price of our common
stock could decline.

Our revenue and operating results in one or more future periods may fluctuate
significantly and these fluctuations may adversely affect the trading price of
our common stock.

   Our revenue and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:

  . variations in the timing and size of sales and shipments of our products;

  . delays or cancellations of product orders by our customers;

  . new product introductions by us or our competitors;

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

  . mix in product configurations that we sell;

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

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

  . our ability to attain and maintain production volumes and quality levels
    for our current and future products;

  . our ability to control expenses and manufacturing costs;


                                       7
<PAGE>

  . costs related to acquisitions of technology or businesses; and

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

   We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.

The Cerent 454 currently is our only product and we are entirely dependent on
its commercial success.

   The Cerent 454 currently is the only product that we offer and, as a result,
our revenue is entirely dependent on its commercial success. Due to the
complexity of the Cerent 454, as well as our current and prospective customers'
network architectures, we cannot assure you that our present or future
customers will not encounter significant problems with the 454, which could
negatively affect sales of the 454. If our target customers do not widely
adopt, purchase and successfully deploy the 454, or if our current or future
customers become dissatisfied with the 454, our business, financial condition
and results of operations will be seriously harmed.

If our products do not interoperate with all widely adopted modes of network
access or with our customers' internal networks, sales of our products will be
adversely impacted.

   Our products are designed to accommodate all widely-adopted modes of network
access such as digital subscriber line, or DSL, frame relay, cable modem,
integrated services digital network, or ISDN, and wireless. In addition, our
products are designed to interface with our customers' existing networks, each
of which has different specifications and utilizes multiple protocol standards.
Many of our customers' networks contain multiple generations of products that
have been added over time as these networks have grown and evolved in order to
meet our customers' requirements. Our products must support all widely-used
forms of network access and must interoperate with all present and future
products within our customers' networks. If we find interoperability problems
or bugs in the existing software used in our customers' networks, we must
modify our software to fix or overcome these errors so that our products will
interoperate and scale with the existing software and hardware. If our products
cannot support all widely-used modes of network access or if our products do
not interoperate with our customers' networks, product installations could be
delayed, orders for our products could be cancelled or our products could be
returned, any of which could seriously harm our business, financial condition
and results of operations.

Because our products are complex and are deployed in complex environments, they
may have errors or defects that we find only after full deployment, which could
seriously harm our business.

   The Cerent 454 is a highly complex product and is designed to be deployed in
very large and complex networks. Although we have thoroughly tested the Cerent
454, because of the nature of the product, it can only be fully tested when
deployed in very large networks with high amounts of traffic. Consequently, our
customers may discover errors or defects in the hardware or the software after
it has been fully deployed. If we are unable to fix errors or other problems
that may be identified in full deployment, we could experience:

  . loss of or delay in revenues and loss of market share;


                                       8
<PAGE>

  . significant harm to our reputation and loss of customers;

  . diversion of development resources;

  . increased service and warranty costs;

  . legal actions by our customers; and

  . increased insurance costs.

Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed.

   The network infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. In developing our products, we have made, and
will continue to make, assumptions with respect to which standards will be
adopted by our customers and competitors. If the standards adopted are
different from those on which we have chosen to focus our efforts, market
acceptance of our products may be significantly reduced or delayed and our
business will be seriously harmed. In addition, the introduction of products
embodying new technologies and the emergence of new industry standards could
render our existing products obsolete, which would seriously harm our business,
financial condition and results of operations.

Our future success depends on our ability to develop innovative new products
and product enhancements that gain market acceptance.

   The market for telecommunications networking equipment, including transport
systems, is marked by rapid innovation and evolution. We cannot assure you that
we will be able to develop new products or product enhancements in a cost-
effective and timely manner, or at all. Even if we are able to develop and
introduce new products and enhancements in a cost-effective and timely manner,
they may be inferior to similar products or enhancements developed by our
current or future competitors and may fail to achieve broad market acceptance.
If we fail to successfully develop and introduce new products or enhanced
features and functionality for the 454, or if our future products or
enhancements fail to achieve widespread market acceptance, our business,
financial condition and results of operations would be seriously harmed.

Our future success depends on our ability to increase sales of our products to
CLECs and other relatively small telecommunications carriers and to effectively
market and sell our products to large, established carriers.

   In order to achieve significant revenue growth, we must increase sales of
our products to CLECs and other relatively small telecommunications carriers
while effectively marketing and selling our products to large, established
carriers, specifically regional Bell operating companies, or RBOCs, such as SBC
and Bell Atlantic, and incumbent IXCs, such as AT&T, Sprint and MCI WorldCom.
Our sales efforts to date have been limited primarily to emerging IXCs, CLECs,
independent carriers and cable companies. Large carriers such as RBOCs and
incumbent IXCs are typically more demanding and deliberate in their product
selection than CLECs and other relatively small carriers and, as a result, the
process of selling equipment to RBOCs and large, incumbent IXCs is likely to
require more time and sales and marketing effort than sales to smaller
carriers. The successful expansion of our sales efforts to include RBOCs and
incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. Competition for qualified sales personnel in the
telecommunications industry is intense, and we cannot assure you that we will
be able to hire a sufficient number of qualified sales personnel to expand our
sales efforts successfully. Further, even if we are successful in expanding the
size of our sales force, we cannot assure you that we will be successful in
increasing our sales to CLECs and other relatively small carriers or that we
will be able to market and sell our products effectively to RBOCs and incumbent
IXCs. If we cannot increase our sales to smaller carriers and effectively sell
our products to large carriers, we will not achieve significant revenue growth,
which would materially and adversely affect our business, financial condition
and results of operations.


                                       9
<PAGE>

   Even if we are successful in expanding our sales to RBOCs and incumbent
IXCs, we cannot assure you that our products will perform in a satisfactory
manner for these potential customers. The deployment of our products by RBOCs
and incumbent IXCs will likely place greater performance and interoperability
demands on our products than deployment by our existing customer base. If our
products fail to perform to the standards established by, or expectations of,
any RBOC or IXC for any reason, such customers may refuse to purchase
additional products from us, which will likely represent a significant loss of
potential market share. Further, any such failure could significantly harm our
reputation in the industry, leading to further loss of sales.

   RBOCs and incumbent IXCs typically have longer sales cycles than the smaller
carriers and, as a result, if we expand our product sales to RBOCs and
incumbent IXCs, our revenues and operating results will be more susceptible to
quarterly fluctuations. Additionally, the long sales cycles associated with
these large carriers will require us to expend significant sales efforts for
each prospective RBOC or incumbent IXC customer regardless of whether we sell
our products to such customer. If a protracted sales cycle for one or more
large customers causes our operating results for any quarter to fall short of
the expectations of securities analysts or investors, the market price of our
common stock could decline.

If the market for broadband and other data communications services does not
continue to expand, demand for our products may decline significantly.

   Our future success depends on the continued growth in the demand for
broadband and other data communications services and the ability of our
customers and prospective customers to sell such services. If this demand does
not continue to grow as anticipated, the demand for our products could decline
significantly, which would materially and adversely affect our business,
financial condition and results of operations.

If the number of competing access services declines or if an access service
standard is adopted, demand for our products may decline significantly.

   One of the key features of our current product is the ability to aggregate
multiple access services such as digital subscriber lines, or DSL, frame relay,
cable modems, or wireless services. However, we cannot assure you that multiple
access services will be utilized in the future. If the telecommunications
industry adopts a standard access service or if one or relatively few access
services are adopted by a substantial portion of our customers or potential
customers, the market for a transport product that aggregates multiple access
services would diminish significantly, which would seriously harm our business,
financial condition and results of operations.

Our markets are highly competitive and dominated by large corporations and we
cannot assure you that we will be able to compete effectively.

   Competition in the transport equipment market is intense and we expect such
competition to increase. Historically, the market for transport equipment has
been dominated by Alcatel, Fujitsu, Lucent, NEC, Nortel and Tellabs. Some of
these companies, including Nortel, have announced products that may be
competitive to the 454. In addition, a number of private companies have
developed or are developing products that perform transport functions. Many of
our competitors and potential competitors have substantially greater name
recognition and technical, financial and marketing resources than we have and
may have a substantial advantage over us in developing or acquiring new
products and technologies and in creating market awareness for those products
and technologies. Further, many of our competitors have built long-standing
relationships with some of our customers and potential customers and have the
ability to provide financing to customers and may, therefore, have an inherent
advantage in selling transport system products to those customers. We expect
our competitors to continue to improve the performance of their current
products and to introduce new products and technologies. To be competitive, we
must continue to invest significant resources in research and development,
sales, marketing and customer support. We cannot assure you that we will have
sufficient resources to make these investments, that we will be able to make
the technological advances necessary to be competitive, or that we will be able
to effectively sell our products to targeted customers who have prior
relationships with our competitors.

                                       10
<PAGE>

   In order to compete effectively in the network transport market we believe
we must deliver products that:

  . provide a cost-effective optical transport solution to our customers both
    initially and throughout the entire system life-cycle;

  . support multiple access technologies and network protocols;

  . scale easily and efficiently without disruption of carrier service to
    evolve with the needs of our customers;

  . perform reliably in a wide variety of physical locations and
    environments; and

  . are flexible and interoperate with existing network designs and
    equipment.

   If we are unable to compete successfully against our current and future
competitors, it could adversely affect us in the following ways:

  . reduce demand for our products;

  . cause delays or cancellations of customer orders;

  . cause us to reduce prices on our products; or

  . increase our expenses.

   Any of the foregoing would materially and adversely affect our business,
financial condition and results of operations. See "Business--Competition."

We currently depend on one contract manufacturer and have no internal
manufacturing capabilities.

   Our future success will depend on our ability to have sufficient volumes of
our products manufactured in a cost-effective and quality-controlled manner.
PCB Assembly, a third-party manufacturer of telecommunications and data
networking equipment, manufactures the Cerent 454 and is our sole manufacturer.
We currently have no internal manufacturing capabilities and we have no present
intention of developing such capabilities. There are a number of additional
risks associated with our dependence on a sole third-party manufacturer
including the following:

  . reduced control over delivery schedules;

  . quality assurance;

  . manufacturing yields and costs;

  . the potential lack of adequate capacity during periods of excess demand;

  . limited warranties on components supplied to us;

  . increases in contract prices;

  . the potential misappropriation of our intellectual property; and

  . manufacturing disruptions.

   Any of these risks could impair our ability to fulfill orders. Our customers
typically request delivery of our products within ten days following submission
of an order. As we increase our level of sales, we cannot assure you that our
third-party manufacturer will be able to meet the delivery requirements of our
customers, which could decrease customer satisfaction and have a material
adverse effect on our product sales. We do not have a long-term contract or
arrangement with our contract manufacturer that guarantees product
availability, the continuation of particular payment terms or the extension of
credit limits. If our manufacturer is unable or unwilling to continue
manufacturing our products in required volumes, for example, we would have to
identify and qualify an alternative manufacturer. Qualifying a new contract
manufacturer and commencing volume production is expensive and time-consuming
and if we are required to change or qualify an additional contract
manufacturer, we would likely lose revenue and damage our customer
relationships, either of which would harm our business, financial condition and
results of operations.

                                       11
<PAGE>

We are dependent on sole source and limited source suppliers for several key
components, including ASICs, and if we are unable to obtain these components on
a timely basis, we will be unable to meet our customers' product delivery
requirements.

   We currently purchase several key components from single or limited sources.
In particular, we rely on LSI Logic as a sole-source foundry for certain of our
application specific integrated circuits, or ASICs, and KLSI as a sole-source
foundry for certain other of our ASICs. If any of our sole or limited source
suppliers suffers from capacity constraints, work stoppages or any other
reduction or disruption in output, they may be unable to meet our delivery
schedule. If we do not receive critical components from our suppliers in a
timely manner, we will be unable to deliver those components to our
manufacturer in a timely manner and would, therefore, be unable to meet our
customers' product delivery requirements. Any failure to meet a customer's
delivery requirements could harm our reputation and decrease our sales, which
would negatively affect our business, financial condition and results of
operations. We currently have no long-term supply contracts to ensure sources
of supply for several of our key components, including ASICs. Our suppliers may
enter into exclusive arrangements with our competitors, stop selling their
products or components to us at commercially reasonable prices or refuse to
sell their products or components to us at any price and we may be unable to
develop alternative sources for the components.

If we fail to accurately predict our manufacturing requirements, we could incur
additional costs or experience delays.

   We provide forecasts of our demand to our manufacturer several months prior
to scheduled delivery of products to our customers. If we overestimate our
requirements, our manufacturer may have excess inventory, which indirectly
would increase our costs. If we underestimate our requirements, our
manufacturer may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues.
In addition, lead times for materials and components that our manufacturer
orders, including ASICs, vary significantly and depend on factors such as the
specific supplier, contract terms and demand for each component at a given
time. If we fail to order sufficient quantities of product components in a
timely manner or if we experience any delay in receiving product components
from third parties, the manufacturing of our products, and the delivery of such
products to our customers, could be delayed, which would harm our business,
financial condition and results of operations.

If we fail to manage our rapid growth effectively, our business, financial
condition and results of operations could be seriously harmed.

   Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process, as well as the implementation of appropriate control systems. We
currently intend to expand our operations to additional sites. There can be no
assurance that we will be successful in accomplishing this expansion. We
continue to increase the scope of our operations and have grown our headcount
substantially. At December 31, 1998, we had a total of 88 employees and at June
30, 1999, we had a total of 210 employees. Additionally, we plan to continue to
hire a significant number of employees. This growth has placed, and our
anticipated growth will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our workforce
worldwide. We may not be able to install adequate control systems in an
efficient and timely manner. Delays in the implementation of new systems or
operational disruptions when we transition to new systems would impair our
ability to accurately forecast sales demand, manage our product inventory and
record and report financial and management information in a timely and accurate
basis, which would seriously harm our business, financial condition and results
of operations.

If we do not expand substantially our customer service and support
organization, we will be unable to significantly increase our product sales.

   Because our products are complex, we must hire highly trained customer
service and support personnel. We currently have a small customer service and
support organization and will need to increase our staff

                                       12
<PAGE>

substantially to support the expanding needs of existing customers and to meet
the demands of new customers, some of which could require significantly greater
amounts of attention than our existing customers. In particular, it is
essential to RBOC and incumbent IXC customers that our products do not result
in network disruption. Hiring customer service and support personnel is
extremely competitive in our industry due to the limited number of people
available with the necessary technical skills and understanding of data
networking. If we are unable to expand our customer service and support
organization, we will be unable to significantly increase the sales of our
products, which would impair our ability to grow and seriously harm our
business, financial condition and results of operations.

If we lose key personnel or are unable to hire additional qualified personnel
as necessary, our business may be adversely affected.

   Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, and finance personnel,
many of whom would be difficult to replace. In particular, we believe that our
future success depends on Carl Russo, our President and Chief Executive
Officer. We do not have employment contracts or key person life insurance
covering any of our key personnel.

   We believe our future success will also depend in large part upon our
ability to identify, attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for these individuals is
intense in our industry, especially in the San Francisco Bay Area, and we have
had difficulty hiring employees in the timeframe we desire, particularly
qualified engineers and sales personnel. We may not succeed in identifying,
attracting and retaining personnel. Further, competitors and other entities
have in the past attempted, and may in the future attempt, to recruit our
employees. The loss of the services of any of our key personnel, the inability
to identify, attract or retain qualified personnel in the future or delays in
hiring qualified personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives, such
as timely product introductions, which would 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.

   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 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. These claims, regardless of their merits, could cause us
to incur substantial costs in defending ourselves and could divert the
attention of our management away from our operations, which could materially
and adversely affect our business.

Any acquisitions we make could disrupt our business and harm our financial
condition and operations.

   While we have no current agreements or negotiations underway, we may buy
businesses, products or technologies in the future. In the event of any future
acquisitions, we could:

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

  . incur debt;

  . assume liabilities;

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

  . incur large and immediate write-offs.

   These acquisitions also involve numerous risks, including:

  . problems integrating the purchased operations, technologies or products
    with our own;

  . unanticipated costs and other liabilities;

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

                                       13
<PAGE>

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

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

  . potential loss of key employees, particularly those of the acquired
    organizations.

   We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future. Our failure to do so could have an adverse effect on our business,
financial condition and results of operations.

We may be subject to product returns and product liability claims resulting
from defects in our products, which could result in costly and time-consuming
litigation, financial liability to our customers or the failure of our products
to attain market acceptance.

   Our products are complex and may contain undetected bugs or defects, which
could result in product returns or product liability claims. Our contracts with
our customers generally contain provisions designed to limit our exposure to
potential product liability claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. A
product liability claim, however, whether successful or not, could seriously
impact our capital reserves, harm our reputation and direct the attention of
key personnel away from our operations, any of which could harm our business,
financial condition or results of operations.

Problems arising from use of our products in conjunction with other vendors'
products could disrupt our business and harm our financial condition.

   Our customers use our products in conjunction with products from other
vendors. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. The occurrence of hardware or software
errors, whether caused by our products or another vendor's products, may result
in the delay or loss of market acceptance of our products, and any necessary
corrections or modifications may cause us to incur significant expenditures.
The occurrence of these types of problems may seriously harm our business,
financial condition and results of operations.

We could become subject to litigation regarding intellectual property rights
which could seriously harm our business.

   Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, many leading companies in the
networking industry, including our competitors, have extensive patent
portfolios with respect to networking technology. From time to time, third
parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to our business. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims and any resulting lawsuit, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:

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

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

  . redesign those products that use such technology.

   If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. For additional information concerning
our intellectual property rights, see "Business--Intellectual Property."

                                       14
<PAGE>

Our business could 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 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. While we have a number of
patent applications pending before the United States Patent and Trademark
Office, we currently hold no issued patents. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. Our future success will depend in part on our ability to
protect our proprietary rights and the technologies used in our principal
products. If we are unable to enforce and protect our intellectual property,
our business, financial condition and results of operations would be materially
adversely affected.

Necessary licenses of third-party technology may not be available to us or may
be very expensive.

   From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and 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.

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

   The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products, and those of our
customers, are subject to FCC rules and regulations. Current and future FCC
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, financial condition and results
of operations. Further, we cannot be certain that we will be successful in
obtaining or maintaining any regulatory approvals that may, in the future, be
required to operate our business.

We face a number of risks associated with year 2000 problems.

   The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to perform data
communications or engage in similar normal business activities.

   We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our product is generally integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of our customers' networks involves different
combinations of third party products. We cannot evaluate whether all of their
products are year 2000 compliant. We may face claims based on year 2000
problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no claims
of this kind have been made, we may in the future be required to defend our
products in legal proceedings which could be expensive regardless of the merits
of these claims.

                                       15
<PAGE>

   If our suppliers, vendors, manufacturer, customers and service providers
fail to correct any year 2000 problems, which they may have, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.

   Additionally, our customers' purchasing plans could be affected by year 2000
issues if they need to expend significant resources to fix their existing
systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. Further, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."

We may need additional capital to fund our future operations.

   The development and marketing of new products and the expansion of our
direct sales operation and associated support personnel is expected to require
a significant commitment of resources. If the market for our products develops
more slowly than anticipated, if we fail to establish significant market share
and achieve increased revenues, if our capital expenditure forecasts change or
prove inaccurate, or if we need to respond to unforeseen challenges or take
advantage of unanticipated opportunities, we may incur significant operating
losses and/or utilize significant amounts of capital. As a result, we may need
to raise substantial additional capital. To the extent that we raise additional
capital through the sale of equity or convertible 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, these
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of such debt could impose 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
operating results.

There has been no prior market for our common stock and a public market for our
securities may not develop or be sustained.

   Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. If an active public market for our common stock does not
develop, the liquidity of your investment may be limited. Further, the market
price of our common stock might fall below the initial public offering price.
The initial public offering price may bear no relationship to the price at
which the common stock will trade upon completion of this offering. The initial
public offering price will be determined based on negotiations between us and
the representatives of the underwriters, based on factors that may not be
indicative of future market performance. See "Underwriting."

Substantial shares of our common stock will be available for future sale and
such sales may depress our stock price.

   After this offering, assuming the number of outstanding shares as of June
30, 1999, we will have    shares of common stock outstanding. All the shares
sold in this offering will be freely tradable. The remaining      shares of
common stock outstanding after this offering are subject to lock-up agreements
that prohibit the sale of the shares for 180 days after the date of this
prospectus. Immediately after the 180 day lock-up period     shares which will
be outstanding after the offering will become available for sale. The remaining
shares of our common stock will become available at various times thereafter
upon the expiration of one-year holding periods and/or lapse of our repurchase
option. Sales of a substantial number of shares of common stock in the public
market after this offering or after the expiration of the lock-up and holding
periods could cause the market price of our common stock to decline. See
"Shares Eligible for Future Sale."

                                       16
<PAGE>

Our officers and directors will continue to have substantial control over
Cerent after this offering and could delay or prevent a change in corporate
control.

   We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately  % of our
outstanding common stock following the completion of this offering. These
stockholders, if acting together, would be able to influence significantly all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other changes in corporate control.

We expect to experience volatility in our share price which could negatively
affect your investment.

   The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:

  . quarterly variations in operating results;

  . any loss of a major customer;

  . changes in market valuations of communications related companies;

  . changes in financial estimates by securities analysts;

  . announcements by us or our competitors of new products or of significant
    acquisitions, strategic partnerships or joint ventures;

  . additions or departures of key personnel;

  . any deviations in net revenues or in losses from levels expected by
    securities analysts;

  . future sales of common stock; and

  . volume fluctuations, which are particularly common among highly volatile
    securities of technology companies.

You will suffer immediate and substantial dilution.

   The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of their investment of approximately $       assuming an
initial public offering price of $   . To the extent that currently outstanding
options or warrants are exercised, there will be further dilution to your
investment.

                   NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
Internet use and deployment of communications equipment. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. We undertake no obligation to update these statements
or publicly release the result of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date
of this prospectus or to reflect the occurrence of unanticipated events. Our
actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this prospectus.

                                       17
<PAGE>

                                USE OF PROCEEDS

   The net proceeds to us from the sale of the     shares of common stock
offered by us are estimated to be $   at an assumed public offering price of
$   per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses (assuming no exercise of the
underwriters' over-allotment option to purchase shares from us).

   We intend to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures. We may also use a
portion of the net proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so and are not currently engaged in any negotiations for any
such acquisition or joint venture. The amounts that we actually expend for
working capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount of cash we
generate from operations. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will most likely invest the net proceeds in short-term, interest-
bearing, investment-grade securities.

                                DIVIDEND POLICY

   We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current credit
facility prohibit us from paying dividends without lender consent.

                                       18
<PAGE>

                                 CAPITALIZATION

   The following table sets forth the following information:

  . the actual capitalization of Cerent as of June 30, 1999;

  . the pro forma capitalization of Cerent after giving effect to proceeds of
    $30.0 million received from the issuance of convertible promissory notes
    on July 21, 1999, and recorded the obligation net of a $12.9 million
    discount; and

  . the pro forma as adjusted capitalization of Cerent after giving effect to
    the conversion of all outstanding shares of convertible preferred stock
    into 32,990,691 shares of common stock, the automatic conversion of the
    convertible promissory notes into      shares of common stock upon
    completion of this offering, at an assumed initial public offering price
    of $   per share and the sale of    shares of common stock in this
    offering at an assumed initial public offering price of $    per share
    after deducting the estimated underwriting discounts and commissions and
    estimated offering expenses payable by us.

   This table should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
                                                 June 30, 1999
                                      ------------------------------------------
                                                                     Pro Forma
                                       Actual        Pro Forma      As Adjusted
                                      ------------  ------------   -------------
                                       (in thousands, except share data)
                                                  (unaudited)
<S>                                   <C>           <C>            <C>
Long-term debt, net of discount...... $      5,001   $     22,144
                                      ------------   ------------      --------
Stockholders' equity:
 Convertible preferred stock, $0.001
  par value per share, issuable in
  series: 37,709,088 shares
  authorized, 32,990,691 shares
  issued and outstanding, actual and
  pro forma: 10,000,000 shares
  authorized, none issued or
  outstanding, pro forma as
  adjusted...........................       64,989         64,989
 Common stock, $0.001 par value per
  share, 150,000,000 shares
  authorized, 33,612,476 shares
  issued and outstanding, actual and
      shares issued and outstanding
  pro forma, and 300,000,000 shares
  authorized and    shares issued and
  outstanding, pro forma as
  adjusted...........................       55,868         68,725
Notes receivable from stockholders...      (11,891)       (11,891)
Deferred stock compensation..........      (35,770)       (35,770)
Accumulated deficit..................      (59,712)       (59,712)
                                      ------------   ------------      --------
  Total stockholders' equity.........       13,484         26,341
                                      ------------   ------------      --------
  Total capitalization............... $     18,485   $     48,485
                                      ============   ============      ========
</TABLE>
---------------------

   The above table is based on shares outstanding as of June 30, 1999. This
table excludes:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.


                                       19
<PAGE>

                                    DILUTION

   The pro forma net tangible book value of our common stock on June 30, 1999
was $      , or approximately $    per share. Pro forma net tangible book value
represents the amount of our total tangible assets less total liabilities
(after giving effect to the proceeds received from the issuance of the
convertible promissory notes on July 21, 1999), divided by the number of shares
of common stock outstanding after giving pro forma effect to the conversion of
all outstanding shares of convertible preferred stock into 32,990,691 shares of
common stock as of June 30, 1999 and the automatic conversion of the
convertible promissory notes into     shares of common stock upon completion of
this offering at an assumed initial public offering price of $    share.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately following this offering. After giving
effect to our sale of     shares of common stock at an assumed initial public
offering price of $     and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our
pro forma net tangible book value would have been $      , or approximately
$    per share. This represents an immediate increase in net tangible book
value of $        per share to existing stockholders and an immediate dilution
in net tangible book value of $    per share to new investors.

<TABLE>
<S>                                                                     <C> <C>
Assumed initial public offering price per share........................     $
  Pro forma net tangible book value per share as of June 30, 1999...... _  $
  Increase in pro forma net tangible book value per share attributable
   to new investors....................................................
Pro forma net tangible book value per share after this offering........
                                                                            ---
Dilution in pro forma net tangible book value per share to new
 investors.............................................................     $
                                                                            ===
</TABLE>

   The following table summarizes on a pro forma basis at June 30, 1999 after
giving effect to the conversion of all outstanding shares of our convertible
preferred stock into an aggregate of 32,990,691 shares of common stock
immediately prior to completion of this offering and the automatic conversion
of the convertible promissory notes into     shares of common stock upon
completion of this offering at an assumed initial public offering price of $
share, the difference between the number of shares of common stock purchased
from us, the total consideration paid to us and the average price paid per
share by existing stockholders and by new investors purchasing common stock in
this offering before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, assuming an initial
public offering price of $    per share:

<TABLE>
<CAPTION>
                         Shares Purchased      Total Consideration
                         -------------------   ---------------------   Average Price
                         Number    Percent      Amount     Percent       Per Share
                         -------   ---------   ---------  ----------   -------------
<S>                      <C>       <C>         <C>        <C>          <C>
Existing stockholders...                     %  $                    %      $
New investors...........
                          -------   ---------   --------   ----------
  Total.................                100.0%                  100.0%
                                    =========              ==========
</TABLE>

   The above tables are based on shares outstanding as of June 30, 1999. These
tables exclude:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.


                                       20
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

   The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data set forth below for the period from January 27, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the consolidated balance sheet data as of December 31, 1997 and 1998 have
been derived from the audited consolidated financial statements of Cerent
Corporation included elsewhere in this prospectus, which have been audited by
Ernst & Young LLP, Independent Auditors. The consolidated statement of
operations data for the six-month periods ended June 30, 1998 and 1999, and the
consolidated balance sheet data as of June 30, 1999, are unaudited. In the
opinion of management, all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
results of operations for these periods. The consolidated financial data for
the six-month period ended June 30, 1999 are not necessarily indicative of
results to be expected for any future period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                            Period from
                                            January 27,
                                                1997
                                            (inception)               Six Months Ended
                                                 to       Year Ended      June 30,
                                            December 31, December 31, -----------------
                                                1997         1998      1998      1999
                                            ------------ ------------ -------  --------
                                                                        (unaudited)
                                              (in thousands, except per share data)
<S>                                         <C>          <C>          <C>      <C>
Consolidated Statement of Operations Data:
 Revenue..................................    $     --    $     220   $    --  $  9,917
 Cost of revenue..........................          --        1,061        --     7,943
                                              --------    ---------   -------  --------
 Gross profit (loss)......................          --         (841)       --     1,974
 Operating expenses:
 Research and development.................       5,159       15,553     6,723     8,792
 Selling, general and administrative......       2,470        5,039     1,673    10,251
 Stock compensation.......................          --          510        --    10,800
                                              --------    ---------   -------  --------
  Total operating expenses................       7,629       21,102     8,396    29,843
                                              --------    ---------   -------  --------
 Operating loss...........................      (7,629)     (21,943)   (8,396)  (27,869)
 Interest expense and other, net..........        (229)        (607)     (268)   (1,435)
                                              --------    ---------   -------  --------
 Net loss.................................    $ (7,858)   $ (22,550)  $(8,664) $(29,304)
                                              ========    =========   =======  ========
 Basic and diluted net loss per share
  (1).....................................    $  (0.82)   $   (1.33)  $ (0.57) $  (1.36)
                                              ========    =========   =======  ========
 Shares used in computing basic and
  diluted net loss per share (1)..........       9,535       16,901    15,091    21,470
                                              ========    =========   =======  ========
 Pro forma basic and diluted net loss per
  share (1) (unaudited)...................                $   (0.67)           $  (0.54)
                                                          =========            ========
 Shares used in computing pro forma
  basic and diluted net loss per share (1)
  (unaudited).............................                   33,850              54,026
                                                          =========            ========
</TABLE>

<TABLE>
<CAPTION>
                                                December 31,
                                              ----------------
                                               1997     1998   June 30, 1999
                                              ------- -------- -------------
                                                                (unaudited)
                                                        (in thousands)
<S>                                           <C>     <C>      <C>           <C>
Consolidated Balance Sheet Data:
 Cash and cash equivalents................... $ 6,758 $ 22,245    $ 5,794
 Working capital.............................   4,868   18,511      1,453
 Total assets................................  10,143   31,877     33,628
 Long-term debt, net of discount.............   3,718    4,229      5,001
 Total stockholders' equity..................   4,197   20,885     13,484
</TABLE>
---------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
    of the determination of the number of shares used to compute per share
    data.


                                       21
<PAGE>

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

Overview

   We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our Cerent 454 efficiently integrates multiple voice and
data services in a single, compact platform and is designed to support any
transmission rate up to an aggregate of 240 Gbps. Our 454 supports multiple
service offerings from a single platform and provides flexibility and
scalability to accommodate the requirements of existing installed equipment and
growing bandwidth demands. The Cerent 454 provides a cost-effective solution
for our service provider customers and enables them to rapidly deploy a wide
range of applications and revenue generating services.

   We were incorporated in Delaware in January 1997 as Fiberlane
Communications, Inc. and commenced operations in April 1997. From our inception
through September 1998, our operating activities were primarily devoted to
increasing our research and development capabilities, designing our ASICs,
developing our software and developing and testing the Cerent 454. We also
staffed and trained our administrative, marketing and sales organizations. In
December 1998, we began shipping the Cerent 454 with volume shipments beginning
in the first quarter of 1999. As of June 30, 1999, we had shipped our 454 to 86
customers.

   Since our inception, we have incurred significant losses, and as of June 30,
1999, we had an accumulated deficit of $59.7 million. We have not achieved
profitability on a quarterly or an annual basis, and anticipate that we will
incur net losses for the foreseeable future. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, we will need to generate significantly higher
revenues to achieve and maintain profitability.

   Our revenue currently is derived from sales of one product, the Cerent 454.
We expect that a significant portion of our future revenue will continue to
come from sales of the Cerent 454. While we are developing and plan to
introduce future products and enhancements to our 454, we cannot assure you
that we will be successful in these efforts.

   We recognize revenue at the time of shipment, assuming that collectibility
is probable, unless we have future obligations or have to obtain customer
acceptance, in which case revenue is deferred until these obligations are met.
We provide for potential product returns and estimated warranty costs in the
period of the related sale.

   We currently sell the 454 through our direct sales force and have targeted
our initial sales efforts primarily to emerging IXCs, CLECs, independent
carriers and cable companies. We intend to pursue incumbent IXCs, RBOCs and
international carriers. In order to achieve significant revenue growth, we must
increase sales of our products to CLECs and the other small carriers and
effectively market and sell our products to large, established carriers, such
as RBOCs and incumbent IXCs. The expansion of our sales efforts to include
RBOCs and incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. See "Risk Factors--Our future success depends on
our ability to increase sales of our products to CLECs and other relatively
small telecommunications carriers and to effectively market and sell our
products to large, established carriers."

   Our cost of revenue consists of amounts paid to third-party manufacturers,
manufacturing start-up and personnel and related costs. We outsource our
manufacturing and assembly requirements. Accordingly, a significant portion of
our cost of revenue consists of payments to a third-party contract
manufacturer. Manufacturing engineering and documentation control are conducted
at our facility in Petaluma, California. Our gross margins will be affected
primarily by the following factors:

  . demand for our products;

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


                                       22
<PAGE>

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

  . the mix of product configurations sold; and

  . the volume of manufacturing and the effect on manufacturing costs.

   Research and development expenses consist primarily of salaries and related
personnel costs, non-recurring engineering charges and prototype costs related
to the design, development, testing and enhancement of our products, including
our ASICs, software and system development. We expense our research and
development costs as they are incurred. Several components of our research and
development effort require significant expenditures, the timing of which can
cause significant quarterly variability in our expenses. Our ASIC development
requires an upfront payment of non-recurring engineering charges, regardless of
whether the integrated circuit works, and a per unit cost payable as ASICs are
purchased. Additionally, we incur significant expenses in connection with the
purchase of testing equipment for our products. With several complex ASICs in
our architecture, we will incur large non-recurring engineering and prototype
expenses with every enhancement of the Cerent 454 and any new product
development. We are devoting substantial resources to the continued development
and enhancement of the Cerent 454 and the introduction of new products. We
believe that research and development is critical to our strategic product
development objectives and intend to leverage our leading technology to meet
the changing requirements of our customers. As a result, we expect our research
and development expenses to increase in absolute dollars in the future.

   Selling, general and administrative expenses consist primarily of salaries
and related personnel costs of sales and marketing personnel, salaries and
related expenses for executive, finance, accounting, facilities, human
resources and information technology personnel, recruiting expenses and
professional fees, commissions and promotional and other marketing expenses. We
expect that sales and marketing expenses will increase substantially in
absolute dollars in the future as we increase our direct sales efforts, hire
additional sales and marketing personnel, initiate additional marketing
programs and establish sales offices in new locations. We expect that general
and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company. We do not allocate general corporate
overhead expenses which include but are not limited to rent and utilities.

   In connection with the granting of certain stock options and warrants during
the year ended December 31, 1998 and the six-month period ended June 30, 1999,
we recorded deferred stock compensation of $2.8 million and $41.3 million,
respectively. Stock compensation primarily includes the amortization of stock
compensation charges resulting from the granting of stock options and warrants
with exercise prices below the deemed fair value of our common stock on the
date of grant. These amounts are being amortized using a graded vesting method
over the vesting periods of the applicable options or term of the related
warrants. We amortized $332,000 of deferred stock compensation during the year
ended December 31, 1998, and $5.7 million of deferred stock compensation during
the six-month period ended June 30, 1999. During the year ended December 31,
1998 and the six-month period ended June 30, 1999, we also recorded stock
compensation charges of $178,000 and $5.1 million, respectively, relating to
the issuance of convertible preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.
Including amounts recorded through June 30, 1999, we expect to amortize
approximately $23.3 million of this deferred compensation expense in 1999,
$15.7 million in 2000, $7.0 million in 2001 and $2.7 million in 2002. See Note
3 of Notes to Consolidated Financial Statements.

   In connection with our financing obligations, we recorded $338,000, $163,000
and $8.8 million as discounts on long-term debt for the period ended December
31, 1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, relating to the deemed fair value of warrants which were issued in
connection with our debt financings. The discounts are being amortized over the
term of the long-term debt as interest expense. We recorded $76,000, $139,000
and $1.0 million of amortization expense for the period ended December 31,
1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, respectively. Including amounts amortized through June 30, 1999, we
expect to amortize approximately

                                       23
<PAGE>

$2.8 million of this discount in 1999, $3.7 million in 2000 and $2.6 million in
2001. See Note 3 of Notes to Consolidated Financial Statements.

   As of December 31, 1998, we had approximately $20.4 million of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Such net operating loss carryforwards expire at various
dates beginning in 2012 to the extent that they are not utilized. We have not
recognized any benefit from the future use of loss carryforwards for these
periods, or for any other periods, since inception. Management's evaluation of
all the available evidence in assessing realizability of the tax benefits of
such loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize the tax benefits currently.

Results of Operations

 Revenue

   The quarter ended December 31, 1998 was the first quarter we recognized
revenue. Revenue was $220,000 for the year ended December 31, 1998 and $9.9
million for the six-month period ended June 30, 1999. The increase in revenue
was directly related to the increase in sales of the Cerent 454.

 Cost of Revenue

   Cost of revenue was $1.1 million for the year ended December 31, 1998 and
$7.9 million for the six-month period ended June 30, 1999. We began shipping
our product in the quarter ended December 31, 1998. Cost of revenue as a
percentage of revenue was very high during these periods due to the large cost
of initial start-up of production and the low volume of sales.

 Research and Development Expenses

   Research and development expenses were $15.6 million for the year ended
December 31, 1998, an increase of $10.4 million from $5.2 million for the
period ended December 31, 1997, and were $8.8 million for the six-month period
ended June 30, 1999, an increase of $2.1 million from $6.7 million for the
comparable period of 1998. The period-to-period increases were primarily due to
increased costs associated with a significant increase in personnel and
personnel-related expenses. An increase in non-recurring engineering costs and
an increase in prototype expenses also contributed to the period-to-period
increases. Development is essential to our future success and we expect that
research and development expenses will increase in absolute dollars in future
periods.

 Selling, General and Administrative Expenses

   Selling, general and administrative expenses were $5.0 million for the year
ended December 31, 1998, an increase of $2.5 million from $2.5 million for the
period ended December 31, 1997, and were $10.3 million in the six-month period
ended June 30, 1999, an increase of $8.6 million from $1.7 million for the
comparable period of 1998. The period-to-period increases were due primarily to
a significant increase in the number of sales and marketing and general and
administrative personnel, increased recruiting expenses and other related
personnel costs. An increase in professional fees and an increase in rent and
utilities also contributed to the period-to-period increases.

 Stock Compensation

   Stock compensation expenses were $510,000 and $10.8 million for the year
ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively. The increase was due primarily to an increase in the number of
options granted to our employees at exercise prices which were below the deemed
fair value of our common stock and $5.1 million of stock compensation expense
relating to the issuance of preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.

                                       24
<PAGE>

 Interest Expense and Other, Net

   Interest expense and other, net, relates primarily to expenses associated
with our financing obligations. Interest expense and other, net, totaled
$229,000 and $607,000 for the period ended December 31, 1997 and year ended
December 31, 1998, respectively, and $268,000 and $1.4 million for the six-
month periods ended June 30, 1998 and 1999, respectively. These increases were
due primarily to increased borrowings under financing obligations and related
amortization of discounts relating to warrants issued in connection with these
obligations.

Quarterly Results of Operations

   The following table presents our operating results for the quarters ended
September 30 and December 31, 1998 and March 31 and June 30, 1999. The 454 was
placed into production in the quarter ended September 30, 1998. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with our audited
consolidated financial statements and the related notes appearing elsewhere in
this prospectus. These operating results are not necessarily indicative of the
results of any future period.

<TABLE>
<CAPTION>
                                                Quarter Ended
                                ---------------------------------------------
                                September 30, December 31, March 31, June 30,
                                    1998          1998       1999      1999
                                ------------- ------------ --------- --------
                                                 (unaudited)
                                               (in thousands)
<S>                             <C>           <C>          <C>       <C>
Consolidated Statement of
 Operations Data:
 Revenue.......................    $    --      $   220     $ 2,442  $  7,475
 Cost of revenue...............        346          715       2,338     5,605
                                   -------      -------     -------  --------
 Gross profit (loss)...........       (346)        (495)        104     1,870
 Operating expenses:
  Research and development.....      4,312        4,518       4,191     4,601
  Selling, general and
   administrative..............      1,332        2,034       4,406     5,845
  Stock compensation...........         49          461         783    10,017
                                   -------      -------     -------  --------
   Total operating expenses....      5,693        7,013       9,380    20,463
                                   -------      -------     -------  --------
 Operating loss................     (6,039)      (7,508)     (9,276)  (18,593)
 Interest expense and other,
  net..........................       (214)        (125)       (149)   (1,286)
                                   -------      -------     -------  --------
 Net loss......................    $(6,253)     $(7,633)    $(9,425) $(19,879)
                                   =======      =======     =======  ========
</TABLE>

   Our revenues and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:

  . variations in the timing and size of sales and shipments of our products;

  . delays or cancellations of product orders by our customers;

  . new product introductions by us or our competitors;

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

  . mix in product configurations that we sell;

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

  . our ability to obtain sufficient supplies of the sole or limited source
    components, including ASICs;

  . our ability to attain and maintain production volumes and quality levels
    for our current and future products;

  . our ability to control expenses and manufacturing costs;

                                       25
<PAGE>

  . costs related to acquisitions of technology or businesses; and

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

   We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.

Liquidity and Capital Resources

   From inception through June 30, 1999, we have financed our operations
primarily through private sales of our capital stock totaling approximately
$50.5 million in net proceeds. We have also financed our operations through net
borrowings on long-term debt agreements totaling approximately $21.0 million.
On July 21, 1999, we received $30.0 million in proceeds through the issuance of
convertible promissory notes. At June 30, 1999, cash and cash equivalents
totaled $5.8 million. As of June 30, 1999, we had $10.0 million available under
long-term debt agreements.

   Cash used in operating activities for the year ended December 31, 1998 was
$19.8 million, an increase of $13.0 million from the $6.8 million used for the
period ended December 31, 1997. The increase was primarily due to an increase
in our net loss from $7.9 million in fiscal 1997 to $22.6 million in fiscal
1998, partially offset by increased non-cash operating charges in 1998. Cash
used in operating activities for the six-month period ended June 30, 1999 was
$17.3 million, an increase of $10.1 million from the $7.2 million used for the
six-month period ended June 30, 1998, as a result of an increase in our net
loss from $8.7 million for the six-month period ended June 30, 1998 to $29.3
million for the six-month period ended June 30, 1999, partially offset by
increased non-cash operating charges.

   Cash used in investing activities for the year ended December 31, 1998 was
$4.2 million, an increase of $0.6 million from the $3.6 million used for the
period ended December 31, 1997. Cash used in investing activities for the six-
month period ended June 30, 1999 was $9.3 million, an increase of $6.8 million
from the $2.5 million used for the six-month period ended June 30, 1998. Cash
used in investing activities for these periods primarily reflected the purchase
of computers and other equipment and software used in our development
activities and other equipment and furniture used in our operations.

   Cash provided by financing activities was $17.1 million for the period ended
December 31, 1997, $39.5 million for the year ended December 31, 1998 and $10.1
million for the six-month period ended June 30, 1999. Cash provided by
financing activities for these periods was derived primarily from private sales
of convertible preferred stock and long-term debt borrowings. See "Related
Party Transactions" and Notes 3, 6 and 9 of Notes to Consolidated Financial
Statements.

   We believe that the net proceeds from this offering, together with our
current cash and cash equivalents will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may

                                       26
<PAGE>

seek to sell additional equity or debt securities. If additional funds are
raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
term of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders, and we cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at all.
If we are unable to obtain this 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.

Year 2000 Compliance

 Impact Of The Year 2000 Computer Problem

   The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

 State Of Readiness Of Our Products

   We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our products are generally
integrated into larger networks involving sophisticated hardware and software
products supplied by other vendors. Each of our customers' networks involves
different combinations of third party products. We cannot evaluate whether all
of their products are year 2000 compliant. We may face claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no such
claims have been made, we may in the future be required to defend our products
in legal proceedings which could be expensive regardless of the merits of such
claims.

 State Of Readiness Of Our Internal Systems

   Our business may be affected by year 2000 issues related to non-compliant
internal systems developed by us or by third-party vendors. We have received
assurances that all material systems from third-party vendors in use by us are
year 2000 compliant. We are not currently aware of any year 2000 problem
relating to any of our material internal systems. We are in the process of
testing all such systems for year 2000 compliance and plan to complete such
testing before September 30, 1999. We do not believe that we have any
significant systems that contain embedded chips that are not year 2000
compliant. Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as our manufacturers,
suppliers, customers and other service providers. We believe that absent a
systemic failure outside our control, such as a prolonged loss of electrical or
telephone service, year 2000 problems at third parties such as manufacturers,
suppliers, customers and service providers will not have a material impact on
our operations. If our manufacturers, suppliers, vendors, partners, customers
and service providers fail to correct their year 2000 problems, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party manufacturers, suppliers and vendors, we are unable to
determine at this time whether year 2000 failures could harm our business and
our financial results. Our customers' purchasing plans could be affected by
year 2000 issues if they need to expend significant resources to fix their
existing systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. In addition, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.


                                       27
<PAGE>

 Risks

   Failures of our internal systems to be year 2000 compliant could temporarily
prevent us from processing orders, issuing invoices and developing products and
could require us to devote significant resources to correcting such problems.
Due to the general uncertainty inherent in the year 2000 computer problem,
resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, we are unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on our business,
results of operations or financial condition.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will be effective for the fiscal year ended
December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.

Quantitative and Qualitative Disclosures About Market Interest Rate Sensitivity

   Our exposure to market risk is principally confined to our cash and money
market accounts which have short maturities and, therefore, minimal and
immaterial risk.


                                       28
<PAGE>

                                    BUSINESS

Overview

   We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth in the volume of communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our Cerent 454 efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate up to an aggregate of 240 Gbps.
The 454 provides a cost-effective solution for our service provider customers
and enables them to rapidly deploy a wide range of applications and revenue
generating services. As of June 30, 1999, we had shipped the Cerent 454 to 86
customers, including ALLTEL, Buckeye TeleSystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, Qwest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.

Industry Background

 Dramatic Increase in the Volume of Data Traffic

   The volume of data traffic over communications networks has surpassed
traditional voice traffic and continues to grow dramatically. Industry sources
have predicted that voice will account for less than 1% of worldwide
communications traffic by 2004. The primary reason for the increase in data
traffic is the emergence of the Internet as an essential communications and
transaction medium. According to International Data Corporation, the number of
Internet users worldwide reached approximately 142 million in 1998 and is
forecasted to grow to approximately 502 million by the end of 2003. The
increasing use of the Internet among consumers and business users is primarily
attributable to easier and cheaper access to the Internet, greater diversity of
devices that are able to access the Internet and the demand for bandwidth-
intensive applications and enhanced services. E-commerce in particular is
generating enormous data traffic over communications networks as it is becoming
a critical element of many businesses' strategies. According to International
Data Corporation, e-commerce revenues are expected to grow from approximately
$32 billion at the end of 1998 to approximately $426 billion by the end of
2002.

   This increase in data traffic has placed significant constraints on the
existing communications infrastructure which was originally designed to carry
only voice traffic over the public switched telephone network, or PSTN. Such
constraints have manifested themselves in the form of network congestion,
decreases in reliability and an inability to scale effectively with an ever-
increasing volume of traffic.

   To accommodate the increase in data traffic as well as meet the demand for
bandwidth-intensive applications and enhanced services, service providers
recognize the need to upgrade their communications networks. With the advent of
telecommunications deregulation and the subsequent increased competition,
existing as well as emerging service providers are deploying new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks.

 The Communications Network

   Service provider communications networks consist of a complex set of several
interlinking networks: the Internet, the public switched telephone network and
private corporate networks. These networks consist of a vast conglomeration of
equipment, which is typically owned by communications service providers and
cannot be changed easily or comprehensively without an interruption of service.

   The communications networks can be conceptually classified into the
following three categories:

  . access network

  . optical transport network


                                       29
<PAGE>

  . optical backbone or core



[Graphic depicting the access, optical transport and optical backbone networks.
The access network is depicted as six access services, including IP/ATM, POTS,
DSL, cable modem, frame relay and analog/ISDN. The optical transport network is
depicted as a interconnected web of fiber optic transmission lines within a
cloud shape. The optical backbone is depicted as an interconnected web of fiber
optic transmission lines within a smaller cloud shape.

   The access network, often referred to as the last mile, carries electrical
signals via telephone copper twisted-pair wiring, coaxial cable and wireless
transmissions between end users' and service providers' networks. The optical
transport network consists of fiber optic transmission lines that aggregate the
multiple electronic signals from the access portion and interconnects these
aggregation points to the fiber optic backbone or core. The fiber optic
backbone consists of long-haul fiber optic lines designed to carry enormous
amounts of communications traffic over great distances.

 Access Network Upgrades Are Enabling High-Speed Broadband Delivery

   The access network connects individual end users and corporate local area
networks, or LANs, to service provider networks and was originally designed to
support low-bandwidth analog voice traffic. Due to the increased demands for
high-bandwidth data traffic and enhanced voice services that now must pass over
this traditional analog network, service providers have begun to install new
high-speed access equipment. These new higher speed broadband digital
transmission technologies include:

  . digital subscriber line, or DSL, over traditional copper twisted-pair
    wiring;

  . cable modem technology over coaxial cable; and

  . broadband wireless.

   Each of these technologies has substantially higher data transmission speeds
or bandwidth than traditional telephone lines and is being deployed at rapid
rates to meet the growing demands of end users. The Gartner Group estimates
that worldwide revenue for DSL equipment will increase from approximately $700
million in 1999 to approximately $3.2 billion by 2003 and that worldwide cable
modem shipments will increase from approximately 1.8 million in 1999 to
approximately 5.3 million by 2003. In addition to supporting multiple types of
emerging broadband traffic, access networks must also support standards such as
internet protocol, or IP, asynchronous transfer mode, or ATM, and frame relay.

   Many vendors focus exclusively on developing new technologies that serve the
access portion of the network. These vendors supply several separate devices to
handle disparate traffic types as existing equipment is unable to aggregate
multiple data types at multiple speeds. This traditional approach of accessing
service-provider networks via separate devices results in a complex access
solution that is expensive, consumes valuable space at a carrier's central
offices and a cable operator's headend locations and is difficult to manage and
maintain. These new broadband services operate in conjunction with traditional
voice technology and are incremental to the existing network resources. As a
result, legacy systems will continue to exist in the network. Accordingly, the
equipment linking the access network to the optical transport network must
provide the

                                       30
<PAGE>

flexibility to support the coexistence of multiple broadband services as well
as voice traffic. We expect that this problem will be exacerbated as broadband
services become more pervasive.

 Backbone Network Upgrades Are Enabling Higher Capacity

   The backbone network is designed to carry the heaviest aggregated traffic
and has traditionally been dominated by a small number of incumbent inter-
exchange carriers, or IXCs, such as AT&T, MCI WorldCom and Sprint. More
recently, new backbone providers such as Level 3, Qwest Communications and
Williams Communications have emerged to support increased capacity and
performance demands. In recent years, carriers have invested significantly to
upgrade transmission capacity and equipment in the backbone. In order to meet
increased bandwidth demands, carriers have adopted and deployed new equipment
and enhanced technologies that include:

  . high performance frame relay and ATM switches and terabit IP routers that
    enable the networks to switch and route the increasing volumes of data
    traffic;

  . dense wave division multiplexing, or DWDM, systems that, depending on the
    commercial system deployed, enhances the capacity of existing fiber optic
    lines by a factor of 8, 32, 64 or 128;

  . optical transmission equipment that enables transition from slower
    speeds, such as the industry standard referred to as OC-3 operating at
    155 Mbps to the higher standards OC-48 operating at 2.5 Gbps and
    eventually OC-192 operating at 10 Gbps; and

  . high-capacity fiber optic cabling which maintains the integrity of a
    signal for longer distances.

   The advent of these new technologies continues to increase the capacity of
the fiber optic backbone. This increased capacity is placing increasing demands
on the optical transport network.

 Limitations of the Traditional Optical Transport Network

   The optical transport network consists of optical equipment that aggregates
multiple traffic types from the access network and interconnects these
aggregation points to the long-haul backbone portion of the network. Service
providers which own and deploy equipment in the transport portion of the
network include competitive local exchange carriers, or CLECs, independent
telephone companies, utility companies, cable companies, Internet service
providers, or ISPs, emerging IXCs such as Level 3, Qwest and Williams, as well
as traditional regional Bell operating companies, or RBOCs, and incumbent IXCs,
such as AT&T, MCI WorldCom and Sprint. In addition, international carriers are
also expanding their transport networks.

   The optical transport network consist within and interconnects metropolitan
area, regional, national and interoffice networks and currently consists
primarily of legacy voice-based technologies, such as add/drop multiplexers, or
ADMs, and digital cross-connects, or DCS, that aggregate access traffic and
place it onto the optical backbone. Current systems in the optical transport
network utilize legacy equipment that conforms to standard fiber-optic
transmission signals called synchronous optical network, or SONET. The
international variation of SONET is called synchronous digital hierarchy, or
SDH. Dataquest estimates that approximately $9 billion of SONET/SDH and DCS
equipment was deployed in the optical transport network in 1998.

   These legacy systems were designed for predictable analog voice traffic and
cannot efficiently handle the multiple data and voice service offerings enabled
by the proliferation of broadband access technologies. Currently, separate
equipment must be dedicated to each service type because existing equipment is
unable to aggregate multiple data types at multiple speeds. Changes or upgrades
to existing equipment are expensive, take up critical space in a service
providers' central office or headend location, require significant time and
effort to implement and increase the risk of network downtime. For example, the
mere upgrading from an OC-12 at 622 Mbps to an OC-48 at 2.5 Gbps SONET system
is very expensive and requires a replacement of existing SONET equipment,
potentially from multiple vendors. This upgrade can take several days to

                                       31
<PAGE>

implement. Because service providers have no tolerance for network downtime,
they are consequently forced to build a second, fully redundant network to
ensure uninterrupted service.

   Traditional transport systems cannot evolve to accommodate the multiple
services and rapid growth that characterize networks in the Internet era. While
new devices and technologies have been introduced to address the increases in
data traffic over the access and backbone portions of the network, the
transport portion has not yet been similarly addressed with new broadband
optimized technologies and equipment.

 The Cerent Opportunity

   As new higher bandwidth access and backbone technologies proliferate on
either side of the transport network, service providers are increasingly
looking for transport equipment that:

  . supports multiple service offerings from a single platform;

  . offers scalability and flexibility to accommodate both the requirements
    of existing installed equipment and the rapidly increasing bandwidth
    demands of service providers' customers;

  . enables rapid deployment of new services and non-service affecting
    upgrades;

  . provides cost-effective installation and maintenance;

  . operates within the service providers' existing network management system
    for operations, administration, maintenance and provisioning; and

  . satisfies carrier-class reliability and system certifications.

The Cerent Solution



[Graphic depicting two of our Cerent 454 products connected by a line across a
cloud shape. Each of the Cerents 454's are in turn connected by lines to
various dots, which are labelled "Voice/TDM," "Video," "POS", "IP," "ATM" and
"Frame Relay."]

   We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our high-speed solution, the Cerent 454, efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate to an aggregate of 240 Gbps. The
Cerent 454 provides a cost-effective solution for our service provider
customers and enables them to rapidly deploy a wide range of applications and
revenue generating services. We believe that our solution provides service
providers with the following key competitive advantages and benefits:

   Supports Multiple Service Offerings from a Single Platform. Our system
enables service providers to meet their optical transport equipment needs from
a single supplier instead of having to purchase a multitude of different
equipment from multiple vendors. While traditional SONET transport system
architectures have been optimized for voice-only based services, our system
efficiently supports voice services, as well as IP, ATM and frame relay in a
single, compact platform. It is also optimized for all emerging broadband
access traffic

                                       32
<PAGE>

including DSL, cable modem and wireless. Our Cerent 454 platform efficiently
aggregates all widely used traffic types, operating at different speeds, and
efficiently delivers the data for transmission over the optical network. The
Cerent 454 integrates the functionality of traditional SONET add-drop
multiplexers, digital cross-connect systems and packet/cell switches on a
single platform.

   Scalable, Flexible, Evolutionary System. Our system is capable of easily and
quickly responding to unpredictable network growth and usage, enabling our
service provider customers to quickly take advantage of future revenue
opportunities. The Cerent 454 supports over-subscription of bandwidth by
utilizing statistical multiplexing and packet/cell switching to aggregate
bandwidth, thus avoiding wasted bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. Flexible slot utilization is
achieved via a plug-and-play architecture as the system's slots support all
Cerent 454 plug-ins and hence facilitate scalability to higher transmission
speeds. Our software-based provisioning system delivered within the 454 is
designed with maximum flexibility to support a comprehensive set of transport
layer protocols including SONET/SDH and DWDM. In addition, our Cerent 454
system supports the ring architectures of the current SONET/SDH networks as
well as the mesh network architectures that will be deployed as service
providers migrate to fully transparent optical network architectures. The
modular structure provides a migration path for service providers which allows
them to leverage their existing infrastructure as end-user requirements and
technologies evolve.

   Rapid Deployment of New Services and Non-Service Affecting Upgrades. Our
Cerent 454 system was designed to be shipped, installed and configured more
quickly than legacy transport equipment. We currently deliver the Cerent 454
within ten days of receipt of order and our customers have installed and turned
up the 454 in less than an hour. Rapid service initiation is achieved through
eliminating the need to make modifications to the hardware elements of the
network and through an innovative route assignment architecture that simplifies
the installation process and enhances the efficiency of sending information
across legacy transport networks. Our six proprietary application specific
integrated circuits, or ASICs, enable service providers to scale transmission
capacity from relatively low-speed OC-3 optical transport at 155 Mbps to higher
speed OC-12 optical transport at 622 Mbps to OC-192 optical transport at 10
Gbps without any changes in network hardware other than a modular line card
swap. This eliminates the need for a complete replacement of existing equipment
and thereby preserves existing investments and minimizes the risk of downtime
and the cost of equipment redundancy. Changes or upgrades to the system can be
performed without any interruption of service.

   Cost-Effective Deployment and Dramatically Lower Lifecycle Costs. Our system
provides customers with a solution that can be rapidly put to use with a modest
initial capital investment. Our Cerent 454 provides for cost-effective
deployment and significantly lower lifecycle costs, as compared to legacy
transport systems. The Cerent 454 supports any transmission speed from DS-1 at
1.5 Mbps to OC-48 at 2.5 Gbps at reduced cost and space requirements relative
to current generation optical transport equipment. The system's small size,
which is 18 1/2 inches tall by 19 inches wide by 12 inches deep, ensures
optimal rack space and power usage. This compares to legacy transport equipment
which can occupy multiple seven-foot racks. The lifecycle cost of the equipment
is further reduced with fewer card types, simplified installation and
maintenance procedures and easy upgrades. Our Cerent 454 has a graphical user
interface that works on any standard personal computer, thus managing our
Cerent 454 network does not require the purchase of an outboard workstation or
separate element management software.

   Interoperability with Existing Networks. The Cerent 454 offers
interoperability with other equipment in the optical transport network. We
actively participate in developing industry-wide standards to continue to
facilitate end-to-end interoperability. Our 454 operates within the service
provider's existing network management system for operations, administration,
maintenance and provisioning. In addition, to further reduce time to service
for service providers the Cerent 454 is compatible with existing service
provider operational systems and support, or OSS.

                                       33
<PAGE>

   High Reliability and Robustness. The Cerent 454 offers the level of
reliability demanded by the operators of the world's largest networks. Our
system combines the robustness required for customer premise equipment and
outside plant compliance with the stringent Bellcore specifications for central
office environments. The 454 is conditioned for a wide variety of environments
and is network equipment buildings standard, or NEBS, level 3 certified which
requires the 454 to be able to operate in severe environments, including
temperatures ranging from -40(degrees)C to +60(degrees)C. Additionally, the
Cerent 454 is rural utility services, or RUS, listed allowing rural independent
carriers to acquire our product using government loans. The Cerent 454 performs
reliably in a wide variety of physical locations within the optical transport
network, including Internet service providers' points of presence, carriers'
central offices and cable operators' headend locations, customer premises,
outside plant cabinets and multi-dwelling units.

The Cerent Strategy

   Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:

   Continue to Develop and Introduce Products that Address Service Providers'
Optical Transport Needs. We intend to continue developing products that provide
scalable, flexible and cost-effective optical transport solutions that will
operate reliably under a wide range of operating environments. The number of
services used to access the optical network is large and growing. We have
designed our initial product, the Cerent 454, to support all modes of access to
the optical network including IP, ATM, frame relay, DSL, cable modem and
wireless and to facilitate such access at multiple speeds without affecting
service. We will continue to focus our product development efforts on providing
transport solutions that accommodate all emerging types of access to the
optical network. At the same time, we intend to preserve the ability of such
products to accommodate traditional types of access so that our customers will
not be forced to make unnecessary upgrades to their existing network
infrastructure or change their preferred forms of access.

   Penetrate a Large Base of Customers with Targeted Direct Sales and
Support. We intend to continue selling our products direct to customers through
our internal sales force. We believe that it is important to take a targeted
approach to the implementation of our sales strategy and have focused initially
on emerging IXCs, CLECs, independent carriers and cable companies. We intend to
pursue incumbent IXCs, RBOCs and international carriers. By focusing our
initial sales efforts on the service providers that can move quickly to adopt
new technologies, we can more rapidly obtain a large installed user base. We
believe that the adoption and implementation of our products, such as the 454,
by a large number of CLECs and independent carriers will help promote the sale
of our products to the incumbent IXCs and RBOCs. Additionally, 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.

   Maintain and Extend Product and Technology Leadership. We believe that we
are currently a technology leader in developing optical transport solutions and
will continue to develop products that are designed to support multiple forms
of broadband access and all leading network technologies. Network service
providers require optical transport solutions that support existing
architectures and types of access and also permit migration to new or upgraded
versions of existing technologies. The Cerent 454 currently supports widely-
deployed, existing SONET architecture, and also can support a wide variety of
network technologies such as an all-optical mesh architecture. We intend to
continue to invest in the development of innovative network software, hardware
and ASIC designs to rapidly develop new products and product enhancements that
further increase the functionality of transport systems. We intend to continue
to build our research and development efforts, cross-leveraging our
intellectual property and technical expertise as we transition to a multi-site,
multi-project organization.

   Enable Fast and Cost-Effective Deployment of Products. Our objective is to
ensure rapid deployment of optical transport systems to our customers. In this
effort, we currently outsource manufacturing, are developing

                                       34
<PAGE>

a Web-based ordering system and will continue to design rapidly-installable
products. We are currently able to deliver our product on the customer request
date, which is typically within ten days of receiving an order. Additionally,
by outsourcing manufacturing to a turnkey manufacturer, we can focus on our
core competencies of designing flexible, scalable transport solutions.

   Extend the Optical Transport Network. As the optical transport network
extends into areas traditionally referred to as the last mile, access providers
will require systems that link electrical access networks with the optical
backbone closer to the end user. We intend to continue to develop optical
transport products that will expand the traditional reach of the optical
transport network and create demand for our products in new markets.

Products and Technology

 Cerent 454

   The Cerent 454 is a powerful 240 Gbps next-generation optical transport
system designed to dramatically lower the cost and increase the efficiency of
bandwidth delivery within optical access and transport networks.



      [A photograph of the Cerent 454 with access and transmission rates.]

   The Cerent 454 base price ranges generally between $20,000 and $50,000 based
on configuration.

 Features of the Cerent 454

   Multiple Uses in Transport Networks. The Cerent 454 is designed for a broad
range of uses and locations in optical transport networks. The Cerent 454
aggregates a variety of voice, data and video services from access networks
over a SONET infrastructure. In backbone networks, the Cerent 454 interconnects
carrier exchanges, cable headends and Internet service provider POPs by
providing next-generation transport and integrated bandwidth management. The
system facilitates the transition of legacy SONET networks to the data
intensive networks of the future. The environmentally hardened platform is
certified at temperatures of -40(degrees)C to +60(degrees)C and can be deployed
in central office, equipment room, outside plant cabinet and customer premises
locations. The Cerent 454 is a fully NEBS level 3 and RUS certified, carrier-
class product.

   Low Cost Bandwidth. The Cerent 454 high-speed optical transport system
dramatically lowers the cost of bandwidth by supporting up to 240 Gbps from a
single shelf. Integration of access, transport and bandwidth management
capabilities in one platform results in significant first-cost and lifecycle-
cost advantages. Optical transport scales from OC-3 at 155 Mbps to OC-192 at 10
Gbps in a single assembly with no impact to service thereby eliminating costly
and cumbersome capacity upgrades. Cerent 454 plug-ins offer bandwidth in
modular increments to improve efficiency and reduce start-up costs. Capacity
can be added as needed, making it cost effective to deploy the system in low
and high-density applications. The system's compact size, minimal

                                       35
<PAGE>

common control card slots, plug-and-play architecture and flexible card slots
ease system configuration, turn-up and use. The Cerent 454's powerful bandwidth
management and packet/cell switching features enable efficient use of
transportation facilities to further lower bandwidth costs.

   Efficient Bandwidth Management. The Cerent 454 significantly improves
bandwidth efficiency to ensure cost-effective transport. The Cerent 454 can
groom and aggregate traditional voice traffic, referred to as time division
multiplexing, or TDM, as well as bandwidth-intensive data traffic. A core
cross-connect matrix provides non-blocking TDM bandwidth management. These
extensive bandwidth management features allow each Cerent 454 to be deployed as
a distributed broadband digital cross-connect. Additionally, the Cerent 454
utilizes statistical multiplexing and packet and cell switching to aggregate
bandwidth. This prevents wasting bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. The system may be oversubscribed
with IP, ATM and frame relay access interfaces when only a fraction of the
bandwidth needs to be transported. Packet and cell switching engines are
distributed to the interface cards to enable locally switched traffic. Packets
and cells from access interfaces are concentrated in standard SONET/SDH
payloads if needed for transport onto the fiber network.

   Multiple Configurations. Because every Cerent 454 card from a DS1 or E1 to
an OC192 or STM64 can be installed in a single shelf, each terminal can provide
transport and access interfaces and can be configured to support one-to-one or
one-to-several protection for electrical access.

   Cerent 454 systems can be deployed in any combination of the following
network configurations:

  . terminal mode for access agreggation;

  . add-drop mode, or ADM, for traffic grooming and agreggation;

  . ring architecture for SONET/SDH transport.

   Cerent 454 systems can also host systems in any of these configurations.

   The Cerent 454 high speed SONET/SDH transport system supports 240 Gbps of
TDM, IP, ATM and frame relay in any combination of configurations from a single
platform.

   Network Management. Typical network management systems require external
platforms. However, our management system for the Cerent 454 is Java-based and
allows the 454 to interface with an off-the-shelf Internet browser, eliminating
the need for an external workstation. Our management system supports standard
network management protocols such as simple network management protocol, or
SNMP, and transaction language 1, or TL-1.

 Technology

   Our unique, single-platform optical transport solution is enabled by key
technology capabilities, including the following:

   Plug-And-Play Architecture. The Cerent 454 incorporates extensive
integration and modular architecture designed to offer significant economic
savings. The Cerent 454 combines in a single platform: high-speed SONET/SDH
transport; VT and STS bandwidth management; TDM, IP, ATM and frame relay
access; and packet/cell switching. The Cerent 454 chassis is a compact assembly
with minimal common control card slots. Flexible slot utilization is achieved
via a plug-and-play architecture allowing any Cerent 454 to seamlessly manage
TDM, IP, ATM and frame relay traffic.

   ASIC Integration. We have currently developed six proprietary ASICs, all of
which are included in our product architecture. These ASICs have significant
component integration with gate counts per ASIC ranging from 500,000 to 2.5
million. Our ASIC technology enables support for add-drop-multiplexer
functionality, digital cross-connect functionality and packet/cell switching.


                                       36
<PAGE>

   High Speed Optics. Optical connection components with support for speeds
higher than OC-12, operating at 622 Mbps, cannot be sourced with off-the-shelf
components. Therefore, we have developed discrete OC-48, operating at 2.5 Gbps
ASICs, and are developing OC-192, operating at 10 Gbps, ASICs, to optimize
size, thermal performance and manufacturing capability. By customizing our
discrete optics designs we are able to enhance our in-house packaging expertise
which will allow us to scale to even higher optical speeds in a cost-effective
manner. In addition, this capability can serve as the basis for future DWDM
enhancement efforts.

   Gigabit Data Switching. The Cerent 454 allocates bandwidth via an innovative
multi-layer point-to-point backplane architecture that switches traffic across
two high-speed planes: a SONET/SDH plane and a data plane. The data plane
features 160 Gbps aggregate bandwidth to allow intercard communication and
traffic management for data cards utilizing one and three Gbps links. The data
plane features an extremely low latency, fully meshed, point-to-point fabric
between each card to provide a fully nonblocking data switch backplane.
Furthermore, each card can work independently, allowing the customer to create
a sub-network that can support a specific service.

   Software. The Cerent 454 incorporates significant software content within
our A to Z provisioning system, which enables carriers to offer point-to-point
services across their networks. For example, provisioning new services and/or
modifying existing services can be accomplished instantaneously through a point
and click design. Our operating system is based on Wind River's VX-Works real-
time operating system. Major software releases for the 454 are generally
released every six months. Our software supports the standard SONET software
requirement.

   Integrated DCS. The SONET plane gives each card slot full access to the core
cross-connect matrix. Cerent 454 full nonblocking cross-connect modules can
groom traffic in STS, up to STS-192, and VT, up to 1344 VT1.5, payloads to any
port on any card. This feature maximizes bandwidth efficiency by making it
possible to groom SONET/SDH traffic in STS or VT increments. Using redundant
cross-connect slots, the Cerent 454 can also be configured as a fully protected
digital cross-connect.

Customers

   We began commercial shipments of our products in December 1998 and as of
June 30, 1999, had shipped to 86 customers. The following is a representative
list of our customers as of June 30, 1999:

<TABLE>
<CAPTION>
  Emerging IXCs      CLECs                   Independent Carriers    Cable Operators
  <S>                <C>                     <C>                     <C>
  Frontier           Advanced TelCom Group   ALLTEL                  Buckeye TeleSystem
  Communications
  GST Telecom        Allegheny               Atlantic Telephone      Cablevision Lightpath
                     Communications Connect
  MEANS              Cavalier Telephone      Chibardun Telephone     Charter
                                                                     Communications
  Qwest              Kratz Communications    Citizens Telephone      TCI
  Communications     Nextlink                Commonwealth Telephone
  IXC Communications Ovation Communications  Conneaut Telephone
  Williams           Primelink               Federated Telephone
  Communications     RCN Corp.               Fiber Four
                     Sho-Me Power Electric
                     Sikeston Light & Water  Fort Bend Long
                                             Distance
                                             Grand River Mutual
                                             Telephone
                                             Gulf Telephone
                                             Hutchinson Telephone
                                             NTS Communications
                                             Paul Bunyan Rural
                                             Telephone
                                             Surry Telephone
                                             Triangle Telephone
                                             Tularosa Basin
                                             Telephone
</TABLE>

                                       37
<PAGE>

Customer Applications

   Set forth below are examples of typical uses of our Cerent 454 by different
types of service providers.

 A CLEC Building Out New Networks

   CLECs have recently begun building out thousands of miles of fiber and
communications networks to reach their service objectives. Traditionally,
network providers have had to turn to multiple vendors to satisfy all of their
optical transport needs, purchasing one piece of equipment for OC-48 backbone
transport, a second and third piece of equipment to support OC-12 and OC-3
metropolitan rings, and a fourth piece of equipment for the digital cross-
connect segment of the network. Thus, a CLEC would potentially acquire four
pieces of equipment from multiple vendors. However, a CLEC deploying the
Cerent 454 in its network is capable of integrating the backbone and various
speeds of metropolitan SONET rings into one transport management platform.

[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation"
illustration appears on the left side of the graphic, and shows four cubes
labelled "OC-48" around an oval-shaped ring. One cube is connected by three
lines to a rectangle labelled "3/1 Digital Cross Connect," which is in turn
connected to two circles labelled "Metropolitan Network." One circle has three
boxes labelled "OC-3" around its circumference; the other has three boxes
labelled "OC-12" around its circumference. The words "Four Distinct Equipment
Pieces Required" appear beneath the graphic.

The "Implementation With Our Solution" graphic appears on the right side of
the page and is depicted as three rings connected by our Cerent 454 in the
center of the rings. One ring is labelled "Backbone Transport"; the other two
are labelled "Metropolitan Network." The words "One Network Element For All
Transport Needs" appear beneath the graphic.]


                             [CHART APPEARS HERE]

   With the Cerent 454, a CLEC is able to deploy one network element to
satisfy its transport needs and is able to realize more optimal network build-
out costs. The Cerent 454 provides a single optical transport network platform
to service and maintain the network on an ongoing basis, enabling a CLEC to
realize significant life-cycle cost benefits, as compared to legacy, multi-
product and multi-vendor transport solutions.

 A Cable Company Offering Multiple Services

   Cable companies are seeking to leverage their hybrid fiber coaxial, or HFC,
networks to move beyond video-only services to deliver voice and data services
at rates significantly lower than those of incumbent carriers. Historically,
if a cable operator wanted to offer multiple services, it would have to deploy
separate transport network infrastructures and three separate fiber rings to
support each of video, data and voice traffic. With the advent of the Cerent
454, a cable operator is able to support multiple services with one common
platform.

[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation" graphic is
two overlapping oval-shaped rings with squares representing data, voice and
video around the circumference of the rings. The words "Multiple Fiber
Overlays to Support Various Services" appear beneath this graphic. The
"Implementation with Our Solution" graphic is one ring representing data,
video and voice with four Cerent 454's around its circumference. The words
"Single Infrastructure for Voice, Data and Video" appear beneath this graphic.

                             [CHART APPEARS HERE]


   With one single optical transport platform that supports existing video
services as well as new voice and data services, a cable company realizes
significant incremental revenue streams at minimal first-time and life-cycle
support costs. Compared to multiple networks, the single multi-purpose optical
transport network enabled by the Cerent 454 is easier to build, install, use
and maintain on an ongoing basis.

                                      38
<PAGE>

 An Emerging IXC Efficiently Grooming Traffic

   Emerging inter-exchange carriers, or IXCs, often referred to as the
carrier's carrier, face the challenge of effectively managing disparate data
fed by multiple carrier customers. No matter how service is delivered to and
from the emerging IXC, whether over its own network or handed off from another
carrier, the traffic needs to be groomed, or separated and uniquely
distributed, to the appropriate equipment for further processing. If an
emerging IXC wanted to support multiple traffic types with legacy transport
systems, it would have to install multiple switches, groomers and routers, or
in the case of private line services, an interconnection to another optical
network or carrier hand-off. In traditional networks, one would have to install
numerous pieces of equipment to provide satisfactory grooming capability for
the network. With the Cerent 454, which in this case is deployed as a stand-
alone piece of equipment, an IXC can remove a whole network layer and separate
different optical and electric traffic types within one piece of equipment and
send such traffic to individually specified locations.

                              [CHART APPEARS HERE]
[Left side of page:
Traditional Implementation
Voice/TDM Digital Switch OC-3 IP IP Router
OC-12 ATM ATM Switch OC-48 Frame Relay Frame Relay Switch OC-192
Numerous Required Networking Equipment
Right side of page:
Implementation with Our Solution
Voice/TDM OC-3
IP Cerent 454
OC-12 ATM OC-48
Frame Relay OC-192
Single, Multi-Purpose Traffic Groomer

   The Cerent 454 supports any traffic interface and any optical transport
speed, therefore eliminating the need for numerous pieces of networking
equipment. As a result, the Cerent 454 offers an emerging IXC significant size
advantages as well as initial deployment and life-cycle cost benefits.

Research And Product Development

   Our future success depends on our continued ability to develop and introduce
new products, product enhancements and technology that can support a broad
array of network protocols and access methods. Our success in meeting these
objectives is dependent on the efforts of our research and development team. To
this end, we have assembled a team of highly-skilled engineers with extensive
experience in a variety of network system architecture disciplines that work in
parallel on several projects. These individuals have been drawn from leading
computer data networking and telecommunications companies. As a result of our
development efforts, we believe that we have created an industry-leading
optical transport system to cost-effectively increase the efficiency of
bandwidth delivery within today's congested transport network.

   We have invested, and intend to continue to invest, significant time and
resources on our research and development activities. We intend to continue to
build our research and development efforts cross-leveraging our intellectual
property and technical expertise to transition to a multi-site multi-project
organization. At present, our engineers are focused on improving our existing
product offering, the Cerent 454, developing next-generation hardware and
software products and designing ASICs that will better integrate our products
with the networks maintained by current and future customers.

   As of June 30, 1999, we employed 112 people in our research and development
group.

   Our research and development expenses totaled $5.2 million for the period
ended December 31, 1997, $15.6 million for the year ended December 31, 1998,
and $8.8 million for the six month period ended June 30, 1999.

   See "Risk Factors--Our future success depends on our ability to develop
innovative products and product enhancements that gain market acceptance," "--
Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Sales And Marketing

   We sell and market our products exclusively through our direct sales
organization. Our direct sales organization establishes and maintains direct
relationships with our customers. In addition, we have a team of consulting
engineers who provide our customers with guidance and assistance with the
deployment of our

                                       39
<PAGE>

product. These consulting engineers also help define the features that are
required for our product to be successful in specific applications. A key
feature in our selling effort is the relationship we establish with individuals
at various levels in our customers' organization. For example, our sales team
maintains contact with key individuals at our customers and prospective
customers who have service planning and infrastructure buildout responsibility.
Our marketing efforts are centered around building brand awareness with a
targeted customer base. We also build our brand name through continued targeted
publicity and referral efforts in both media and industry-centered activities,
including editorial presence in various trade magazines, press releases, public
speaking opportunities, national and regional trade show participation,
advertising, Internet-based communication and promotion, media sponsorships and
participation in industry standards activities.

   To date, sales activities have been focused primarily on emerging IXCs,
CLECs, independent carriers and cable companies. We intend to target RBOCs and
incumbent IXCs in the near future. Additionally, we have designed our product
to permit deployment in the international marketplace and we intend to pursue
international carriers.

   As of June 30, 1999, we employed 39 people in our sales and marketing
organizations.

   See "Risk Factors--Our future success depends on our ability to increase
sales of our products to CLECs and other relatively small telecommunications
carriers and to effectively market and sell our products to large, established
carriers" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Customer Service And Support

   We are committed to providing our customers with high levels of service and
support. Our service and support organization provides support through a
variety of mechanisms. Telephonic support is available on a 24 hours a day,
seven days a week basis. Customers can obtain repair and replacement of
equipment either on a 15-day, 3-day or 24-hour turnaround, depending on the
urgency of the request. We also provide on-site field engineering services if
our customers require the presence of one of our trained engineers. In
addition, we provide a variety of training courses either at our headquarters
in Petaluma, California or on-site at the customer's facilities. One key
advantage of the Cerent 454 is that customers need only be trained on one piece
of network equipment and thus can save substantially on training costs.

   As of June 30, 1999, we employed 22 people in our customer service and
support organization.

   See "Risk Factors--If we do not expand substantially our customer service
and support organization, we will be unable to significantly increase our
product sales."

Competition

   We compete in a relatively new, rapidly evolving and highly competitive
market. The market historically has been dominated by Alcatel, Fujitsu, Lucent,
NEC, Nortel and Tellabs. Some of these companies, including Nortel, have
announced products that may be competitive with the 454. In addition, a number
of private companies provide products, technologies and/or services that are
competitive to ours. We believe that the principal competitive factors in this
market include, or are likely to include, product performance, initial and
lifecycle cost, installation time, flexibility, scalability, service and
support and interoperability with a broad range of network systems.

   See "Risk Factors--Our markets are highly competitive and dominated by large
corporations and we cannot assure you that we will be able to compete
effectively."

                                       40
<PAGE>

Patents and Intellectual Property Rights

   Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We currently hold no issued
patents, but we have nine patent applications pending in the United States and
we are currently preparing a number of additional patent applications seeking
protection for our technology. Our software was developed internally and is
protected by United States and other copyright laws.

   While we will use patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent
product enhancements and reliable product maintenance are essential to
establishing and maintaining a technology leadership position.

   See "Risk Factors--Our business could be adversely affected it we are unable
to protect our intellectual property rights from third party challenges," "--
Necessary licenses of third party technology may not be available to us or may
be very expensive" and "--We could become subject to litigation regarding
intellectual property rights which could seriously harm our business."

Manufacturing

   We currently outsource our entire manufacturing and assembly operation to
PCB Assembly. PCB Assembly is a third-party manufacturer of telecommunications
and data networking equipment, which has a high-capacity ISO 9002-registered
facility and specializes in the manufacture of high-end telecom and data
networking equipment. PCB Assembly provides full turnkey production including
material procurement and handling, final assembly, integrated circuit and
functional testing, box build, quality control and shipment to our customers.
We design, specify and monitor all of the tests that are required to meet
functional requirements. Pursuant to the terms of our agreement with PCB
Assembly, PCB Assembly is required to manufacture, assemble and test our
products based on our monthly forecasts. PCB Assembly is required to ship the
finished products, at our direction, to us or directly to our customers upon
submission of purchase orders. Our agreement with PCB Assembly expires in April
2000, subject to automatic renewal for successive one-year periods unless
either we or PCB Assembly provides prior notice of intent to terminate. This
arrangement provides us with the following key benefits:

  . we provide manufacturing capabilities to our customers without dedicating
    any space to manufacturing operations;

  . we conserve the capital that would be required for funding inventory and
    equipment acquisition and maintenance;

  . we can adjust manufacturing volumes quickly to meet changes in demand;
    and

  . we can quickly deliver products to customers through PCB Assembly's
    turnkey manufacturing and drop shipment capabilities.

   Several key components for our platform including our ASICs are acquired
from single or limited sources. For example, we rely on LSI Logic as a sole-
source foundry for certain of our ASICs and KLSI as a sole-source foundry for
certain other of our ASICs.

   See "Risk Factors--We currently depend on one contract manufacturer and have
no internal manufacturing capabilities," "--If we fail to accurately predict
our manufacturing requirements, we could incur additional costs or experience
delays" and "--We are dependent on sole source and limited source suppliers for
several key components, including ASICs, and if we are unable to obtain these
components on a timely basis, we will be unable to meet our customers' product
delivery requirements."

                                       41
<PAGE>

Employees

   As of June 30, 1999, we had 210 full-time employees, 112 of whom were
engaged in research and development, 39 in sales and marketing, 22 in customer
service and support and 37 in operations, finance and administration. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and we consider our relations with our employees to be good.

   See "Risk Factors--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Facilities

   We lease approximately 82,000 square feet of office space in Petaluma,
California pursuant to a lease that expires in March 31, 2007. We believe that
by 2001, we will need additional space to accommodate our growth. The
commercial real estate market in the San Francisco Bay Area is volatile and
unpredictable in terms of available space, rental fees, occupancy rates and
preferred locations. We cannot be certain that additional space will be
available when we require it, or that it will be affordable or in a preferred
location.

   See "Risk Factors--If we fail to manage our rapid growth effectively, our
business, financial conditions and results of operations could be seriously
harmed."

Legal Proceedings

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

                                       42
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to our executive
officers and directors as of June 30, 1999:

<TABLE>
<CAPTION>
Name                         Age                    Position
----                         ---                    --------
<S>                          <C> <C>
Carl Russo (1)..............  42 President, Chief Executive Officer and Director
Michael Ashby...............  50 Chief Financial Officer
Ajaib Bhadare...............  39 Vice President, Engineering
Terry Brown.................  36 Vice President, Field Operations
Tom Corker..................  34 Vice President, Product Marketing
Scott Lester................  42 Vice President and General Counsel
Richard Roney...............  54 Vice President, Operations
Vinod Khosla (1)............  44 Chairman of the Board of Directors
Kevin Compton (2)...........  40 Director
Donald Green (2)............  68 Director
Promod Haque (1)............  51 Director
</TABLE>
---------------------
(1) Member of compensation committee
(2) Member of audit committee

   Carl Russo has served as President and Chief Executive Officer of Cerent
since June 1998 and has served as a director of Cerent since May 1998. From May
1995 to May 1998, Mr. Russo was employed by Xircom, Inc., a manufacturer of
mobile networking equipment, most recently as Chief Operating Officer
responsible for sales, marketing, development and manufacturing of Xircom
products. Mr. Russo has also held executive management positions at Network
Systems Corporation, a networking company, most recently as Senior Vice
President and General Manager, Channel Networking Group, a networking company,
and at AT&T Paradyne, Inc., a manufacturer of broadband network access
products, where he was most recently Vice President and General Manager, Data
Networking Products Division. Mr. Russo is a director of Xircom, Inc.

   Michael Ashby has served as Chief Financial Officer of Cerent since July
1999 and served as a consultant to Cerent from May 1999 to July 1999. Prior to
joining Cerent, Mr. Ashby was Executive Vice President and Chief Financial
Officer of Ascend Communications, Inc., a networking company, from November
1997 to June 1999. Mr. Ashby has agreed to continue to work with Lucent
Technologies, Inc. through January 31, 2000, to assist in the transition
related to Lucent's acquisition of Ascend. Before joining Ascend, Mr. Ashby was
Vice President and Chief Financial Officer at Pacific Telesis Enterprise and
subsequently at Pacific Bell, a communications company, from September 1995 to
December 1997. Mr. Ashby was Chief Financial Officer and then President and
Chief Executive Officer of Network Systems Corporation, a networking company,
from September 1992 to September 1995. Mr. Ashby is a director of Xircom, Inc.

   Ajaib Bhadare, a co-founder of Cerent, has served as Vice President,
Engineering for Cerent since January 1997. Prior to joining Cerent, Mr. Bhadare
was Senior Director of Engineering with DSC Communications, a networking
company, from March 1988 to January 1998. Prior to DSC, Mr. Bhadare was an
engineer at Optilink Corporation, a networking company. Mr. Bhadare received
his B.S.C. degree from the University of London. Mr. Bhadare also holds a
patent for improving register robustness against software failure.

   Terry Brown has served as Vice President, Field Operations for Cerent since
July 1997. From 1993 to 1997, Mr. Brown led the sales effort of Advanced Fibre
Communications, a manufacturer of telecommunications systems. Mr. Brown
received his B.S.E.E. from the University of Notre Dame and his M.M. degree in
marketing and economics from Northwestern University's Kellogg School of
Management.

                                       43
<PAGE>

   Tom Corker has served as Vice President, Product Marketing for Cerent since
January 1999. From July 1997 to January 1999, Mr. Corker was the Director of
Product Management at Cerent. From 1991 to 1997, Mr. Corker was the Director,
Product Marketing at Advanced Fibre Communications, Inc. and held various
engineering roles at DSC Communications and Nortel, a networking company. Mr.
Corker received his B.S.E.E. and M.S.E.E. from the Georgia Institute of
Technology.

   Scott Lester has served as Vice President and General Counsel of Cerent
since July 1999. From October 1984 to July 1999, Mr. Lester was an attorney
with the law firm of Brobeck, Phleger & Harrison LLP, where he was a partner
since January 1989. From August 1981 to October 1984, he was an attorney with
Milbank, Tweed, Hadley & McCloy. Mr. Lester received his J.D. from Georgetown
University Law School.

   Richard Roney has served as Vice President, Operations for Cerent since
November 1998. From May 1997 to October 1998, Mr. Roney was Vice President of
Manufacturing at VINA Technologies, a networking company. From June 1995 to
October 1996, Mr. Roney was Vice President of Operations at Netro Corporation,
a communications company. From January 1993 to May 1995, Mr. Roney served as
Vice President of Operations at Ericsson-Raynet Corporation, a
telecommunications company. Mr. Roney received his B.S. from Cornell University
and his M.B.A. from Stanford Graduate School of Business.

   Vinod Khosla has served as Chairman of the Board of Directors of Cerent
since April 1997. Mr. Khosla has been a general partner of Kleiner Perkins
Caufield & Byers, a venture capital firm, since 1987. Mr. Khosla was a co-
founder of Daisy Systems Corporation, an electronic design automation company,
and the founding Chief Executive Officer of Sun Microsystems, Inc., a computer
and data networking company. Mr. Khosla also serves on the boards of Concentric
Network Corporation, Corio Inc., Corvis Corporation, Juniper Networks, Inc. and
Qwest Communications International Inc., as well as several other private
companies. Mr. Khosla received his B.S.E.E. from the Indian Institute of
Technology in New Delhi, an M.S.E. from Carnegie-Mellon University, and an
M.B.A. from the Stanford Graduate School of Business.

   Kevin Compton has served as a director of Cerent since March 1999. Mr.
Compton joined Kleiner Perkins Caufield & Byers, a venture capital firm, in
1990 and has been a general partner since 1994. Mr. Compton serves on the
Boards of Citrix Systems, Corsair Communications, OneWorld Systems, formerly
Global Village Communication, Rhythms NetConnections and VeriSign, as well as
several other private companies. He received his B.S. from University of
Missouri.

   Donald Green has served as a director of Cerent since August 1997. Mr. Green
has been the Chairman of the Board and a director of Advanced Fibre
Communications, Inc. since June 1998. Mr. Green also served as the Chief
Executive Officer of Advanced Fibre Communications, Inc. from May 1992 until
May 1999 and as the President from May 1992 until June 1998. Mr. Green also
serves on the boards of Larscom Corporation and TCSI. He received his B.S.E.E.
equivalent from British Institute of Electrical Engineers.

   Promod Haque has served as a director of Cerent since July 1998. Mr. Haque
joined Norwest Venture Partners, a venture capital firm, in November 1990 and
is currently Managing General Partner of Norwest Venture Partners VII, General
Partner of Norwest Venture Partners VI and General Partner of Norwest Equity
Partners IV and V. Mr. Haque currently serves as a director of Extreme
Networks, Inc., Information Advantage, Inc., Primus Knowledge Solutions, Inc.,
Transaction Systems Architects, Inc., Showcase Corporation, and several other
privately held companies. Mr. Haque holds a Ph.D. from Northwestern University,
an M.B.A. from the J. L. Kellogg Graduate School of Management, Northwestern
University and a B.S.E.E. from the University of Delhi, India.

   The board of directors elects executive officers on an annual basis.
Executive officers serve until their successor has been duly elected and
qualified. There are no family relationships among any of the directors,
officers or key employees of Cerent.


                                       44
<PAGE>

 Board Composition

   Our board of directors currently consists of five members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.

 Board Committees

   The board of directors has a compensation committee and an audit committee.

   Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Carl Russo, Vinod Khosla and Promod Haque. Since the
current members of the compensation committee do not meet the definition of
"non-employee directors" for purposes of SEC Rule 16(b)(3), the full board of
directors will continue to approve stock option grants for our officers in
order to qualify the option grants for an exemption from "short-swing" trading
rules.

   Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent accountants, and our compliance with
legal matters that have a significant impact on our financial reports. The
current members of the audit committee are Donald Green and Kevin Compton.

 Compensation Committee Interlocks and Insider Participation

   The board of directors established its compensation committee in April 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.

 Board Compensation

   We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the 1997 Stock Plan. Upon completion of this offering,
nonemployee directors will also be eligible to participate in our 1999
Directors' Stock Option Plan. See "--Incentive Stock Plans" for a description
of the 1997 Stock Plan and the 1999 Directors' Stock Option Plan.

                                       45
<PAGE>

Executive Compensation

   Summary Compensation. The following table sets forth the compensation
received for services rendered to Cerent for the year ended December 31, 1998
by our Chief Executive Officer and each of the other four most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the year ended December 31, 1998 (collectively, the "Named
Executive Officers").

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-Term
                                                                   Compensation
                                       Annual Compensation            Awards
                                ---------------------------------- ------------
                                                                    Securities
                                                    Other Annual    Underlying     All Other
Name and Principal Position(1)  Salary($) Bonus($) Compensation($)  Options(#)  Compensation($)
------------------------------  --------- -------- --------------- ------------ ---------------
<S>                             <C>       <C>      <C>             <C>          <C>
Carl Russo(2)...........        $111,537  $58,331      $54,912(3)   2,700,000          --
 President and Chief
  Executive Officer
Ajaib Bhadare...........        $159,858  $    --      $    --             --          --
 Vice President,
  Engineering
Terry Brown.............        $137,865  $48,500      $44,249(4)          --          --
 Vice President, Field
  Operations
Tom Corker..............        $111,538  $31,486      $    --        240,000          --
 Vice President, Product
  Marketing
Richard Roney...........        $ 20,192  $20,000      $53,966(5)     600,000          --
 Vice President,
  Operations
</TABLE>
---------------------
(1) Michael Ashby became employed by Cerent in July 1999, as Cerent's Chief
    Financial Officer at an annual base salary of $160,000, and a bonus of up
    to 25% of his base salary per year based on the achievement of business
    goals.
(2) Mr. Russo joined Cerent in April 1998. Prior to that, Vinod Khosla served
    as acting Chief Executive Officer.
(3) Represents interest payments made by Cerent on Carl Russo's behalf in
    connection with a loan obtained by Mr. Russo for the purchase of his home.
(4) Represents reimbursement for relocation and automobile expenses.
(5) Represents reimbursement for relocation expenses.

   Option Grants. The following table sets forth certain information with
respect to stock options granted to each of the Named Executive Officers in the
year ended December 31, 1998. In accordance with the rules of the Securities
and Exchange Commission, also shown below is the potential realizable value
over the term of the option (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts are based on certain assumed rates of appreciation and
do not represent our estimate of future stock price. Actual gains, if any, on
stock option exercises will depend on the future performance of the common
stock.
<TABLE>
<CAPTION>
                                                          Potential Realizable
                                                            Value at Assumed
                                                             Annual Rates of
                                                           Stock Appreciation
                           Individual Grants               For Option Term($)
               ------------------------------------------ ---------------------
                          % of Total
               Number of   Options
               Securities Granted to
               Underlying Employees  Exercise
                Options     During     Price   Expiration
Name           Granted(#) Period(1)  ($/share)    Date        5%        10%
----           ---------- ---------- --------- ---------- ---------- ----------
<S>            <C>        <C>        <C>       <C>        <C>        <C>
Carl Russo.... 2,700,000    39.3%     $0.1333     6/7/08  $  226,345 $  573,604
Ajaib
 Bhadare......        --       --          --         --          --         --
Terry Brown...        --       --          --         --          --         --
Tom Corker....   240,000     3.5%      0.6667   12/22/08     100,628    255,012
Richard
 Roney........   600,000     8.7%      0.2833   11/23/08     106,900    270,904
</TABLE>

                       Option Grants in Last Fiscal Year

---------------------
(1) Based on an aggregate of 6,876,000 options granted by Cerent during the
    year ended December 31, 1998 to our employees, including the Named
    Executive Officers.

                                       46
<PAGE>

(2) Options were granted at an exercise price equal to the fair market value of
    our common stock, as determined in good faith by our board of directors on
    the grant date based upon such factors as the purchase price paid by
    investors for shares of our preferred stock, the absence of a trading
    market for our securities and our financial outlook and results of
    operations.
(3) These stock options were granted under the 1997 Stock Plan and were
    immediately exercisable. The options granted to Carl Russo and Richard
    Roney were exercised prior to December 31, 1998. We retain the right to
    repurchase at cost any shares that remain unvested at the time of the
    officer's cessation of employment. The shares vest at a rate of 1/4th of
    the total number of shares on the first anniversary of the vesting
    commencement date, and 1/48th of the total number of shares monthly
    thereafter, as long as each continues to provide services to Cerent.
(4) The potential realizable value is based on the term of the option at its
    time of grant, which is ten (10) years, and assumes that the fair market
    value of our common stock on the date of grant appreciates at the indicated
    annual rate compounded annually for the entire term of the option and that
    the option is exercised and sold on the last day of its term for the
    appreciated stock price.

   Aggregate Option Exercises and Option Values. The following table provides
summary information with respect to our Named Executive Officers in 1998. As of
December 31, 1998, all options granted the Named Executive Officers were
granted under our 1997 Stock Plan, all were immediately exercisable. We retain
the right to repurchase at cost any shares that remain unvested at the time of
the officer's cessation of employment. The shares currently vest at a rate of
1/4th of the total number of shares on the first anniversary of the vesting
commencement date, and 1/48th of the total number of shares monthly thereafter,
as long as each continues to provide services to Cerent.

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

<TABLE>
<CAPTION>
                                                        Number of Securities
                                                       Underlying Unexercised     Value of Unexercised
                                                             Options at          In-the-Money Options at
                            Shares                      December 31, 1998 (#)   December 31, 1998 ($)(1)
                         Acquired on       Value      ------------------------- -------------------------
Name                     Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----                     ------------ --------------- ----------- ------------- ----------- -------------
<S>                      <C>          <C>             <C>         <C>           <C>         <C>
Carl Russo..............  2,700,000     $1,440,180           --         --           --           --
Ajaib Bhadare...........         --             --           --         --           --           --
Terry Brown.............         --             --           --         --           --           --
Tom Corker..............         --             --      240,000         --           --           --
Richard Roney...........    600,000        230,040           --         --           --           --
</TABLE>
---------------------
(1) Based on a value of $0.6667 per share, the fair market value of our common
    stock as of December 31, 1998 as determined by the board of directors,
    minus the per share exercise price, multiplied by the number of shares
    issued upon exercise of the option.

Stock Plans

   1999 Stock Plan. Our 1999 Stock Plan was adopted by the board of directors
in July 1999 and will be submitted for approval by our stockholders prior to
the completion of this offering. A total of 5,000,000 shares of common stock
has been reserved for issuance under the 1999 Stock Plan, all of which remain
available for future option grants. In addition, the number of shares reserved
under the plan will automatically be increased on the first day of each of our
fiscal years in 2000, 2001, 2002, 2003 and 2004 by an amount equal to the
lesser of (a) 15,000,000 shares, (b) six percent of the shares outstanding on
the last day of the preceding fiscal year or (c) a lesser number of shares as
is determined by the board of directors. The purposes of the 1999 Stock Plan
are to attract and retain the best available personnel to Cerent Corporation,
to provide additional incentives to our employees and consultants and to
promote the success of our business. Our board of directors intends to
determine from time to time whether it is necessary or advisable given our
hiring and growth expectations and the competitive factors affecting the
networking industry to allow the maximum or some lesser number of shares under
the above "evergreen" formula to become available for issuance under the 1999
Stock Plan.

                                       47
<PAGE>

   The 1999 Stock Plan provides for the grant of incentive stock options to
employees, including officers and directors, and nonstatutory stock options and
stock purchase rights to employees and consultants, including nonemployee
directors. If not terminated earlier, the 1999 Stock Plan will terminate in
July 2009.

   The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator determines the terms of options and
stock purchase rights granted under the 1999 Stock Plan, including the number
of shares subject to the award, exercise or purchase price, term and
exercisability. In no event, however, may an individual employee receive option
grants or stock purchase rights for more than 5,000,000 shares under the 1999
Stock Plan in any fiscal year.

   The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of any incentive stock option granted
to an optionee who owns stock representing more than 10% of the total combined
voting power of all classes of outstanding capital stock of Cerent or any
parent or subsidiary corporation of Cerent must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of a
nonstatutory stock option granted to our chief executive officer or one of our
other four most highly compensated officers will generally equal at least 100%
of the fair market value of the common stock on the date of grant. The exercise
prices of nonstatutory stock options granted to other persons will be specified
by the administrator at the time of grant. Payment of the exercise price may be
made in cash or other consideration as determined by the administrator.

   The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a 10%
stockholder. Generally, no option may be transferred by the optionee other than
by will or the laws of descent or distribution. However, the administrator may
in its discretion permit limited transferability of nonstatutory stock options
granted under the 1999 Stock Plan. The administrator determines when options
become exercisable. Options granted under the 1999 Stock Plan generally vest
over a four-year period at a rate of 1/4th of the total number of shares
subject to the option twelve months after the vesting commencement date and
1/4th of the total number of shares subject to the options each month
thereafter.

   In addition to stock options, the administrator may issue to employees,
directors and consultants stock purchase rights under the 1999 Stock Plan. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting Cerent an option to
repurchase the shares at cost upon termination of the recipient's relationship
with us. This repurchase right generally lapses on the same schedule as options
vest.

   If we sell all or substantially all of our assets, merge with another
corporation or engage in specified reorganizations, each outstanding option and
stock purchase right will be assumed or an equivalent option or stock purchase
right substituted by the successor corporation. However, if the successor
corporation does not agree to assume or substitute an option or stock purchase
right, then the option or stock purchase right will automatically terminate as
of the closing of the transaction. The administrator has the authority to amend
or terminate the 1999 Stock Plan as long as the amendment or termination does
not adversely affect any outstanding option or stock purchase right and
provided that stockholder approval shall be obtained to the extent it is
required by applicable law.

   1997 Stock Plan. Our 1997 Stock Plan was originally adopted by our board of
directors and stockholders in July 1997. The plan has been amended a number of
times since its adoption. Currently, a total of 18,477,000 shares of our common
stock have been reserved for issuance under the 1997 Stock Plan. As of June 30,
1999, options to purchase 459,875 shares of common stock were outstanding at a
weighted average exercise price of $3.24 per share, 16,590,788 shares had been
issued upon exercise of outstanding options, 1,936,122 shares of

                                       48
<PAGE>

which have been repurchased by Cerent pursuant to its repurchase rights,
1,426,337 shares remained available for future grant and no shares had been
issued pursuant to restricted stock purchase rights. We expect that following
the date of this offering we will make most of our option and stock purchase
right grants to employees and consultants from our 1999 Stock Plan.

   The purposes of the 1997 Stock Plan is to attract and retain the best
available personnel to Cerent Corporation, to provide additional incentives to
our employees and consultants and to promote the success of our business. The
plan provides for the grant of incentive stock options to employees, including
officers and directors, and nonstatutory stock options and stock purchase
rights to employees and consultants, including nonemployee directors. If not
terminated earlier, the 1997 Stock Plan will terminate in July 2007.

   The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. Prior to the date of this
offering, options granted under the 1997 Stock Plan allowed the optionee to
exercise the option immediately after its grant date, including with respect to
shares that were not yet vested. We have been given a repurchase right at the
optionee's exercise price with respect to any shares purchased upon exercise of
an option prior to its vesting. Our repurchase right lapses over the same
period of time as the vesting schedule that applied to the option prior to its
exercise.

   Similar to our 1999 Stock Plan, our 1997 Stock Plan imposes an annual
limitation on the number of shares that may be subject to options and stock
purchase rights granted to an individual employee during any one fiscal year of
5,000,000 shares.

   1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan was
adopted by the board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Directors' Stock Option Plan, all of which remain available for future grants.

   The 1999 Directors' Stock Option Plan provides for the grant of nonstatutory
stock options to nonemployee directors of Cerent. The 1999 Directors' Stock
Option Plan is designed to work automatically without administration; however,
to the extent administration is necessary, it will be performed by the board of
directors. To the extent they arise, it is expected that conflicts of interest
will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which the director has a personal
interest.

   The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director of Cerent after the effective date of this offering will
be granted a nonstatutory stock option to purchase 20,000 shares of common
stock on the date on which the optionee is first appointed or elected to our
board of directors. In addition, on the date of our annual stockholders meeting
each year, each nonemployee director will be granted an additional option to
purchase 10,000 shares of common stock if, on such date, he or she has served
on our board of directors for at least six months.

   The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum
number of shares for which options may be granted to any one nonemployee
director, but does specify the number of shares that may be included in any
grant and the method of making a grant. No option granted under the 1999
Directors' Stock Option Plan is transferable by the optionee other than by will
or the laws of descent or distribution or pursuant to a qualified domestic
relations order. Each option is exercisable, during the lifetime of the
optionee, only by the optionee or pursuant to a qualified domestic relations
order.

   The 1999 Directors' Stock Option Plan provides that all options granted
under this plan shall be fully exercisable as to 100% of the total number of
shares on the date of grant. If a nonemployee director ceases to serve as a
director of Cerent for any reason other than death or disability, he or she may
within 90 days after the date he or she ceases to be a director, exercise an
option granted under the 1999 Directors' Stock Option

                                       49
<PAGE>

Plan to the extent that he or she was entitled to exercise it at the date of
termination. The exercise price of all stock options granted under the 1999
Directors' Stock Option Plan shall be equal to the fair market value of a share
of our common stock on the date of grant of the option. Options granted under
the 1999 Directors' Stock Option Plan have a term of ten years.

   In the event that we are acquired by another company, each option
outstanding under the plan will terminate if not exercised prior to
consummation of the transaction, if the acquiring entity does not assume or
substitute the option. The board of directors may amend or terminate the 1999
Directors' Stock Option Plan at any time as long as such action does not
adversely affect any outstanding option and stockholder approval is obtained
for any amendment as required by applicable law. If not terminated earlier, the
1999 Directors' Stock Option Plan will have a term of ten years.

   1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was
adopted by our board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Employee Stock Purchase Plan. The number of shares reserved for issuance under
the 1999 Employee Stock Purchase Plan will automatically increase on the first
day of each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 by
an amount equal to the lesser of 500,000 shares, one percent of the total
shares outstanding on the last day of the immediately preceding fiscal year, or
a lesser number of shares as determined by the Board.

   The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000, with subsequent purchase periods ending on October 31,
2000, April 30, 2000 and October 31, 2001. The 1999 Employee Stock Purchase
Plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or
employees of any majority-owned subsidiary designated by the board, are
eligible to participate in the 1999 Employee Stock Purchase Plan if they are
employed by us or a subsidiary of ours for at least 20 hours per week and more
than five months per year. The 1999 Employee Stock Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
initially may not exceed 10% of an employee's base salary, commissions and
bonus. The purchase price is equal to the lower of 85% of the fair market value
of the common stock at the beginning of each offering period or at the end of
each purchase period. In circumstances specified in the 1999 Employee Stock
Purchase Plan, the purchase price may be adjusted during an offering period to
avoid our incurring adverse accounting charges. Employees may end their
participation in the 1999 Employee Stock Purchase Plan at any time during an
offering period, and participation ends automatically on termination of
employment.

   An employee cannot be granted an option under the 1999 Employee Stock
Purchase Plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equalling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee to purchase stock under
the 1999 Employee Stock Purchase Plan at a rate that exceeds $25,000 in fair
market value of stock for each calendar year in which the option is
outstanding. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 Employee Stock Purchase Plan in any one purchase
period. If the fair market value of the common stock on a purchase date is less
than the fair market value at the beginning of the offering period, each
participant in that offering period shall automatically be withdrawn from the
offering period as of the end of the purchase date and re-enrolled in the new
offering period beginning on the first business day following the purchase
date.


                                       50
<PAGE>

   If we are acquired by another company, each right to purchase stock under
the 1999 Employee Stock Purchase Plan will be assumed or an equivalent right
substituted by our successor corporation. However, the board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 Employee Stock Purchase Plan are exercised prior to the
transaction in the event that our successor corporation refuses to assume each
purchase right or to substitute an equivalent right of the acquiring
corporation. The board of directors has the power to amend or terminate the
1999 Employee Stock Purchase Plan and to change or terminate offering periods
as long as this action does not adversely affect any outstanding rights to
purchase stock thereunder. However, the board of directors may amend or
terminate the 1999 Employee Stock Purchase Plan or an offering period even if
it would adversely affect outstanding options in order to avoid our incurring
adverse accounting charges.

   401(k) Plan. Effective January 27, 1997, we adopted the Cerent 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by Cerent, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan, and so that contributions by Cerent, if any, will be deductible by Cerent
when made. Under the 401(k) plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1999)
and to have the amount of such reduction contributed to the 401(k) plan. The
401(k) plan permits, but does not require, additional matching contributions to
participants' 401(k) plan accounts by Cerent on behalf of all participants in
the 401(k) plan. To date, we have not made any matching contributions to the
401(k) plan.

Limitations on Liability and Indemnification

   Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

  . any breach of their duty of loyalty to the corporation or its
    stockholders;

  . acts or omissions not in good faith or which involve intentional
    misconduct or a knowing violation of law;

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions; or

  . any transaction from which the director derived an improper personal
    benefit.

   This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws provide that Cerent shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.

   We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer of
Cerent, any subsidiary of Cerent or any other company or enterprise to which
the person provides services at the request of Cerent. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.

                                       51
<PAGE>

                           RELATED PARTY TRANSACTIONS

   Some stock option grants to directors and executive officers of Cerent are
described under the caption "Management--Executive Compensation."

   Since our inception in January 1997, we have issued and sold shares of our
preferred stock as follows: an aggregate of 1,800,000 shares of Series A
preferred stock at $0.03 per share in March 1997, an aggregate of 3,286,668
shares of Series B preferred stock, and warrants to purchase an aggregate of
1,500,000 shares of Series B preferred stock, at $0.67 per share in April 1997,
an aggregate of 6,450,000 shares of Series C preferred stock, and warrants to
purchase an aggregate of 967,500 shares of Series C preferred stock, at $1.33
per share in August 1997, an aggregate of 9,165,051 shares of Series D
preferred stock at $1.43 per share in July 1998 and November 1998, an aggregate
of 12,288,972 shares of Series E preferred stock at $2.17 per share in November
1998 and May 1999. The following table summarizes the shares of common stock
and preferred stock purchased by our Chief Executive Officer and five-percent
stockholders and persons and entities associated with them in these
transactions:

<TABLE>
<CAPTION>
                                                         Series B            Series C
                                     Series A  Series B  Preferred Series C  Preferred Series D  Series E
                            Common   Preferred Preferred   Stock   Preferred   Stock   Preferred Preferred
Investor (1)                Stock      Stock     Stock   Warrants    Stock   Warrants    Stock     Stock
------------              ---------- --------- --------- --------- --------- --------- --------- ---------
<S>                       <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>
Carl Russo..............   2,700,000     --           --        --        --       --    179,550   573,528
Kleiner Perkins Caufield
 & Byers (2)............  13,333,332     --    3,166,668 1,500,000 1,500,000  225,000    697,674   600,000
Advanced Fibre
 Communications,
 Inc. (2)...............          --     --           --        -- 2,250,000  337,500    450,000   633,678
Norwest Venture
 Partners (2)...........          --     --           --        --        --       --  6,279,069 1,310,604
Cisco Systems (2).......          --     --           --        --        --       --         -- 6,000,000
</TABLE>
---------------------
(1) Shares held by affiliated persons and entities have been added together for
    the purposes of this chart. See "Principal Stockholders" for a chart of
    beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.

   In October 1998, Cerent entered into a technology license agreement with
Siara Systems, Inc. pursuant to which Cerent granted limited license rights to
Siara to use technology developed by Cerent related to two ASICs. Siara was
established in 1998 by former employees of Cerent and was initially financed by
Kleiner Perkins Caufield & Byers, which is a significant stockholder of Cerent.
Vinod Khosla, our chairman of the board of directors and a general partner of
Kleiner Perkins Caufield & Byers, and Promod Haque, a director of Cerent, are
also directors of Siara. In February 1999, Cerent and Siara entered into an
amendment and supplement to the technology license agreement pursuant to which
Siara agreed to pay Cerent $403,000 and a royalty of 2% of its gross revenues
resulting from sales of products incorporating the licensed technology, up to a
maximum of $500,000.

   On May 15, 1998, in connection with the hiring of Carl Russo as our
President and Chief Executive Officer, we entered into an agreement with Mr.
Russo pursuant to which we agreed to assist Mr. Russo in obtaining a line of
credit of up to $1.0 million and we agreed to pay the interest on this loan for
three years from the date of the loan. In July 1998, in connection with the
exercise of an option to purchase 2,700,000 shares of our common stock, we
loaned Mr. Russo $359,100 in exchange for a full-recourse promissory note which
bears interest at a rate of 5.6% per annum. The principal and interest under
this note become due and payable on the earlier of July 7, 2002 or the date of
termination of Mr. Russo's employment or consulting relationship with us.

                                       52
<PAGE>

   Mr. Russo purchased 179,550 shares of our Series D preferred stock in
November 1998 at $1.433 per share. Additionally, in May 1999, Mr. Russo
purchased 573,528 shares of our Series E preferred stock at $2.167 per share.
Mr. Russo paid an amount of $1,242,644 to us through the issuance of a full-
recourse promissory note, with an interest rate of 5.22% per annum, which is
secured by the Series E preferred stock held by Mr. Russo pursuant to the terms
of a security agreement. The principal and interest under this note become due
and payable on the earlier of May 17, 2004 or promptly upon the sale of shares
of Cerent's stock forming the security interest under the security agreement.

   To facilitate the exercise of stock options, we loaned the following
executive officers the following amounts in exchange for full-recourse
promissory notes: Michael Ashby--$2,599,600; Terry Brown--$24,875, and
$324,950; Tom Corker--$159,920; Scott Lester--$1,999,800; and Richard Roney--
$169,800. Each of these notes accrues interest at the minimum federal rate and
matures on the four-year anniversary of the date of issuance. The principal and
interest under these notes become due and payable on the earlier of their
respective maturity dates or the date of termination of the holder's
employment. These notes are secured by the stock purchased with the loaned
amounts.


   All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.

   We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification" for a description of the indemnification obligations.

                                       53
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 1999, by (a) each person or entity
who is known by us to own beneficially more than 5% of our outstanding common
stock, (b) each of the Named Executive Officers, (c) each of our directors and
(d) all directors and executive officers of Cerent as a group.

<TABLE>
<CAPTION>
Name and Address of                                  Percentage of Shares
Beneficial Owner          Number of Shares            Beneficially Owned
-------------------         Beneficially   ----------------------------------------
                             Owned (1)     Prior to the Offering After the Offering
                          ---------------- --------------------- ------------------
<S>                       <C>              <C>                   <C>
Kleiner Perkins Caufield
 & Byers (2)............     21,022,674            30.8%

Norwest Venture Partners
 VI, LP (3).............      7,589,673            11.4

Cisco Systems, Inc.
 (4)....................      6,000,000             9.0

Advanced Fibre
 Communications, Inc.
 (5)....................      3,671,178             5.5

Carl Russo (6)..........      3,453,078             5.2

Ajaib Bhadare (7).......      1,586,250             2.4

Terry Brown (8).........        525,000              *

Tom Corker (9)..........        435,000              *

Richard Roney (10)......        600,000              *

Vinod Khosla (11).......     21,022,674            30.8

Kevin Compton (12)......     21,022,674            30.8

Promod Haque (13).......      7,589,673            11.4

Donald Green (14).......      4,102,428             6.1

All directors and
 officers as a group
 (11 persons) (15)......     61,736,777            87.6
</TABLE>
---------------------
*Less than 1% of the outstanding shares of common stock.
(1) Applicable percentage ownership in the above table is based on 66,603,167
    shares of common stock outstanding as of June 30, 1999, as adjusted to
    reflect the conversion of all outstanding shares of preferred stock into
    common stock upon the closing of this offering and as adjusted to reflect
    the sale of common stock offered hereby. Beneficial ownership is determined
    in accordance with the rules of the Securities and Exchange Commission. In
    computing the number of shares beneficially owned by a person and the
    percentage ownership of that person, shares of common stock subject to
    options or warrants held by that person that are currently exercisable or
    will become exercisable within 60 days after June 30, 1999 are deemed
    outstanding, while such shares are not deemed outstanding for purposes of
    computing percentage ownership of any other person. To our knowledge and
    except as otherwise indicated, we believe that the beneficial owners of the
    common stock listed above, based on information furnished by such owners,
    have sole voting power and investment power with respect to such shares,
    subject to community property laws where applicable. Unless otherwise
    indicated, the address for each stockholder listed in the table is c/o
    Cerent Corporation, 1450 North McDowell Blvd., Petaluma, California 94954.
(2) Represents 17,785,860 shares held by Kleiner Perkins Caufield & Byers VIII,
    1,029,372 shares held by KPCB VIII Founders Fund, 482,442 shares held by
    KPCB Information Sciences Zaibatsu Fund II, warrants to purchase 1,589,868
    shares of common stock held by Kleiner Perkins Caufield & Byers VIII,
    warrants to purchase 92,007 shares of common stock held by KPCB VIII
    Founders Fund and warrants to

                                       54
<PAGE>

    purchase 43,125 shares of common stock held by KPCB Information Sciences
    Zaibatsu Fund II. The address of these stockholders is 2750 Sand Hill
    Road, Menlo Park, California 94025.
(3) Norwest Venture Partners VI, LP is located at 245 Lytton Avenue, Suite
    250, Palo Alto, California 94301.
(4) Cisco Systems, Inc. is located at 170 West Tasman Drive, San Jose,
    California 95134.
(5) Represents 3,333,678 shares and a warrant to purchase 337,500 shares of
    common stock. Advanced Fibre Communications, Inc. is located at One Willow
    Brook Court, Petaluma, California 94954.
(6) Includes 2,700,000 shares subject to a stock pledge agreement in favor of
    Cerent, 1,968,750 of which are subject to our right to repurchase at cost
    upon cessation of employment. Also includes 573,528 shares subject to a
    security agreement in favor of Cerent.
(7) Includes a warrant to purchase 11,250 shares of common stock and 437,719
    shares which are subject to our right to repurchase at cost upon cessation
    of employment.
(8) The shares listed are subject to stock pledge agreements in favor of
    Cerent, 345,313 of which are subject to our right to repurchase at cost
    upon cessation of employment.
(9) Includes 240,000 shares subject to a stock pledge agreement in favor of
    Cerent, 125,000 of which are subject to our right to repurchase at cost
    upon cessation of employment. Also includes 101,563 shares subject to our
    right to repurchase at cost upon cessation of employment
(10) The shares listed are subject to a stock pledge agreement in favor of
     Cerent, all of which are subject to our right to repurchase at cost upon
     cessation of employment.
(11) Mr. Khosla is a general partner of KPCB VIII Associates, LP. which is the
     general partner of Kleiner Perkins Caufield & Byers VIII and KPCB VIII
     Founders Fund. Mr. Khosla is also a general partner of KPCB VII
     Associates, L.P., which is the general partner of KPCB Information
     Sciences Zaibatsu Fund II. Mr. Khosla's address is c/o Kleiner Perkins
     Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
     shares listed represent 17,785,860 shares held by Kleiner Perkins
     Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
     482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
     warrants to purchase 1,589,868 shares of common stock held by Kleiner
     Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
     common stock held by KPCB VIII Founders Fund and warrants to purchase
     43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
     Fund II. Mr. Khosla disclaims beneficial ownership of these shares,
     except to the extent of his pecuniary interest therein.
(12) Mr. Compton is a general partner of KPCB VIII Associates, L.P., which is
     the general partner of Kleiner Perkins Caufield & Byers VIII and KPCB
     VIII Founders Fund. Mr. Compton is also a general partner of KPCB VII
     Associates, L.P. which is the general partner of KPCB Information
     Services Zaibatsu Fund II. Mr. Compton's address is c/o Kleiner Perkins
     Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
     shares listed represent 17,785,860 shares held by Kleiner Perkins
     Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
     482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
     warrants to purchase 1,589,868 shares of common stock held by Kleiner
     Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
     common stock held by KPCB VIII Founders Fund and warrants to purchase
     43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
     Fund II. Mr. Kompton disclaims beneficial ownership of these shares,
     except to the extent of his pecuniary interest therein.
(13) Mr. Haque is a partner of Itasca VC Partners VI, LLP, the general partner
     of Norwest Venture Partners VI. The shares listed represent shares held
     by Norwest Venture Partners VI. Mr. Haque disclaims beneficial ownership
     of these shares, except to the extent of his pecuniary interest therein.
     Mr. Haque's address is c/o Norwest Venture Partners, 245 Lytton Avenue,
     Suite 250, Palo Alto, California 94301.
(14) Mr. Green is the Chairman of the Board and a director of Advanced Fibre
     Communications, Inc. The shares listed represent 3,333,678 shares held by
     Advanced Fibre Communications, Inc. and a warrant to purchase 337,500
     shares of common stock held by Advanced Fibre Communications, Inc. Mr.
     Green disclaims beneficial ownership of these shares, except to the
     extent of his pecuniary interest therein. Also includes 375,000 shares
     held in Mr. Green's retirement account and a warrant to purchase 56,250
     shares of common stock held in Mr. Green's retirement account. Mr.
     Green's address is c/o Advanced Fibre Communications, Inc., One Willow
     Brook Court, Petaluma, California 94954.

                                      55
<PAGE>

(15) See footnotes (1) through (14). Also includes shares beneficially owned by
     certain officers who joined Cerent subsequent to June 30, 1999.

                                       56
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon completion of this offering, we will be authorized to issue 300,000,000
shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock is not complete and is qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.

Common Stock

   As of June 30, 1999, there were 66,603,167 shares of common stock
outstanding that were held of record by approximately 250 stockholders after
giving pro-forma effect to the conversion of our preferred stock into common
stock at a one-to-one ratio and assuming no exercise or conversion of
outstanding convertible securities after June 30, 1999. There will be
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise or conversion of outstanding convertible
securities after June 30, 1999) after giving effect to the sale of the shares
of common stock offered hereby.

   The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Cerent, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued upon the closing of this offering will be fully paid and
nonassessable.

   On July 20, 1999, Cerent entered into a convertible note purchase agreement
with certain entities affiliated with MSD Capital, L.P., the private investment
firm for Michael S. Dell. Pursuant to this agreement, Cerent issued $30,000,000
of convertible notes, which will be automatically convertible into shares of
Cerent's common stock upon completion of the initial public offering. In
connection with the sale of the convertible notes, the investors were granted
certain other rights, including registration rights with respect to the shares
issuable upon the conversion of the convertible notes.

Preferred Stock

   Effective upon the closing of this offering, the board of directors will
have the authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among
other things, restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
and delaying or preventing a change in control of Cerent without further action
by the stockholders. We have no present plans to issue any shares of preferred
stock.

Warrants

   As of June 30, 1999, we had warrants outstanding that, following the
completion of this offering, will be exercisable for up to an aggregate of
4,014,618 shares of common stock including 393,702 shares reserved for issuance
in connection with drawdowns on a credit line. In addition, as of June 30,
1999, we also had warrants outstanding to purchase an aggregate of 967,500
shares of Series C convertible preferred stock that, to the extent not
exercised, will expire upon the completion of this offering.

                                       57
<PAGE>

Registration Rights of Certain Holders

   The holders of 49,193,898 shares of common stock, 4,982,118 shares issuable
upon exercise of warrants and      shares to be issued upon automatic
conversion of convertible promissory notes, assuming an initial public offering
price of $   per share (the "registrable securities"), or their permitted
transferees, are entitled to certain rights with respect to registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between Cerent and the holders of registrable securities. Under
these registration rights, beginning on the earlier of August 15, 2002, or six
months after the effective date of the offering contemplated by this
prospectus, holders of at least 51% of the then-outstanding registrable
securities may require on two occasions that Cerent register at least 30% of
the registrable securities then outstanding for public resale. In addition,
holders of at least 30% of the then-outstanding registrable securities may
require that we register their shares for public resale on Form S-3 or similar
short-form registration, provided we are eligible to use Form S-3 or similar
short-form registration statement and provided further that the value of the
securities to be registered is at least $500,000. Furthermore, in the event
Cerent elects to register any of its shares of common stock for purposes of
effecting any public offering, the holders of registrable securities are
entitled to include their shares of common stock in the registration, subject
however to our right to reduce the number of shares proposed to be registered
in view of market conditions. All expenses in connection with any registration
(other than underwriting discounts and commissions) will be borne by us. All
registration rights will terminate five years after the date of this public
offering or, with respect to each holder of registrable securities, at such
time as the holder is entitled to sell all of its shares in any three month
period under Rule 144 of the Securities Act or another similar exemption.

Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

   Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of Cerent by a third party and the
removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of Cerent to first negotiate with us. We believe that the benefits of
increased protection of our ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Cerent outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.

   We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

  . the board of directors approved the transaction in which such stockholder
    became an interested stockholder prior to the date the interested
    stockholder attained such status;

  . upon consummation of the transaction that resulted in the stockholder's
    becoming an interested stockholder, he or she owned at least 85% of the
    voting stock of the corporation outstanding at the time the transaction
    commenced, excluding shares owned by persons who are directors and also
    officers; or

  . on or subsequent to such date the business combination is approved by the
    board of directors and authorized by 66 2/3% vote at an annual or special
    meeting or stockholders.

   A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.

                                       58
<PAGE>

   Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Cerent. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Cerent.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation. The transfer agent's address is 1745 Gardena Avenue, 2nd Floor,
Glendale, CA 91204, and its telephone number is (818) 502-1404.

Listing

   We have applied to list our common stock on The Nasdaq National Market under
the trading symbol "CERE."

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.

   Upon completion of this offering and based on shares outstanding at June 30,
1999, we will have outstanding           shares of common stock. Of these
shares, all the shares sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.

   The remaining       shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below.

   Our directors, officers and stockholders have entered into lock-up
agreements with the underwriters of this offering generally providing that they
will not offer, sell, contract to sell, pledge or otherwise dispose of our
shares of common stock or any securities exercisable for or convertible into
our common stock owned by them prior to this offering for a period of 180 days
after the date of this offering without the prior written consent of Credit
Suisse First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by Credit Suisse First Boston
Corporation. Taking into account the lock-up agreements, and assuming Credit
Suisse First Boston Corporation does not release stockholders from these
agreements prior to the expiration of the 180 day lock-up period, the following
shares will be eligible for sale in the public market at the following times:

  . Beginning on the effective date of the registration statement, only the
         shares sold in this offering, will be immediately available for sale
    in the public market;


                                       59
<PAGE>

  . Beginning 180 days after the effective date,           additional shares
    will become eligible for sale under Rule 701, Rule 144 and Rule 144(k),
    subject to volume restrictions as described below, of which all but
               shares are held by affiliates;

  . An additional           shares will be eligible for sale pursuant to Rule
    701 at various times beginning 180 days after the effective date when
    these shares are released from our repurchase option with respect to
    these shares, of which, all but           shares are held by affiliates;
    and

  . An additional 573,528 shares will be eligible for sale pursuant to Rule
    144 in May 2000, and an additional 6,000 shares will be eligible for sale
    pursuant to Rule 144 in June 2000.

   In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:

  . 1% of the number of shares of common stock then outstanding, which will
    equal approximately      shares immediately after this offering; or

  . the average weekly trading volume of our common stock during the four
    calendar weeks preceding the filing of a Form 144 with respect to such
    sale.

Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
Cerent. Under Rule 144(k), a person who is not deemed to have been an affiliate
of Cerent at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

   Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors, or consultant who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, we intend to file
registration statements under the Securities Act as promptly as possible after
the completion of this offering to register approximately 7,886,212 shares to
be issued pursuant to our employee benefit plans. As a result, any options or
rights exercise under the 1997 Stock Plan, the 1999 Employee Stock Purchase
Plan or the 1999 Directors' Stock Option Plan after the effectiveness of the
registration statements will be available for sale in the public market 180
days after the effective date of this offering upon the expiration of lock-up
agreements. However, such shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of June
30, 1999, there were outstanding options for the purchase of 459,875 shares of
our common stock under the 1997 stock Plan and 1,426,337 shares were available
for future grant.

   Also beginning 6 months after the date of this offering, holders of
           restricted shares and certain holders of warrants to purchase
          shares of common stock will be entitled to certain registration
rights. See "Description of Capital Stock--Registration Rights." Registration
of such shares under the Securities Act would result in such shares becoming
freely tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.

                                       60
<PAGE>

                                  UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated   , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
and Warburg Dillon Read LLC are acting as representatives, the following
respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                        Number
          Underwriter                                                  of Shares
          -----------                                                  ---------
     <S>                                                               <C>
     Credit Suisse First Boston Corporation...........................
     BancBoston Robertson Stephens Inc................................
     Dain Rauscher Wessels............................................
     Warburg Dillon Read LLC..........................................
                                                                          ---
       Total..........................................................
                                                                          ===
</TABLE>

   The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to       additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $     per share. The
underwriters and selling group members may allow a discount of $     per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
                                    Per Share                       Total
                          ----------------------------- -----------------------------
                             Without          With         Without          With
                          Over-allotment Over-allotment Over-allotment Over-allotment
                          -------------- -------------- -------------- --------------
<S>                       <C>            <C>            <C>            <C>
Underwriting discounts
 and commissions payable
 by us..................       $              $              $              $
Expenses payable by us..       $              $              $              $
</TABLE>

   The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

   We, our officers and directors and our stockholders have agreed that we and
they will not offer, sell, contract to sell, announce an intention to sell,
pledge or directly or indirectly dispose of, or file with the Commission a
registration statement under the Securities Act relating to, any additional
shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus.


                                       61
<PAGE>

   We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.

   We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "CERE."

   Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between us
and the underwriters. The principal factors to be considered in determining the
public offering price include:

  . the information set forth in this prospectus and otherwise available to
    the underwriters;

  . the history and the prospects for the industry in which we will compete;

  . the ability of our management;

  . the prospects for our future earnings;

  . the present state of our development and our current financial condition;

  . the general condition of the securities markets at the time of this
    offering; and

  . the recent market prices of, and the demand for, publicly traded common
    stock of generally comparable companies.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.

  . Over-allotment involves syndicate sales in excess of the offering size,
    which creates a syndicate short position.

  . Syndicate covering transactions involve purchases of the common stock in
    the open market after the distribution has been completed to cover
    syndicate short positions.

  . Penalty bids permit the representatives to reclaim a selling concession
    from a syndicate member when the common stock originally sold by the
    syndicate member are purchased in a syndicate covering transaction to
    cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market and, if commenced, may be discontinued
at any time.

                                       62
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission of rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that a purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility of Investment

   Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

                                 LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for
Cerent by Venture Law Group, A Professional Corporation, Menlo Park,
California. Joshua L. Green, a director of Venture Law Group, is the

                                       63
<PAGE>

Secretary of Cerent. Legal matters in connection with this offering will be
passed upon for the underwriters by Wilson Sonsini Goodrich and Rosati,
Professional Corporation, Palo Alto, California. As of the date of this
prospectus, an investment partnership associated with Venture Law Group owns an
aggregate of 37,500 shares of our common stock, and one director of Venture Law
Group beneficially owns 7,500 shares of our common stock.

                                    EXPERTS

   The consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (January 27, 1997) through December 31, 1997 and for
the year ended December 31, 1998 included in this prospectus and in the related
financial statement schedule included elsewhere in the registration statement,
have been included in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

                       CHANGE IN INDEPENDENT ACCOUNTANTS

   Effective June 17, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our Board of Directors on June 17, 1999. Prior to June 17, 1999, our former
auditors issued a report on the period from inception (January 27, 1997) to
December 31, 1997. The report of our former auditors did not contain an adverse
opinion or disclaimer of opinion qualified or modified as to audit scope or
accounting principle. The auditor's opinion did contain an uncertainty as to
substantial doubt regarding the Company's ability to continue as a going
concern. In connection with the audit for the period from inception (January
27, 1997) through December 31, 1997 and through June 17, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former auditors,
would have caused them to make reference thereto in their report. Our former
auditors have not audited or reported on any of the financial statements or
information included in this prospectus. Prior to June 17, 1999, we had not
consulted with Ernst & Young LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our financial
statements. We have requested that our former auditors furnish us with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of this letter is filed as an exhibit to the registration
statement of which this prospectus forms a part.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to Cerent and such
common stock, we refer you to the registration statement and to the exhibits
and schedules filed therewith. Statements contained in this prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.

                                       64
<PAGE>

                       CONSOLIDATED FINANCIAL STATEMENTS

                               CERENT CORPORATION

                                    CONTENTS

<TABLE>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2

Audited Consolidated Financial Statements
  Consolidated Balance Sheets............................................... F-3
  Consolidated Statements of Operations..................................... F-4
  Consolidated Statements of Stockholders' Equity........................... F-5
  Consolidated Statements of Cash Flows..................................... F-6
  Notes to Consolidated Financial Statements................................ F-7
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Cerent Corporation

   We have audited the accompanying consolidated balance sheets of Cerent
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from January 27, 1997 (inception) through December 31, 1997 and for the year
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position
of Cerent Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the period from January 27,
1997 (inception) through December 31, 1997 and for the year ended December 31,
1998, in conformity with generally accepted accounting principles.

                                          /s/ Ernst & Young LLP

Walnut Creek, California
July 19, 1999, except for Note 9, as to which the date is
September   , 1999

                                      F-2
<PAGE>

                               CERENT CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                      (in thousands except par value data)

<TABLE>
<CAPTION>
                                                                    Pro Forma
                                                                  Stockholders'
                                     December 31,                   Equity at
                                   -----------------   June 30,     June 30,
                                    1997      1998       1999         1999
                                   -------  --------  ----------- -------------
                                                      (unaudited)  (unaudited)
<S>                                <C>      <C>       <C>         <C>
              ASSETS
Current assets:
  Cash and cash equivalents....... $ 6,758  $ 22,245   $  5,794
  Accounts receivable, net of
   allowance for doubtful accounts
   of $0 at December 31, 1998 and
   $200 at June 30, 1999..........      --       231      5,827
  Inventories.....................      --     2,013      4,418
  Prepaid expenses and other
   current assets.................     338       785        557
                                   -------  --------   --------
Total current assets..............   7,096    25,274     16,596
Property and equipment, net.......   3,003     5,996     14,179
Other assets......................      44       607      2,853
                                   -------  --------   --------
Total assets...................... $10,143  $ 31,877   $ 33,628
                                   =======  ========   ========
  LIABILITIES AND STOCKHOLDERS'
              EQUITY
Current liabilities:
  Accounts payable................ $   526  $  3,481   $  8,676
  Accrued compensation and related
   liabilities....................     167       210      1,046
  Accrued expenses................     144       800      1,601
  Current portion of long-term
   debt...........................   1,391     2,272      3,820
                                   -------  --------   --------
Total current liabilities.........   2,228     6,763     15,143
Long-term debt, net of discount...   3,718     4,229      5,001
                                   -------  --------   --------
Total liabilities.................   5,946    10,992     20,144
Commitments
Stockholders' equity:
  Convertible preferred stock,
   $0.00033 par value, issuable in
   series: 19,570, 37,597 and
   37,709 shares authorized at
   December 31, 1997 and 1998 and
   June 30, 1999, respectively
   (10,000 shares pro forma);
   11,537, 32,417 and 32,991
   shares issued and outstanding
   at December 31, 1997 and 1998
   and June 30, 1999, respectively
   (none pro forma); aggregate
   liquidation preference of
   $50,614 at June 30, 1999 (none
   pro forma).....................  11,124    49,878     64,989     $     --
  Common stock, $0.00033 par
   value, 67,986 shares authorized
   at December 31, 1997 and 1998
   and 150,000 shares authorized
   at June 30, 1999 (300,000
   shares pro forma); 25,194,
   28,744 and 33,612 shares issued
   and outstanding at December 31,
   1997 and 1998 and June 30,
   1999, respectively (66,603
   shares pro forma)..............   1,247     4,905     55,868      120,857
  Notes receivable from
   stockholders...................    (316)   (1,023)   (11,891)     (11,891)
  Deferred stock compensation.....      --    (2,467)   (35,770)     (35,770)
  Accumulated deficit.............  (7,858)  (30,408)   (59,712)     (59,712)
                                   -------  --------   --------     --------
Total stockholders' equity........   4,197    20,885     13,484     $ 13,484
                                   -------  --------   --------     ========
Total liabilities and
 stockholders' equity............. $10,143  $ 31,877   $ 33,628
                                   =======  ========   ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                               CERENT CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands except per share amounts)

<TABLE>
<CAPTION>
                            Period from
                            January 27,                 Six Months Ended
                          1997 (inception)  Year Ended      June 30,
                          to December 31,  December 31, -----------------
                                1997           1998      1998      1999
                          ---------------- ------------ -------  --------
                                                          (unaudited)
<S>                       <C>              <C>          <C>      <C>       <C> <C>
Revenue.................      $    --        $    220   $    --  $  9,917
Cost of revenue.........           --           1,061        --     7,943
                              -------        --------   -------  --------
Gross profit (loss).....           --            (841)       --     1,974
Operating expenses:
  Research and
   development..........        5,159          15,553     6,723     8,792
  Selling, general and
   administrative.......        2,470           5,039     1,673    10,251
  Stock compensation....           --             510        --    10,800
                              -------        --------   -------  --------
Total operating
 expenses...............        7,629          21,102     8,396    29,843
                              -------        --------   -------  --------
Operating loss..........       (7,629)        (21,943)   (8,396)  (27,869)
Interest income.........          122             249        91       197
Interest expense........         (351)           (749)     (394)   (1,471)
Other income (expense)..           --            (107)       35      (161)
                              -------        --------   -------  --------
Net loss................      $(7,858)       $(22,550)  $(8,664) $(29,304)
                              =======        ========   =======  ========
Basic and diluted net
 loss per share.........      $ (0.82)       $  (1.33)  $ (0.57) $  (1.36)
                              =======        ========   =======  ========
Shares used in computing
 basic and diluted net
 loss per share.........        9,535          16,901    15,091    21,470
                              =======        ========   =======  ========
Pro forma basic and
 diluted net loss per
 share (unaudited)......                     $  (0.67)           $  (0.54)
                                             ========            ========
Shares used in computing
 pro forma basic and
 diluted net loss per
 share (unaudited)......                       33,850              54,026
                                             ========            ========
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                               CERENT CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                            Convertible                        Notes
                          Preferred Stock  Common Stock      Receivable    Deferred                   Total
                          --------------- ----------------      from        Stock     Accumulated Stockholders'
                          Shares  Amount  Shares   Amount   Stockholders Compensation   Deficit      Equity
                          ------ -------- ------  --------  ------------ ------------ ----------- -------------
<S>                       <C>    <C>      <C>     <C>       <C>          <C>          <C>         <C>
Issuance of common stock
 to founders............     --  $     --  8,073  $      2   $      --    $      --    $      --    $      2
Issuance of Series A
 convertible preferred
 stock, net of issuance
 costs..................   1,800       60    --        --          --           --           --           60
Issuance of Series B
 convertible preferred
 stock, net of issuance
 costs..................   3,287    2,167    --        --          --           --           --        2,167
Issuance of warrants to
 purchase Series B and C
 convertible preferred
 stock..................     --       338    --        --          --           --           --          338
Issuance of Series C
 convertible preferred
 stock, net of issuance
 costs..................   6,450    8,559    --        --          --           --           --        8,559
Issuance of common stock
 to third-party.........     --       --  13,333       890         --           --           --          890
Exercise of stock
 options by employees...     --       --   4,881       363        (316)         --           --           47
Repurchase of common
 stock from employees
 and founders...........     --       --  (1,093)       (8)        --           --           --           (8)
Net loss and
 comprehensive loss.....     --       --     --        --          --           --        (7,858)     (7,858)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances of December 31,
 1997...................  11,537   11,124 25,194     1,247        (316)         --        (7,858)      4,197
Issuance of Series D
 convertible preferred
 stock, net of issuance
 costs..................   9,165   13,277    --        --          --           --           --       13,277
Issuance of warrants to
 purchase Series D
 convertible preferred
 stock..................     --       163    --        --          --           --           --          163
Issuance of Series E
 convertible preferred
 stock, net of issuance
 costs..................  11,715   25,314    --        --          --           --           --       25,314
Exercise of stock
 options by employees...     --       --   6,827     1,010        (707)         --           --          303
Repurchase of common
 stock from employees
 and founders...........     --       --  (3,277)     (151)        --           --           --         (151)
Deferred stock
 compensation...........     --       --     --      2,799         --        (2,799)         --          --
Amortization of deferred
 stock compensation.....     --       --     --        --          --           332          --          332
Net loss and
 comprehensive loss.....     --       --     --        --          --           --       (22,550)    (22,550)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances of December 31,
 1998...................  32,417   49,878 28,744     4,905      (1,023)      (2,467)     (30,408)     20,885
Issuance of Series E
 convertible preferred
 stock, net of issuance
 costs (unaudited)......     574    6,300    --        --       (1,243)         --           --        5,057
Issuance of warrants to
 purchase Series D and E
 convertible preferred
 stock (unaudited)......     --     8,811    --        --          --           --           --        8,811
Issuance of warrants to
 purchase common stock
 (unaudited)............     --       --     --      2,350         --           --           --        2,350
Exercise of stock
 options by employees
 (unaudited)............     --       --   4,889     9,646      (9,625)         --           --           21
Repurchase of common
 stock from employees
 (unaudited)............     --       --     (21)       (1)        --           --           --           (1)
Deferred stock
 compensation
 (unaudited)............     --       --     --     38,968         --       (38,968)         --          --
Amortization of deferred
 stock compensation
 (unaudited)............     --       --     --        --          --         5,665          --        5,665
Net loss and
 comprehensive loss
 (unaudited)............     --       --     --        --          --           --       (29,304)    (29,304)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances at June 30,
 1999 (unaudited).......  32,991 $ 64,989 33,612  $ 55,868   $ (11,891)   $ (35,770)   $ (59,712)   $ 13,484
                          ====== ======== ======  ========   =========    =========    =========    ========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                               CERENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                  Period from
                                  January 27,                 Six Months Ended
                                1997 (inception)  Year Ended      June 30
                                to December 31,  December 31, -----------------
                                      1997           1998      1998      1999
                                ---------------- ------------ -------  --------
                                                                (unaudited)
<S>                             <C>              <C>          <C>      <C>
Operating activities
 Net loss.....................      $(7,858)       $(22,550)  $(8,664) $(29,304)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities:
 Depreciation and
  amortization................          563           1,670       758     1,116
 Amortization of discount on
  long-term debt related to
  issuance of warrants........           76             139        --     1,041
 Stock compensation...........           --             510        --    16,800
 Loss on sale of property and
  equipment...................           --              56        --        --
 Changes in operating assets
  and liabilities:
  Accounts receivable.........           --            (231)      (21)   (5,596)
  Inventories.................           --          (2,013)       --    (2,405)
  Prepaid expenses and other
   current assets.............         (338)           (447)       61       228
  Other assets................          (44)           (563)     (322)      (26)
  Accounts payable............          526           2,955     1,295     5,195
  Accrued compensation and
   related liabilities........          167              43      (167)      836
  Accrued expenses............          144             656      (144)      801
                                    -------        --------   -------  --------
Net cash used in operating
 activities...................       (6,764)        (19,775)   (7,204)  (17,314)
Investing activities
 Purchases of property and
  equipment...................       (3,566)         (4,312)   (2,541)   (9,299)
 Proceeds from sale of
  property and equipment......           --              87        --        25
                                    -------        --------   -------  --------
Net cash used in investing
 activities...................       (3,566)         (4,225)   (2,541)   (9,274)
Financing activities
 Proceeds from issuance of
  preferred stock.............       10,786          38,413        --        --
 Proceeds from issuance of
  common stock................          937             303       822        20
 Repurchase of common stock
  from employees..............           (8)           (151)      (76)       --
 Proceeds from issuance of
  long-term debt..............        5,640           2,632     2,979    11,824
 Payments on long-term debt...         (267)         (1,710)       --    (1,707)
                                    -------        --------   -------  --------
Net cash provided by financing
 activities...................       17,088          39,487     3,725    10,137
                                    -------        --------   -------  --------
Net increase (decrease) in
 cash and cash equivalents....        6,758          15,487    (6,020)  (16,451)
Cash and cash equivalents at
 beginning of period..........           --           6,758     6,758    22,245
                                    -------        --------   -------  --------
Cash and cash equivalents at
 end of period................      $ 6,758        $ 22,245   $   738  $  5,794
                                    =======        ========   =======  ========
Supplemental disclosures of
 cash flow information
 Cash paid for interest.......      $   204        $    610   $   302  $    442
                                    =======        ========   =======  ========
Noncash financing activities
 Acquisition of equipment
  under capital leases........      $    --        $    351   $    --  $     --
                                    =======        ========   =======  ========
 Warrants issued in connection
  with long-term debt
  agreements and customer
  commitments.................      $   338        $    163   $    --  $ 11,161
                                    =======        ========   =======  ========
 Employee notes issued in
  exchange for the exercise of
  stock options and
  convertible preferred
  stock.......................      $   316        $    707   $    58  $ 10,868
                                    =======        ========   =======  ========
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                               CERENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

1. Organization and Summary of Significant Accounting Policies

 The Company

   The Company was incorporated on January 27, 1997 as Fiberlane
Communications, Inc. in Petaluma, California, under the laws of the State of
Delaware. The Company subsequently changed its name to Cerent Corporation (the
Company).

   The Company develops and delivers a multi-service optical transport platform
designed to lower network operating costs and increase the efficiency of
bandwidth delivery within today's transport networks. The Company was in the
development stage until December 1998, when sales of its sole product, the
Cerent 454, commenced. The Company's target market includes emerging inter-
exchange carriers, the local exchange carriers, independent carriers and cable
companies. The Company markets its products through direct sales.

 Unaudited Interim Financial Information

   The accompanying consolidated financial statements as of June 30, 1999 and
for the six months ended June 30, 1998 and 1999 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its consolidated financial
position, operating results, and cash flows for the interim date and periods
presented. Results for the six months ended June 30, 1999 are not necessarily
indicative of results for the entire fiscal year or future periods.

 Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.

 Use of Estimates

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

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market accounts at December 31, 1998 and 1997.

 Concentrations of Credit Risk and Credit Risk Evaluations

   Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, trade accounts
receivable and long-term debt. The Company maintains its demand deposit
accounts and its money market accounts primarily with one financial
institution. The Company has partially financed its operations through long-
term debt issuance through a lending institution. The Company generally does
not require collateral for sales to customers. The Company maintains reserves
for potential credit losses. For the year ended December 31, 1998, one customer
accounted for 62% and a second customer accounted for 38% of the Company's
revenue. No customer accounted for more than 10% of the Company's revenue for
the six months ended June 30, 1999.

                                      F-7
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


 Suppliers

   The Company receives certain custom semi-conductor chips from two sole
sources. Additionally, the Company relies on one hardware manufacturer for the
production of its product and does not have an internal manufacturing facility.
The inability of the supplier or manufacturer to fulfill supply requirements of
the Company could negatively impact future results.

 Inventories

   Inventories consist of raw materials, work-in-process and finished products.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method. Finished products principally consist of items shipped to
customers that are subject to completion of obligations or customer acceptance.

 Property and Equipment

   Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three years, or
the lease term of the respective assets.

 Software Development Costs

   The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" (FAS 86) under
which certain development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. To date, the Company has not capitalized any
development costs related to software products, as the costs incurred
subsequent to the establishment of technological feasibility have not been
significant and all software development costs have been charged to product
development expense in the accompanying consolidated statements of operations.

 Revenue Recognition

   The Company generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless the Company has future
obligations or is required to obtain customer acceptance, in which cases
revenue is deferred until these obligations are met.

 Warranty Obligations

   The Company's products generally carry a three-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses for
warranty obligations are accrued as revenue is recognized.

 Income Taxes

   The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

 Research and Development

   Costs to develop the Company's products are expensed as incurred in
accordance with Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," (FAS 2) which establishes accounting and
reporting standards for research and development.


                                      F-8
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

 Other Comprehensive Income

   The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the period ended December 31, 1997 and the
year ended December 31, 1998 does not differ from the reported net loss.

 Stock-Based Compensation

   The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and has elected to follow
the "disclosure only" alternative prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).

 Fair Value of Financial Instruments

   The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms, degrees
of risk, and remaining maturities. The carrying values of these obligations
approximate their fair values.

 Net Loss Per Share

   Basic net loss per share and diluted net loss per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period, less
the weighted average number of shares of common stock issued to founders,
investors and employees that are subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the consolidated statements of
operations, have been computed as described above and also give effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance, using an assumed initial public offering price of $    per
share to calculate the conversion ratio for convertible preferred stock.

                                      F-9
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


   The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                 Period from
                                 January 27,                 Six Months Ended
                               1997 (inception)  Year Ended      June 30,
                               to December 31,  December 31, -----------------
                                     1997           1998      1998      1999
                               ---------------- ------------ -------  --------
                                                               (unaudited)
   <S>                         <C>              <C>          <C>      <C>
   Historical:
     Net loss.................     $(7,858)       $(22,550)  $(8,664) $(29,304)
                                   =======        ========   =======  ========
     Weighted-average shares
      used in computing basic
      and diluted net loss per
      share...................       9,535          16,901    15,091    21,470
                                   =======        ========   =======  ========
     Basic and diluted net
      loss per share..........     $ (0.82)       $  (1.33)  $ (0.57) $  (1.36)
                                   =======        ========   =======  ========
   Pro forma:
     Net loss.................                    $(22,550)           $(29,304)
                                                  ========            ========
     Shares used above........                      16,901              21,470
     Pro forma adjustment to
      reflect the weighted
      effect of the assumed
      conversion of
      convertible preferred
      stock...................                      16,949              32,556
                                                  --------            --------
     Shares used in computing
      pro forma basic and
      diluted net loss per
      share (unaudited).......                      33,850              54,026
                                                  --------            --------
     Pro forma basic and
      diluted net loss per
      share (unaudited).......                    $  (0.67)           $  (0.54)
                                                  ========            ========
</TABLE>

 Unaudited Pro Forma Stockholders' Equity

   If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma stockholders' equity at June 30, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at June 30, 1999 is disclosed
on the consolidated balance sheets.

 Business Segments

   The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (FAS
131). The Company operates solely in one segment, the development and marketing
of communications infrastructure equipment; and therefore, there are no
separate disclosures required for segment information as required by FAS 131.

                                      F-10
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


 Computer Software

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. To date SOP 98-1 has had no material impact on its
consolidated financial position, results of operations, or cash flows.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which will be effective for the fiscal year
ended December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.

2. Balance Sheet Details

   The components of inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                        December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (Unaudited)
   <S>                                                  <C>          <C>
   Raw materials.......................................    $  210      $  186
   Work-in-process.....................................     1,179         --
   Finished products...................................       624       4,232
                                                           ------      ------
                                                           $2,013      $4,418
                                                           ======      ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Computer equipment............................................ $1,770 $4,379
   Furniture and fixtures........................................    189    432
   Software......................................................  1,575  3,238
   Leasehold improvements........................................     32     37
                                                                  ------ ------
                                                                   3,566  8,086
   Less accumulated depreciation and amortization................    563  2,090
                                                                  ------ ------
                                                                  $3,003 $5,996
                                                                  ====== ======
</TABLE>

                                      F-11
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


   Certain computer and office equipment are recorded under capital leases that
aggregated $351,000 as of December 31, 1998 (none as of December 31, 1997).
Accumulated amortization on the assets recorded under capital leases aggregated
$12,000 as of December 31, 1998 (none as of December 31, 1997).

   Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Customer support and warranty expenses........................ $   -- $  207
   Other accrued expenses........................................    144    593
                                                                  ------ ------
                                                                  $  144 $  800
                                                                  ====== ======
</TABLE>

3. Stockholders' Equity

 Stock Split

   In June 1999, the Company's Board of Directors approved a 3-for-1 stock
split of the Company's authorized, issued and outstanding common and
convertible preferred stock. All common and convertible preferred share and per
share amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.

 Common Stock

   In 1997, the Company entered into Stock Purchase Agreements with its
founders to initially capitalize the Company. The Company has the right to
repurchase, at the original issue price, a declining percentage of certain of
the shares of common stock issued. The repurchase right generally declines on a
percentage basis over four years based on the length of the founder's and each
respective employee's continued employment with the Company. As of December 31,
1997 and 1998, 7,101,000 and 1,572,000 shares, respectively, of common stock
issued under this agreement were subject to repurchase.

 Convertible Preferred Stock

   Convertible preferred stock consists of the following series (in thousands
except per share amounts):

<TABLE>
<CAPTION>
                                              Shares Issued
                                            and Outstanding at           Per share           Aggregate     Aggregate
                               Shares     ---------------------- -------------------------  Liquidation   Liquidation
                            Designated at December 31,                                     Preference at Preference at
                            December 31,  ------------- June 30, Noncumulative Liquidation December 31,    June 30,
   Series                       1998       1997   1998    1999     Dividend    Preference      1998          1999
   ------                   ------------- ------ ------ -------- ------------- ----------- ------------- -------------
   <S>                      <C>           <C>    <C>    <C>      <C>           <C>         <C>           <C>
   A.......................     1,800      1,800  1,800   1,800      $--          $ .03       $    60       $    60
   B.......................     5,552      3,287  3,287   3,287       .07           .67         2,191         2,191
   C.......................     7,418      6,450  6,450   6,450       .13          1.33         8,600         8,600
   D.......................    10,212        --   9,165   9,165       .14          1.43        13,136        13,136
   E.......................    12,615        --  11,715  12,289       .22          2.17        25,383        26,627
                               ------     ------ ------  ------                               -------       -------
                               37,597     11,537 32,417  32,991                               $49,370       $50,614
                               ======     ====== ======  ======                               =======       =======
</TABLE>

                                      F-12
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


   The holders of Series A, B, C, D, and E convertible preferred stock are
entitled to annual noncumulative dividends per share as shown above when-and-if
declared by the Board of Directors. In the event of any voluntary or
involuntary liquidation of the Company, the Series A, B, C, D, and E
convertible preferred stockholders are entitled to a liquidation preference per
share as shown above plus any undeclared but unpaid dividends, all in
preference to the holders of the common stock. Upon the completion of a
distribution, the holders of the common stock will receive any and all
remaining assets of the Company.

   The holders of Series A, B, C, D and E convertible preferred stock have the
right, at any time after the date of issuance to convert each of their shares
into common shares at a pre-defined conversion ratio, initially set at a ratio
of 1:1. Convertible preferred stock is anti-dilutive for the Series C Warrants
and upon the earlier of i) August 2000, ii) sale or merger of the Company or
substantially all of the Company's assets, or iii) the closing of an initial
public offering of the Company's common stock. The holders of each share of
convertible preferred stock have the right to one vote for each share of common
stock into which the preferred stock can be converted.

   Convertible preferred shares automatically convert into shares of common
stock at the conversion price in effect upon the earlier of the Company's sale
of its common stock in a public offering with cash proceeds to the Company of
at least $10,000,000 and an offering price of which is not less than $2.87 per
share or upon the agreement of the holders of a majority of the outstanding
shares of Series A, B, C, D and E convertible preferred stock, voting together
as a class.

   In November 1998, in connection with the issuance of 343,000 shares of
Series D convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $178,000 for the difference between
the exercise price and the fair value of the convertible preferred stock.
Additionally, in May 1999, in connection with the issuance of 574,000 shares of
Series E convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $5,057,000 for the difference
between the exercise price and the fair value of the convertible preferred
stock.

 Warrants

   In connection with the issuance of Series B and Series C convertible
preferred stock in April and August 1997, the Company issued warrants to
purchase 1,500,000 shares of Series B convertible preferred stock at an
exercise price of $0.67 per share and 967,000 shares of Series C convertible
preferred stock at an exercise price of $1.33 per share, respectively. The
warrants are immediately exercisable and expire in April 2000.

   In connection with the long-term debt agreements entered into in May 1997
and October 1998, the Company issued warrants to purchase 765,000 shares of
Series B convertible preferred stock at an exercise price of $0.67 per share
and 174,000 shares of Series D convertible preferred stock at an exercise price
of $1.43 per share. The Company imputed a value for the Series B and Series D
warrants using the Black Scholes valuation model of $338,000 and $163,000,
respectively, which amounts were recorded as a discount on the long-term debt.
These discounts are being amortized over the term of the long-term debt to
interest expense. The warrants are immediately exercisable and expire between
April and June 2000.

   In connection with a long-term debt agreement entered into in April 1999,
the Company issued warrants to purchase 520,000 shares of Series D convertible
preferred stock at an exercise price of $1.43 per share and 233,000 shares of
Series E convertible preferred stock at an exercise price of $2.17 per share.
The warrants are immediately exercisable and expire in April 2006. The Company
may be required to issue additional warrants of Series D and Series E preferred
stock, respectively depending upon the type and amount of outstanding

                                      F-13
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

borrowings under the agreement. In May 1999, the Company borrowed $10,000,000
for working capital purposes and issued warrants to purchase 213,000 shares of
Series D convertible preferred stock at an exercise price of $1.43 per share
and 90,000 shares of Series E convertible preferred stock at an exercise price
of $2.17 per share in connection with the borrowing. The Company imputed a
value for these warrants using the Black Scholes model of $8,811,000 which
amount was recorded as a discount on the long term debt, and is being amortized
over the term of the long-term debt to interest expense. The warrant described
above to acquire 174,000 shares of Series D convertible preferred stock which
was issued in October 1998 was canceled as part of this agreement.

   In connection with a customer sales arrangement entered into in April 1999,
the Company issued warrants to purchase 300,000 shares of common stock at an
exercise price of $2.17 per share. The warrants are immediately exercisable and
expire in December 2004. The Company recorded a deferred charge of $2,350,000
reflecting the value of the warrants as determined using the Black Scholes
model. This asset is included in other assets in the accompanying consolidated
balance sheet and is being amortized over the term of the sales arrangement.
The Company recognized a charge of $78,000 for amortization of the deferred
long-term asset for the six months ended June 30, 1999 which is included in
stock compensation in the accompanying consolidated statement of operations.

 Notes Receivable from Stockholders

   Notes receivable from stockholders for common and convertible preferred
stock issued in 1997 and 1998 bear interest at interest rates ranging from
4.47% to 6.14% and are generally due four years after issuance. All notes
receivable are full recourse to the assets of the borrower.

 Shares of Common Stock Reserved for Future Issuance

   Common stock reserved for future issuance consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                         December 31, June 30,
                                                             1998       1999
                                                         ------------ --------
   <S>                                                   <C>          <C>
   Common stock reserved for:
     Convertible preferred stock........................    32,417     32,991
     1997 stock option plan.............................     3,319      1,880
     Convertible preferred stock warrants (as converted
      into common stock)................................     3,406      4,288
     Common stock warrants..............................       --         300
                                                            ------     ------
                                                            39,142     39,459
                                                            ======     ======
</TABLE>

4. Stock Plan

   In July 1997, the Company established the 1997 Stock Plan (the 1997 Plan)
under which incentive stock options may be granted to employees, directors and
consultants of the Company to purchase up to 14,127,000 shares of common stock.
In October 1998 and April 1999, the Board of Directors of the Company increased
the number of shares authorized for issuance under the 1997 Plan to 15,027,000
and 18,477,000, respectively. Under the 1997 Plan, stock purchase rights may be
issued either alone, in addition to, or in tandem with other awards granted
under the 1997 Plan and/or cash awards made outside of the 1997 Plan.
Nonstatutory stock options (the NSO) and stock purchase rights may be granted
to employees and consultants, and incentive stock options (the ISO) may be
granted only to employees. In the case of an ISO that is granted to an employee
who, at the time of the grant of such option, owns stock representing more than
10% of the

                                      F-14
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is Unaudited)

total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair market value per
share on the date of grant or, granted to any other employee, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant. In the case of a NSO that is granted to a person who, at the
time of the grant of such option, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair value per share on
the date of grant or, granted to an executive of the Company, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant, or, granted to another person, the per share exercise price
shall not be less than 85% of the fair value per share on the date of grant.

   For the period from inception (January 27, 1997) through December 31, 1997,
for the year ending December 31, 1998 and for the six months ending June 30,
1999, 120,000, 1,715,000 and 21,000 shares were repurchased under the 1997
Plan, respectively, at the original issuance price.

   The 1997 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1997 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.

   Options issued under the 1997 Plan are immediately exercisable and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter. At December 31, 1997 and 1998 and at June 30,
1999, the Company had 4,671,000, 7,146,000, and 10,443,000 outstanding common
shares which were subject to repurchase rights under the 1997 Plan,
respectively.

   Option activity is as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                          Outstanding Options
                                                        ------------------------
                                                                    Weighted-
                                                        Number of    Average
                                                         Shares   Exercise Price
                                                        --------- --------------
   <S>                                                  <C>       <C>
     Options granted...................................   7,459       $ .08
     Options exercised.................................  (4,881)        .07
     Options canceled..................................    (450)        .07
                                                         ------       -----
   Balance at December 31, 1997........................   2,128         .10
     Options granted...................................   6,876         .17
     Options exercised.................................  (6,827)        .15
     Options canceled..................................  (1,879)        .11
                                                         ------       -----
   Balance at December 31, 1998........................     298         .51
     Options granted (unaudited).......................   5,069        2.18
     Options exercised (unaudited).....................  (4,889)       1.98
     Options canceled (unaudited)......................     (18)       2.17
                                                         ------       -----
   Balance at June 30, 1999 (unaudited)................     460        3.24
                                                         ======       =====
</TABLE>

   At December 31, 1997 and 1998, the weighted average remaining contractual
life of options outstanding is 9.62 and 9.82 years, respectively. At June 30,
1999, 1,426,000 shares were available for future option grants under the 1997
Plan.

                                      F-15
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is Unaudited)


   During the year ended December 31, 1998 and the six months ended June 30,
1999, the Company recorded deferred stock compensation of $2,799,000 and
$38,968,000, respectively, representing the difference between the exercise
price and the deemed fair value of the Company's common stock on the date such
stock options were granted. For the year ended December 31, 1998 and the six
months ended June 30, 1999, the company recorded amortization of deferred stock
compensation of $332,000 and $5,665,000, respectively. At December 31, 1998 and
June 30, 1999, the Company had $2,467,000 and $35,770,000, respectively, of
remaining unamortized deferred compensation. Such amount is included as a
reduction of stockholders' equity and is being amortized over the corresponding
period of each respective option.

 Pro Forma Disclosures of the Effect of Stock-Based Compensation

   Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of FAS 123. The fair value for each options granted was estimated
at the date of grant using the Black Scholes valuation model with the following
weighted-average assumptions: a risk-free interest rate of 5.50%, and 5.69%,
respectively for the period ended December 31, 1997 and the year ended December
31, 1998, no dividend yield and an exercisable life of 5 years for 1997 and
1998.

   The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

   For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                   Period from
                                                 January 27, 1997
                                                  (inception) to   Year Ended
                                                   December 31,   December 31,
                                                       1997           1998
                                                 ---------------- ------------
   <S>                                           <C>              <C>
   Pro forma net loss...........................     $(7,878)       $(22,631)
                                                     =======        ========
   Pro forma basic and diluted net loss per
    share.......................................     $ (0.83)       $  (1.34)
                                                     =======        ========
</TABLE>

   The weighted average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.02 and $0.04 for options
granted for the period ended December 31, 1997 and the year ended December 31,
1998, respectively.

   The pro forma impact of options on the net loss for the period ended
December 31, 1997 and the year ended December 31, 1998 is not representative of
the effects on net income (loss) for future years, as future years will include
the effects of additional years of stock option grants.


                                      F-16
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

5. Income Taxes

   There has been no provision for U.S. federal, U.S. state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.

   A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying consolidated statements of
operations is as follows:

<TABLE>
<CAPTION>
                                                                  Year Ended
                                                                 December 31,
                                                                 --------------
                                                                  1997    1998
                                                                 ------  ------
   <S>                                                           <C>     <C>
   U.S. federal taxes:
     At statutory rate..........................................   34.0%   34.0%
     State......................................................    5.8     5.8
     Valuation allowance........................................  (39.8)  (39.8)
                                                                 ------  ------
   Total........................................................    0.0%    0.0%
                                                                 ======  ======
</TABLE>

   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Deferred tax assets:
     Net operating loss carry forwards....................... $ 2,120  $  8,157
     Capitalized expenditures................................     890     2,989
     Research and development credits........................     390       697
     Accrued expenses........................................      --       804
                                                              -------  --------
   Total deferred tax assets.................................   3,400    12,647
   Valuation allowance.......................................  (3,400)  (12,647)
                                                              -------  --------
   Net deferred tax assets................................... $    --  $     --
                                                              =======  ========
</TABLE>

   Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $3,400,000 and $9,247,000 during 1997 and
1998, respectively.

   As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $20,392,000 which expire in
the years 2012 through 2018 and federal research and development tax credits of
approximately $394,000 which also expire in the years 2012 through 2018.

   The Company also had net operating loss carryforwards for state income tax
purposes of approximately $20,392,000 expiring in 2005 and state research tax
credits of approximately $303,000 which carryforward indefinitely.

   Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.

                                      F-17
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)


6. Long-Term Debt

   In May 1997, the Company entered into a financing agreement with a financial
institution which provides for borrowings of up to $3,000,000 for working
capital purposes and up to $3,000,000 for the purchase of equipment.
Outstanding borrowings for working capital purposes bear interest at 4.60%,
mature in April 2000, and are secured by the general assets of the Company.
Outstanding borrowings for the purchase of equipment bear interest at 6.60%,
mature in April 2002, and are secured by the equipment purchased.

   In October 1998, the Company entered into a financing agreement with the
same financial institution for borrowings of up to $5,000,000 for either
working capital purposes or for the purchase of equipment. Outstanding
borrowings bear interest at 7.50%, mature in December 1999, and are secured by
either the general assets of the Company or the equipment purchased depending
upon the type of borrowing.

   In April 1999, the Company entered into a financing agreement with a group
of lenders led by the same financial institution for borrowings up to
$15,000,000 for working capital purposes and up to $10,000,000 for the purchase
of equipment. In addition, the Company canceled the October 1998 agreement and
transferred the amounts outstanding under this agreement to the new management.
Outstanding borrowings for working capital purposes bear interest at rates
ranging from 7.42% to 12.27%, mature in December 2001 and are secured by the
general assets of the Company. Outstanding borrowings for the purchase of
equipment bear interest at rates ranging from 8.05% to 8.46%, mature in various
dates ranging from June 2002 to January 2003, and are secured by the equipment
purchased.

   At December 31, 1997 and 1998, the Company has outstanding debt balances,
including obligations under capital leases, in the amount of $5,109,000 and
$6,501,000 respectively, related to these financing agreements, net of
discounts of $262,000 and $286,000, respectively.

   Future payments due on the long-term debt obligations, including obligations
under capital leases, are as follows as of December 31, 1998: 1999--$2,400,000;
2000--$2,456,000; 2001--$1,530,000; 2002--$401,000.

7. Lease Commitments

   The Company leases certain facilities and equipment under noncancelable
operating and capital leases. Future minimum lease payments under operating and
capital leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             Operating Capital
                                                              Leases   Leases
                                                             --------- -------
   <S>                                                       <C>       <C>
   Year ending December 31,
     1999...................................................  $  407    $ 51
     2000...................................................     438      44
     2001...................................................     446       5
     2002...................................................     460       5
     2003 and thereafter....................................   1,447       5
                                                              ------    ----
   Total minimum lease payments.............................  $3,198     110
                                                              ======
   Less amount representing interest........................              15
                                                                        ----
   Present value of minimum lease payments..................              95
   Less current portion of obligations under capital
    leases..................................................              66
                                                                        ----
   Obligations under capital leases, excluding current
    portion.................................................            $ 29
                                                                        ====
</TABLE>


                                      F-18
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

   Amounts outstanding under capital lease obligations are classified as long-
term debt in the accompanying consolidated balance sheets.

   Rent expense for the period ended December 31, 1997 and the year ended
December 31, 1998, was $410,000 and $480,000, respectively.

8. Defined Contribution Plan

   The Company has a defined contribution retirement plan qualified under
Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll
withholdings, subject to certain limitations. To date, the Company has not
matched contributions by plan participants.

9. Subsequent Events

 Proposed Public Offering of Common Stock

   On July 19, 1999, the Company's Board of Directors authorized the Company to
proceed with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock.

 Convertible Note Financing

   On July 21, 1999, the Company entered into three separate subordinated
convertible promissory note agreements ("notes") for a total of $30 million.
These notes i) bear interest at 10%, ii) have interest and principal due on the
earlier of September 28, 2000, the receipt of $30 million of proceeds from new
debt or equity financings or the closing of a debt or equity facility of not
less than $30 million, iii) have principal that is automatically convertible
into the Company's common stock upon the closing of an initial public offering
on or before June 30, 2000 at 70% of the public offering price or, at the
option of the holder and subject to an independent appraisal, the notes
principal and interest can be converted into the Company's common stock at 70%
of the appraised value. In connection with these notes, the Company will record
a $12.9 million discount on the notes in the third quarter of fiscal 1999. This
discount will be amortized to interest expense over fifteen months. Should the
Company complete an initial public offering on or before June 30, 2000, any
remaining unamortized discount on the notes will be immediately amortized to
interest expense.

 1999 Employee Stock Purchase Plan

   In July, 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Employee Stock Purchase Plan. The plan becomes
effective upon the completion of the Company's initial public offering of its
common stock. A total of 500,000 shares of common stock have been reserved for
issuance under the plan, plus an automatic annual increase on the first day of
each of the Company's fiscal years from 2000 through 2005 equal to the lesser
of: i) 500,000 shares, ii) one percent of the Company's outstanding common
stock on the last day of the preceding fiscal year, or iii) a lesser number of
shares as determined by the Company's Board of Directors. Under the plan,
eligible employees may purchase common stock through payroll deductions, which
in any event may not exceed 10% of an employee's compensation, at a price equal
to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or at the end of each purchase period. The
overlapping offering periods will last for a duration of

                                      F-19
<PAGE>

                               CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

twenty-four months. The initial offering period will begin on the closing of
the Company's initial public offering and end on April 30, 2000.

 1999 Directors' Stock Option Plan

   In July 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Directors' Stock Option Plan. A total of 500,000
shares of common stock have been reserved for issuance under the plan. Under
the plan, each person who becomes a non-employee director after the effective
date of the Company's initial public offering will receive an automatic initial
grant of an option to purchase 20,000 shares of common stock, that immediately
vest, on appointment or election to the Board of Directors and all non-employee
directors will receive an additional grant, that immediately vest, to purchase
10,000 shares of common stock on the date of each annual meeting provided the
Director has served in this capacity for the previous six month period.

 1999 Stock Plan

   The 1999 Stock Plan was adopted by the Board of Directors in July 1999 and
will be submitted for approval by our stockholders prior to the completion of
this offering. A total of 5,000,000 shares of common stock have been reserved
for issuance under the 1999 Stock Plan, all of which remain available for
future option grants. In addition, the number of shares reserved under the plan
will automatically be increased on the first day of each of our fiscal years in
2000, 2001, 2002, 2003 and 2004 by an amount equal to the lesser of (a)
15,000,000 shares, (b) six percent of the shares outstanding on the last day of
the preceding fiscal year or (c) a lesser number of shares as is determined by
the Board of Directors. The Plan's terms are similar to the 1997 Stock Option
Plan.

                                      F-20
<PAGE>

                                     [LOGO]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Cerent in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.

<TABLE>
<CAPTION>
                                                                       Amount
                                                                     to be Paid
                                                                     ----------
   <S>                                                               <C>
   SEC registration fee............................................. $27,800.00
   NASD filing fee..................................................  10,563.00
   Nasdaq National Market listing fee...............................          *
   Printing and engraving expenses..................................          *
   Legal fees and expenses..........................................          *
   Accounting fees and expenses.....................................          *
   Blue Sky qualification fees and expenses.........................          *
   Transfer Agent and Registrar fees................................          *
   Miscellaneous fees and expenses..................................          *
                                                                     ----------
     Total..........................................................          *
</TABLE>
  ---------------------
   * To be filed by amendment

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article XIII of
Cerent's certificate of incorporation and sections 6.1 and 6.2 of Article VI of
Cerent's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Cerent has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Cerent, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto)
also provides for cross indemnification among Cerent and the underwriters with
respect to certain matters, including matters arising under the 1933 Act.

Item 15. Recent Sales of Unregistered Securities

   (a) Since inception in January 1997, Cerent has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:

     (1) In March 1997, registrant issued and sold 8,073,000 shares of common
  stock to 28 purchases for a total offering price of $2,691.

     (2) In March 1997, registrant issued and sold shares of Series A
  preferred stock convertible into a total of 1,800,000 shares of common
  stock to one purchaser for an offering price of $60,000.

     (3) In April 1997, registrant issued and sold 13,333,332 shares of
  common stock to a total of 2 investors for an aggregate purchase price of
  $888,889, including the cancellation of indebtedness in the amount of
  $400,000. Registrant also issued and sold shares of Series B preferred
  stock convertible into a total of 3,166,668 shares of common stock to a
  total of five investors for an aggregate purchase price of $2,111,112.
  Registrant also issued warrants to purchase shares of Series B preferred
  stock convertible into 1,500,000 shares of common stock to two investors
  for a total purchase price of $500 in connection with the preferred stock
  financing.

                                      II-1
<PAGE>

     (4) In May and June of 1997, registrant issued warrants to purchase
  shares of Series B preferred stock convertible into a total of 765,000
  shares of common stock in connection with a credit line.

     (5) In August 1997, registrant issued and sold shares of Series C
  preferred stock convertible into a total of 6,450,000 shares of common
  stock to a total of 14 investors for an aggregate purchase price of
  $8,600,000. Registrant also issued warrants to purchase shares of Series C
  preferred stock convertible into 967,500 shares of common stock to 14
  investors for a total purchase price of $322.50 in connection with the
  preferred stock financing.

     (6) In July 1998, registrant issued and sold shares of Series D
  preferred stock convertible into a total of 8,822,091 shares of common
  stock to a total of seven investors for an aggregate purchase price of
  $12,644,997.10. In November 1998, registrant issued and sold shares of
  Series D preferred stock convertible into a total of 342,960 shares of
  common stock to two investors for a total purchase price of $491,576.

     (7) In November 1998, registrant issued and sold shares of Series E
  preferred stock convertible into a total of 11,715,444 shares of common
  stock to a total of ten investors for a total purchase price of
  $25,383,462. In May 1999, registrant issued and sold shares of Series E
  preferred stock convertible into a total of 573,528 shares of common stock
  to one investor for a total purchase price of $1,242,644, which price was
  paid for by the issuance of a promissory note.

     (8) In April 1999, registrant issued warrants to purchase shares of
  Series D preferred stock convertible into a total of up to 1,010,241 shares
  of common stock and warrants to purchase shares of Series E preferred stock
  convertible into a total of up to 439,377 shares of common stock in
  connection with an equipment lease and working capital credit line,
  including the transfer of a warrant to purchase shares of Series D
  preferred stock convertible into 174,000 shares of common stock issued in
  connection with a credit line in October 1998. As of June 30, 1999,
  registrant has drawn down $15,000,000 under this credit facility and has
  issued warrants to purchase shares of Series D preferred stock convertible
  into 733,410 shares of common stock and warrants to purchase shares of
  Series E preferred stock convertible into 322,506 shares of common stock.

     (9) In April 1999, registrant issued a warrant to purchase 300,000
  shares of common stock in connection with a corporate partnership
  agreement.

     (10) In July 1999, registrant issued and sold convertible promissory
  notes in the total principal amount of $30,000,000 convertible into shares
  of common stock.

     (11) From September 1997 to June 30, 1999, registrant issued 16,590,788
  shares of common stock in connection with option exercises.

   (b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

   The issuances described in Items 15(a)(1)-(10) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Item 15(a)(11) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Cerent.

                                      II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
 <C>    <S>
  1.1   Form of Underwriting Agreement.
  3.1   Amended and Restated Certificate of Incorporation of Cerent.
  3.2   Form of Amended and Restated Certificate of Incorporation of Cerent, to
        be filed and effective upon completion of this offering.
  3.3   Bylaws of Cerent, as amended.
  3.4   Proposed Bylaws of Cerent.
  4.1*  Form of Cerent's common stock certificate.
  5.1*  Opinion of Venture Law Group, A Professional Corporation.
 10.1   1997 Stock Plan, as amended.
 10.2   1999 Stock Plan.
 10.3   1999 Employee Stock Purchase Plan.
 10.4   1999 Directors' Stock Option Plan.
 10.5   Form of Indemnification Agreement between Cerent and each of its
        officers and directors.
 10.6   Amended and Restated Investors' Rights Agreement dated July 20, 1999.
 10.7   Promissory Note and Security Agreement dated May 7, 1999, executed by
        Carl Russo in connection with a loan from Cerent in connection with
        purchase of Series E preferred stock.
 10.8   Form of Promissory Note and Pledge and Security Agreement issued by
        employees in connection with the exercise of options to purchase common
        stock.
 10.9   Promissory Note and Pledge and Security Agreement dated July 8, 1998,
        executed by Carl Russo in connection with a loan from Cerent in
        connection with the exercise of options to purchase common stock.
 10.10* Offer Letter dated November 20, 1996, between Cerent and Ajaib Bhadare.
 10.11* Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
 10.12* Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
 10.13  Full Service Lease dated April 22, 1998, between Cerent and G &
        W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
        Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
        21, 1999.
 10.14  Net Lease dated March 30, 1999, between Cerent and G & W/Copley Redwood
        Business Park, L.P. for offices at 1455 N. McDowell Blvd., Petaluma, CA
        94954
 10.15  Standard Sublease dated June 30, 1999, between Cerent and Advanced
        Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
        Petaluma, CA 94954.
 10.16+ Purchase Agreement dated April 23, 1999, between Cerent and Williams
        Communications, Inc., together with the Amendment dated as of April 28,
        1999 and the form of Warrant to Purchase Common Stock.
 10.17+ Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
        Assembly, Inc.
 10.18+ Custom Product Development and Production Agreement dated November 10,
        1997, between Cerent and Hamilton Hallmark.
 10.19+ Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
        Inc., together with the Nondisclosure Agreement dated July 10, 1998.
 10.20  Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
        together with Amendment No. 1 dated July 22, 1999.
 10.21* Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
 10.22* Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
 16.1   Change in Independent Accountants.
 23.1   Consent of Ernst & Young LLP, Independent Auditors.
 23.2*  Consent of Counsel (see Exhibit 5.1).
 24.1   Power of Attorney (see page II-5).
</TABLE>

                                      II-3
<PAGE>

<TABLE>
 <C>  <S>
 27.1 Financial Data Schedule for the six-month periods ended June 30, 1998 and
      1999 (EDGAR-filed version only).
 27.2 Financial Data Schedule for the period ended December 31, 1997 and the
      year ended December 31, 1998 (EDGAR-filed version only).
</TABLE>
---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.

   (b) Financial Statement Schedules

Item 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Act, the
  information omitted from the form of prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in the form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
  or 497(h) under the Act shall be deemed to be a part of this Registration
  Statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Act, each
  post-effective amendment that contains a form of prospectus shall be deemed
  to be a new registration statement relating to the securities offered
  therein, and this offering of such securities at that time shall be deemed
  to be the initial bona fide offering thereof.

                                      II-4
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Petaluma, State of California, on July 22, 1999.

                                          Cerent Corporation

                                                       /s/ Carl Russo
                                          By: _________________________________
                                                         Carl Russo
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl Russo and Michael Ashby, and each one of
them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.

   Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
            /s/ Carl Russo             President, Chief Executive    July 22, 1999
______________________________________  Officer and Director
              Carl Russo                (Principal Executive
                                        Officer)

          /s/ Michael Ashby            Chief Financial Officer       July 22, 1999
______________________________________  (Principal Financial and
            Michael Ashby               Accounting Officer)

           /s/ Vinod Khosla            Chairman of the Board of      July 22, 1999
______________________________________  Directors
             Vinod Khosla

          /s/ Kevin Compton            Director                      July 22, 1999
______________________________________
            Kevin Compton

           /s/ Donald Green            Director                      July 22, 1999
______________________________________
             Donald Green

           /s/ Promod Haque            Director                      July 22, 1999
______________________________________
             Promod Haque
</TABLE>


                                      II-5
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.   Exhibit Name
 ------- ------------
 <C>     <S>
  1.1    Form of Underwriting Agreement.
  3.1    Amended and Restated Certificate of Incorporation of Cerent.
  3.2    Form of Amended and Restated Certificate of Incorporation of Cerent,
         to be filed and effective upon completion of this offering.
  3.3    Bylaws of Cerent, as amended.
  3.4    Proposed Bylaws of Cerent.
  4.1*   Form of Cerent's common stock certificate.
  5.1*   Opinion of Venture Law Group, A Professional Corporation.
 10.1    1997 Stock Plan, as amended.
 10.2    1999 Stock Plan.
 10.3    1999 Employee Stock Purchase Plan.
 10.4    1999 Directors' Stock Option Plan.
 10.5    Form of Indemnification Agreement between Cerent and each of its
         officers and directors.
 10.6    Amended and Restated Investors' Rights Agreement dated July 20, 1999.
 10.7    Promissory Note and Security Agreement dated May 7, 1999, executed by
         Carl Russo in connection with a loan from Cerent in connection with
         purchase of Series E preferred stock.
 10.8    Form of Promissory Note and Pledge and Security Agreement issued by
         employees in connection with the exercise of options to purchase
         common stock.
 10.9    Promissory Note and Pledge and Security Agreement dated July 8, 1998,
         executed by Carl Russo in connection with a loan from Cerent in
         connection with the exercise of options to purchase common stock.
 10.10*  Offer Letter dated November 20, 1996, between Cerent and Ajaib
         Bhadare.
 10.11*  Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
 10.12*  Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
 10.13   Full Service Lease dated April 22, 1998, between Cerent and G &
         W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
         Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
         21, 1999.
 10.14   Net Lease dated March 30, 1999, between Cerent and G & W/Copley
         Redwood Business Park, L.P. for offices at 1455 N. McDowell Blvd.,
         Petaluma, CA 94954
 10.15   Standard Sublease dated June 30, 1999, between Cerent and Advanced
         Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
         Petaluma, CA 94954.
 10.16+  Purchase Agreement dated April 23, 1999, between Cerent and Williams
         Communications, Inc., together with the Amendment dated as of April
         28, 1999 and the form of Warrant to Purchase Common Stock.
 10.17+  Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
         Assembly, Inc.
 10.18+  Custom Product Development and Production Agreement dated November 10,
         1997, between Cerent and Hamilton Hallmark.
 10.19+  Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
         Inc., together with the Nondisclosure Agreement dated July 10, 1998.
 10.20   Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
         together with Amendment No. 1 dated July 22, 1999.
 10.21*  Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
 10.22*  Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
 16.1    Change in Independent Accountants.
 23.1    Consent of Ernst & Young LLP, Independent Auditors.
 23.2*   Consent of Counsel (see Exhibit 5.1).
 24.1    Power of Attorney (see page II-5).
 27.1    Financial Data Schedule for the six-month periods ended June 30, 1998
         and 1999 (EDGAR-filed version only).
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.   Exhibit Name
 ------- ------------
 <C>     <S>
 27.2    Financial Data Schedule for the period ended December 31, 1997 and the
         year ended December 31, 1998 (EDGAR-filed version only).
</TABLE>
---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 347721}]
{"company-data": {"conformed-name": "CERENT CORP", "cik": "0001090953", "assigned-sic": "", "irs-number": "770447327", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-83507", "film-number": "99668919"}, "business-address": {"street1": "1450 N MCDOWELL BLVD", "city": "PETALUMA", "state": "CA", "zip": "94954", "phone": "7077939055"}, "mail-address": {"street1": "1450 N MCDOWELL BLVD", "city": "PETALUMA", "state": "CA", "zip": "94954"}}
As filed with the Securities and Exchange Commission on July 22, 1999
                                                      Registration No. 333-

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ----------------
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                               ----------------
                               CERENT CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)
                               ----------------
                                      3661
         Delaware             (Primary Standard             77-0447327
     (State or Other              Industrial             (I.R.S. Employer
     Jurisdiction of         Classification Code      Identification Number)
     Incorporation or              Number)
      Organization)

                           1450 North McDowell Blvd.
                               Petaluma, CA 94954
                                 (707) 793-9055
       (Address, Including Zip Code, and Telephone Number, Including Area
               Code, of Registrant's Principal Executive Offices)
                               ----------------
                                   Carl Russo
                     President and Chief Executive Officer
                               Cerent Corporation
                           1450 North McDowell Blvd.
                               Petaluma, CA 94954
                                 (707) 793-9055
 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
                             of Agent for Service)
                               ----------------
                                   COPIES TO:
           Joshua L. Green                          Jeffrey D. Saper
           Keith A. Miller                            Selim B. Day
          Kevin G. Montler                            Robert G. Day
          VENTURE LAW GROUP                            Ava M. Hahn
     A Professional Corporation             WILSON SONSINI GOODRICH & ROSATI
         2800 Sand Hill Road                    Professional Corporation
        Menlo Park, CA 94025                       650 Page Mill Road
           (650) 854-4488                          Palo Alto, CA 94304
                                                     (650) 493-9300
                               ----------------
        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
                               ----------------

   If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                        CALCULATION OF REGISTRATION FEE

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Proposed
                                                         Maximum
                                                        Aggregate    Amount Of
                Title Of Each Class Of                   Offering   Registration
             Securities To Be Registered                 Price(1)       Fee
--------------------------------------------------------------------------------
Common stock, par value $0.001.......................  $100,000,000   $27,800
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(o) solely for the purpose of computing the
    amount of the registration fee.

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

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   SUBJECT TO COMPLETION, DATED JULY 22, 1999

                                        Shares

                                     [LOGO]

                               Cerent Corporation

                                  Common Stock

                                   --------

  Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $    and $    per
share. We have made application to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "CERE."

  The underwriters have an option to purchase a maximum of     additional
shares to cover over-allotments of shares.

  Investing in our common stock involves risks. See "Risk Factors" on page 7.
Underwriting
                                                         Discounts     Proceeds
                                             Price to       and           to
                                              Public    Commissions     Cerent
                                             --------   ------------   --------
Per Share..................................   $            $            $
Total......................................   $            $            $
Delivery of the shares of common stock will be made on or about     , 1999.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

Credit Suisse First Boston

         BancBoston Robertson Stephens

                    Dain Rauscher Wessels
                     a division of Dain Rauscher Incorporated

                                                         Warburg Dillon Read LLC

                  The date of this prospectus is      , 1999.
Illustrations of the Cerent 454 in several network configurations
------------

                               TABLE OF CONTENTS
Page
                                      ----
Prospectus Summary..................    4
Risk Factors........................    7
Note Regarding Forward-Looking
 Statements.........................   17
Use of Proceeds.....................   18
Dividend Policy.....................   18
Capitalization......................   19
Dilution............................   20
Selected Consolidated Financial Da-
 ta.................................   21
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   22
Business............................   29
Management..........................   43
Page
                                     ----
Related Party Transactions.........   52
Principal Stockholders.............   54
Description of Capital Stock.......   57
Shares Eligible for Future Sale....   59
Underwriting.......................   61
Notice to Canadian Residents.......   63
Legal Matters......................   63
Experts............................   64
Change in Independent Accountants..   64
Where You Can Find More
 Information.......................   64
Index to Consolidated Financial
 Statements........................  F-1
------------

   You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.

   Cerent(TM) and Cerent 454(TM) are trademarks of Cerent. This prospectus also
contains additional trade names, trademarks and service marks of Cerent and of
other companies.

                     Dealer Prospectus Delivery Obligation

   Until       , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.

                                       3
PROSPECTUS SUMMARY

   This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully. Except as otherwise indicated,
all information in this prospectus is based on the following assumptions: (a) a
three-for-one stock split of the common stock effected on July 16, 1999, (b)
the conversion of each outstanding share of convertible preferred stock into
one share of common stock immediately prior to the completion of this offering,
(c) the automatic conversion of our convertible promissory notes into
shares of common stock upon the completion of this offering, assuming an
initial public offering price of $     per share, (d) no exercise of the
underwriters' over-allotment option and (e) the filing of our amended and
restated certificate of incorporation.

                               Cerent Corporation
                                  ------------
   We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth of data and voice communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our high-speed solution, the
Cerent 454, is designed to support any traffic interface at any transmission
rate up to an aggregate of 240 gigabits per second, or Gbps, in a single,
compact system. The Cerent 454 provides a cost-effective solution for our
service provider customers and enables them to rapidly deploy a wide range of
applications and revenue generating services. We are currently able to deliver
our 454 on the customer request date, which is typically within ten days of
receiving an order. As of June 30, 1999, we had shipped our 454 to 86
customers, including ALLTEL, Buckeye Telesystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, QWest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.

   We use a direct sales force to sell our products to service providers that
we believe will move quickly to adopt new technologies. Accordingly, we believe
it is important to take a targeted approach in our sales efforts and have
focused initially on emerging inter-exchange carriers, or IXCs, competitive
local exchange carriers, or CLECs, independent carriers and cable companies. We
also intend to pursue incumbent IXCs, regional Bell operating companies, or
RBOCs, and international carriers.

   We believe that communications traffic will continue to grow at significant
rates and network service providers will deploy new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks. While new equipment and
technologies have been introduced to address the increases in data traffic over
the access and backbone networks, the optical transport network has not yet
been similarly addressed with new broadband optimized technologies and
equipment. The optical transport network, which aggregates multiple traffic
types from the access network and interconnects them to the backbone network,
currently consists primarily of legacy, voice-based technologies. This
situation has created the need for a transport solution that can accommodate
multiple services and addresses the demand for both high-bandwidth data and
voice communications.

   Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:

  . continue developing products that provide scalable, flexible and cost-
    effective optical transport solutions;

  . penetrate a large base of customers with targeted direct sales and
    support;

  . continue developing products that are designed to support multiple forms
    of broadband access and all leading network technologies;

  . enable fast and cost-effective deployment of our products; and

  . continue developing optical transport products that will expand the
    traditional reach of the optical transport network and create demand for
    our products in new markets.

                                       4
Recent Developments

   On July 21, 1999, we issued $30,000,000 of convertible notes to certain
entities affiliated with MSD Capital, L.P., the private investment firm for
Michael S. Dell. The convertible promissory notes will be automatically
convertible into      shares of our common stock upon completion of this
offering, assuming an initial public offering price of $    per share.

                                  ------------

   We were originally incorporated in Delaware under the name "Fiberlane
Communications, Inc." in January 1997 and changed our name to "Cerent
Corporation" in June 1998. Our principal executive offices are located at 1450
North McDowell Blvd., Petaluma, CA 94954, and our telephone number is (707)
793-9055. The address of our Web site is "www.cerent.com." Information
contained on our Web site is not a part of this prospectus.

                                  The Offering
Common stock offered...............      shares
Common stock to be outstanding af-
 ter this offering.................      shares
Use of proceeds.................... For general corporate purposes, including
                                    working capital, capital expenditures, and
                                    potential acquisitions.
Proposed Nasdaq National Market
 symbol............................ CERE
----------------

   The above table is based on shares outstanding as of June 30, 1999. This
table includes     shares of common stock issuable upon automatic conversion of
convertible promissory notes upon the completion of this offering, assuming an
initial public offering price of $     per share. This table excludes:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.

                                ----------------

                                       5
Summary Consolidated Financial Data
                     (in thousands, except per share data)
Period from
                               January 27, 1997              Six Months Ended
                                (inception) to   Year Ended      June 30,
                                 December 31,   December 31, -----------------
                                     1997           1998      1998      1999
                               ---------------- ------------ -------  --------
                                                               (unaudited)
Consolidated Statement of Op-
 erations Data:
 Revenue......................     $    --        $    220   $    --  $  9,917
 Gross profit (loss)..........          --            (841)       --     1,974
 Operating loss...............      (7,629)        (21,943)   (8,396)  (27,869)
 Net loss.....................     $(7,858)       $(22,550)  $(8,664) $(29,304)
                                   =======        ========   =======  ========
 Pro forma basic and diluted
  net loss per share(1).......                    $  (0.67)           $  (0.54)
                                                  ========            ========
 Shares used in computing pro
  forma basic and diluted net
  loss per share(1)...........                      33,850              54,026
                                                  ========            ========
June 30, 1999
                                               ---------------------------------
                                                          Pro       Pro Forma
                                               Actual  Forma(2)   As Adjusted(3)
                                               ------  --------   --------------
                                                      (unaudited)
Consolidated Balance Sheet Data:
 Cash and cash equivalents.................... $5,794   $35,794
 Working capital..............................  1,453    31,453
 Total assets................................. 33,628    63,628
 Long-term debt, net of discount..............  5,001    22,144
 Total stockholders' equity................... 13,484    26,341
--------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
    of the determination of the number of shares used to compute per share
    data.
(2) The pro forma amounts in the table above are adjusted to give effect to the
    proceeds of $30.0 million received from the issuance of convertible
    promissory notes on July 21, 1999, and recorded the obligation net of a
    $12.9 million discount.
(3) The pro forma as adjusted amounts in the table above are adjusted to give
    effect to the automatic conversion of the convertible promissory notes into
        shares of common stock upon completion of this offering, assuming an
    initial public offering price of $    per share and to the receipt of the
    net
    proceeds from the sale of        shares of common stock offered by us at an
    assumed initial public offering price of $    per share, after deducting
    the estimated underwriting discounts and commissions and estimated offering
    expenses payable by us.

                                       6
RISK FACTORS

   You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us. Additional risks and uncertainties, such as those that
generally apply to our industry or to companies undertaking initial public
offerings, also may impair our business operations. You should also refer to
the other information set forth in this prospectus, including the discussions
set forth in "Note Regarding Forward-Looking Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as our consolidated financial statements and the related
notes.

Our failure to increase our revenues would prevent us from achieving and
maintaining profitability.

   We cannot assure you that our revenue will continue to grow, or that we will
generate sufficient revenue to achieve profitability. We have incurred
significant net losses since inception and expect to continue to incur
significant losses in the future. As of June 30, 1999, we had an accumulated
deficit of $59.7 million. Further, we expect to incur negative operating cash
flow in the future. We have large fixed expenses and we expect to continue to
incur significant and increasing sales and marketing, product development and
administrative expenses. As a result, we will need to generate significantly
higher revenues to achieve and maintain profitability. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements for more
information on our results of operations.

Our limited operating history makes it difficult to evaluate our business and
prospects.

   We were incorporated in January 1997, commenced operations in April 1997 and
began shipping the Cerent 454 in December 1998. As a result, we have only a
limited operating history upon which you may evaluate our business and
prospects. Further, due to our limited operating history, we have difficulty
accurately forecasting our revenues, and we have limited meaningful historical
financial data upon which to base planned operating expenses. You should
consider our business and prospects in light of the heightened risks and
unexpected expenses and problems we may face as a company in an early stage of
development in a relatively new and rapidly-evolving industry. If we do not
achieve our expected level of revenues or if our operating results are below
the expectations of securities analysts and investors, the price of our common
stock could decline.

Our revenue and operating results in one or more future periods may fluctuate
significantly and these fluctuations may adversely affect the trading price of
our common stock.

   Our revenue and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:

  . variations in the timing and size of sales and shipments of our products;

  . delays or cancellations of product orders by our customers;

  . new product introductions by us or our competitors;

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

  . mix in product configurations that we sell;

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

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

  . our ability to attain and maintain production volumes and quality levels
    for our current and future products;

  . our ability to control expenses and manufacturing costs;

                                       7
. costs related to acquisitions of technology or businesses; and

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

   We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.

The Cerent 454 currently is our only product and we are entirely dependent on
its commercial success.

   The Cerent 454 currently is the only product that we offer and, as a result,
our revenue is entirely dependent on its commercial success. Due to the
complexity of the Cerent 454, as well as our current and prospective customers'
network architectures, we cannot assure you that our present or future
customers will not encounter significant problems with the 454, which could
negatively affect sales of the 454. If our target customers do not widely
adopt, purchase and successfully deploy the 454, or if our current or future
customers become dissatisfied with the 454, our business, financial condition
and results of operations will be seriously harmed.

If our products do not interoperate with all widely adopted modes of network
access or with our customers' internal networks, sales of our products will be
adversely impacted.

   Our products are designed to accommodate all widely-adopted modes of network
access such as digital subscriber line, or DSL, frame relay, cable modem,
integrated services digital network, or ISDN, and wireless. In addition, our
products are designed to interface with our customers' existing networks, each
of which has different specifications and utilizes multiple protocol standards.
Many of our customers' networks contain multiple generations of products that
have been added over time as these networks have grown and evolved in order to
meet our customers' requirements. Our products must support all widely-used
forms of network access and must interoperate with all present and future
products within our customers' networks. If we find interoperability problems
or bugs in the existing software used in our customers' networks, we must
modify our software to fix or overcome these errors so that our products will
interoperate and scale with the existing software and hardware. If our products
cannot support all widely-used modes of network access or if our products do
not interoperate with our customers' networks, product installations could be
delayed, orders for our products could be cancelled or our products could be
returned, any of which could seriously harm our business, financial condition
and results of operations.

Because our products are complex and are deployed in complex environments, they
may have errors or defects that we find only after full deployment, which could
seriously harm our business.

   The Cerent 454 is a highly complex product and is designed to be deployed in
very large and complex networks. Although we have thoroughly tested the Cerent
454, because of the nature of the product, it can only be fully tested when
deployed in very large networks with high amounts of traffic. Consequently, our
customers may discover errors or defects in the hardware or the software after
it has been fully deployed. If we are unable to fix errors or other problems
that may be identified in full deployment, we could experience:

  . loss of or delay in revenues and loss of market share;

                                       8
. significant harm to our reputation and loss of customers;

  . diversion of development resources;

  . increased service and warranty costs;

  . legal actions by our customers; and

  . increased insurance costs.

Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed.

   The network infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. In developing our products, we have made, and
will continue to make, assumptions with respect to which standards will be
adopted by our customers and competitors. If the standards adopted are
different from those on which we have chosen to focus our efforts, market
acceptance of our products may be significantly reduced or delayed and our
business will be seriously harmed. In addition, the introduction of products
embodying new technologies and the emergence of new industry standards could
render our existing products obsolete, which would seriously harm our business,
financial condition and results of operations.

Our future success depends on our ability to develop innovative new products
and product enhancements that gain market acceptance.

   The market for telecommunications networking equipment, including transport
systems, is marked by rapid innovation and evolution. We cannot assure you that
we will be able to develop new products or product enhancements in a cost-
effective and timely manner, or at all. Even if we are able to develop and
introduce new products and enhancements in a cost-effective and timely manner,
they may be inferior to similar products or enhancements developed by our
current or future competitors and may fail to achieve broad market acceptance.
If we fail to successfully develop and introduce new products or enhanced
features and functionality for the 454, or if our future products or
enhancements fail to achieve widespread market acceptance, our business,
financial condition and results of operations would be seriously harmed.

Our future success depends on our ability to increase sales of our products to
CLECs and other relatively small telecommunications carriers and to effectively
market and sell our products to large, established carriers.

   In order to achieve significant revenue growth, we must increase sales of
our products to CLECs and other relatively small telecommunications carriers
while effectively marketing and selling our products to large, established
carriers, specifically regional Bell operating companies, or RBOCs, such as SBC
and Bell Atlantic, and incumbent IXCs, such as AT&T, Sprint and MCI WorldCom.
Our sales efforts to date have been limited primarily to emerging IXCs, CLECs,
independent carriers and cable companies. Large carriers such as RBOCs and
incumbent IXCs are typically more demanding and deliberate in their product
selection than CLECs and other relatively small carriers and, as a result, the
process of selling equipment to RBOCs and large, incumbent IXCs is likely to
require more time and sales and marketing effort than sales to smaller
carriers. The successful expansion of our sales efforts to include RBOCs and
incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. Competition for qualified sales personnel in the
telecommunications industry is intense, and we cannot assure you that we will
be able to hire a sufficient number of qualified sales personnel to expand our
sales efforts successfully. Further, even if we are successful in expanding the
size of our sales force, we cannot assure you that we will be successful in
increasing our sales to CLECs and other relatively small carriers or that we
will be able to market and sell our products effectively to RBOCs and incumbent
IXCs. If we cannot increase our sales to smaller carriers and effectively sell
our products to large carriers, we will not achieve significant revenue growth,
which would materially and adversely affect our business, financial condition
and results of operations.

                                       9
Even if we are successful in expanding our sales to RBOCs and incumbent
IXCs, we cannot assure you that our products will perform in a satisfactory
manner for these potential customers. The deployment of our products by RBOCs
and incumbent IXCs will likely place greater performance and interoperability
demands on our products than deployment by our existing customer base. If our
products fail to perform to the standards established by, or expectations of,
any RBOC or IXC for any reason, such customers may refuse to purchase
additional products from us, which will likely represent a significant loss of
potential market share. Further, any such failure could significantly harm our
reputation in the industry, leading to further loss of sales.

   RBOCs and incumbent IXCs typically have longer sales cycles than the smaller
carriers and, as a result, if we expand our product sales to RBOCs and
incumbent IXCs, our revenues and operating results will be more susceptible to
quarterly fluctuations. Additionally, the long sales cycles associated with
these large carriers will require us to expend significant sales efforts for
each prospective RBOC or incumbent IXC customer regardless of whether we sell
our products to such customer. If a protracted sales cycle for one or more
large customers causes our operating results for any quarter to fall short of
the expectations of securities analysts or investors, the market price of our
common stock could decline.

If the market for broadband and other data communications services does not
continue to expand, demand for our products may decline significantly.

   Our future success depends on the continued growth in the demand for
broadband and other data communications services and the ability of our
customers and prospective customers to sell such services. If this demand does
not continue to grow as anticipated, the demand for our products could decline
significantly, which would materially and adversely affect our business,
financial condition and results of operations.

If the number of competing access services declines or if an access service
standard is adopted, demand for our products may decline significantly.

   One of the key features of our current product is the ability to aggregate
multiple access services such as digital subscriber lines, or DSL, frame relay,
cable modems, or wireless services. However, we cannot assure you that multiple
access services will be utilized in the future. If the telecommunications
industry adopts a standard access service or if one or relatively few access
services are adopted by a substantial portion of our customers or potential
customers, the market for a transport product that aggregates multiple access
services would diminish significantly, which would seriously harm our business,
financial condition and results of operations.

Our markets are highly competitive and dominated by large corporations and we
cannot assure you that we will be able to compete effectively.

   Competition in the transport equipment market is intense and we expect such
competition to increase. Historically, the market for transport equipment has
been dominated by Alcatel, Fujitsu, Lucent, NEC, Nortel and Tellabs. Some of
these companies, including Nortel, have announced products that may be
competitive to the 454. In addition, a number of private companies have
developed or are developing products that perform transport functions. Many of
our competitors and potential competitors have substantially greater name
recognition and technical, financial and marketing resources than we have and
may have a substantial advantage over us in developing or acquiring new
products and technologies and in creating market awareness for those products
and technologies. Further, many of our competitors have built long-standing
relationships with some of our customers and potential customers and have the
ability to provide financing to customers and may, therefore, have an inherent
advantage in selling transport system products to those customers. We expect
our competitors to continue to improve the performance of their current
products and to introduce new products and technologies. To be competitive, we
must continue to invest significant resources in research and development,
sales, marketing and customer support. We cannot assure you that we will have
sufficient resources to make these investments, that we will be able to make
the technological advances necessary to be competitive, or that we will be able
to effectively sell our products to targeted customers who have prior
relationships with our competitors.

                                       10
In order to compete effectively in the network transport market we believe
we must deliver products that:

  . provide a cost-effective optical transport solution to our customers both
    initially and throughout the entire system life-cycle;

  . support multiple access technologies and network protocols;

  . scale easily and efficiently without disruption of carrier service to
    evolve with the needs of our customers;

  . perform reliably in a wide variety of physical locations and
    environments; and

  . are flexible and interoperate with existing network designs and
    equipment.

   If we are unable to compete successfully against our current and future
competitors, it could adversely affect us in the following ways:

  . reduce demand for our products;

  . cause delays or cancellations of customer orders;

  . cause us to reduce prices on our products; or

  . increase our expenses.

   Any of the foregoing would materially and adversely affect our business,
financial condition and results of operations. See "Business--Competition."

We currently depend on one contract manufacturer and have no internal
manufacturing capabilities.

   Our future success will depend on our ability to have sufficient volumes of
our products manufactured in a cost-effective and quality-controlled manner.
PCB Assembly, a third-party manufacturer of telecommunications and data
networking equipment, manufactures the Cerent 454 and is our sole manufacturer.
We currently have no internal manufacturing capabilities and we have no present
intention of developing such capabilities. There are a number of additional
risks associated with our dependence on a sole third-party manufacturer
including the following:

  . reduced control over delivery schedules;

  . quality assurance;

  . manufacturing yields and costs;

  . the potential lack of adequate capacity during periods of excess demand;

  . limited warranties on components supplied to us;

  . increases in contract prices;

  . the potential misappropriation of our intellectual property; and

  . manufacturing disruptions.

   Any of these risks could impair our ability to fulfill orders. Our customers
typically request delivery of our products within ten days following submission
of an order. As we increase our level of sales, we cannot assure you that our
third-party manufacturer will be able to meet the delivery requirements of our
customers, which could decrease customer satisfaction and have a material
adverse effect on our product sales. We do not have a long-term contract or
arrangement with our contract manufacturer that guarantees product
availability, the continuation of particular payment terms or the extension of
credit limits. If our manufacturer is unable or unwilling to continue
manufacturing our products in required volumes, for example, we would have to
identify and qualify an alternative manufacturer. Qualifying a new contract
manufacturer and commencing volume production is expensive and time-consuming
and if we are required to change or qualify an additional contract
manufacturer, we would likely lose revenue and damage our customer
relationships, either of which would harm our business, financial condition and
results of operations.

                                       11
We are dependent on sole source and limited source suppliers for several key
components, including ASICs, and if we are unable to obtain these components on
a timely basis, we will be unable to meet our customers' product delivery
requirements.

   We currently purchase several key components from single or limited sources.
In particular, we rely on LSI Logic as a sole-source foundry for certain of our
application specific integrated circuits, or ASICs, and KLSI as a sole-source
foundry for certain other of our ASICs. If any of our sole or limited source
suppliers suffers from capacity constraints, work stoppages or any other
reduction or disruption in output, they may be unable to meet our delivery
schedule. If we do not receive critical components from our suppliers in a
timely manner, we will be unable to deliver those components to our
manufacturer in a timely manner and would, therefore, be unable to meet our
customers' product delivery requirements. Any failure to meet a customer's
delivery requirements could harm our reputation and decrease our sales, which
would negatively affect our business, financial condition and results of
operations. We currently have no long-term supply contracts to ensure sources
of supply for several of our key components, including ASICs. Our suppliers may
enter into exclusive arrangements with our competitors, stop selling their
products or components to us at commercially reasonable prices or refuse to
sell their products or components to us at any price and we may be unable to
develop alternative sources for the components.

If we fail to accurately predict our manufacturing requirements, we could incur
additional costs or experience delays.

   We provide forecasts of our demand to our manufacturer several months prior
to scheduled delivery of products to our customers. If we overestimate our
requirements, our manufacturer may have excess inventory, which indirectly
would increase our costs. If we underestimate our requirements, our
manufacturer may have an inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues.
In addition, lead times for materials and components that our manufacturer
orders, including ASICs, vary significantly and depend on factors such as the
specific supplier, contract terms and demand for each component at a given
time. If we fail to order sufficient quantities of product components in a
timely manner or if we experience any delay in receiving product components
from third parties, the manufacturing of our products, and the delivery of such
products to our customers, could be delayed, which would harm our business,
financial condition and results of operations.

If we fail to manage our rapid growth effectively, our business, financial
condition and results of operations could be seriously harmed.

   Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process, as well as the implementation of appropriate control systems. We
currently intend to expand our operations to additional sites. There can be no
assurance that we will be successful in accomplishing this expansion. We
continue to increase the scope of our operations and have grown our headcount
substantially. At December 31, 1998, we had a total of 88 employees and at June
30, 1999, we had a total of 210 employees. Additionally, we plan to continue to
hire a significant number of employees. This growth has placed, and our
anticipated growth will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our workforce
worldwide. We may not be able to install adequate control systems in an
efficient and timely manner. Delays in the implementation of new systems or
operational disruptions when we transition to new systems would impair our
ability to accurately forecast sales demand, manage our product inventory and
record and report financial and management information in a timely and accurate
basis, which would seriously harm our business, financial condition and results
of operations.

If we do not expand substantially our customer service and support
organization, we will be unable to significantly increase our product sales.

   Because our products are complex, we must hire highly trained customer
service and support personnel. We currently have a small customer service and
support organization and will need to increase our staff

                                       12
substantially to support the expanding needs of existing customers and to meet
the demands of new customers, some of which could require significantly greater
amounts of attention than our existing customers. In particular, it is
essential to RBOC and incumbent IXC customers that our products do not result
in network disruption. Hiring customer service and support personnel is
extremely competitive in our industry due to the limited number of people
available with the necessary technical skills and understanding of data
networking. If we are unable to expand our customer service and support
organization, we will be unable to significantly increase the sales of our
products, which would impair our ability to grow and seriously harm our
business, financial condition and results of operations.

If we lose key personnel or are unable to hire additional qualified personnel
as necessary, our business may be adversely affected.

   Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, and finance personnel,
many of whom would be difficult to replace. In particular, we believe that our
future success depends on Carl Russo, our President and Chief Executive
Officer. We do not have employment contracts or key person life insurance
covering any of our key personnel.

   We believe our future success will also depend in large part upon our
ability to identify, attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for these individuals is
intense in our industry, especially in the San Francisco Bay Area, and we have
had difficulty hiring employees in the timeframe we desire, particularly
qualified engineers and sales personnel. We may not succeed in identifying,
attracting and retaining personnel. Further, competitors and other entities
have in the past attempted, and may in the future attempt, to recruit our
employees. The loss of the services of any of our key personnel, the inability
to identify, attract or retain qualified personnel in the future or delays in
hiring qualified personnel, particularly engineers and sales personnel, could
make it difficult for us to manage our business and meet key objectives, such
as timely product introductions, which would 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.

   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 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. These claims, regardless of their merits, could cause us
to incur substantial costs in defending ourselves and could divert the
attention of our management away from our operations, which could materially
and adversely affect our business.

Any acquisitions we make could disrupt our business and harm our financial
condition and operations.

   While we have no current agreements or negotiations underway, we may buy
businesses, products or technologies in the future. In the event of any future
acquisitions, we could:

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

  . incur debt;

  . assume liabilities;

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

  . incur large and immediate write-offs.

   These acquisitions also involve numerous risks, including:

  . problems integrating the purchased operations, technologies or products
    with our own;

  . unanticipated costs and other liabilities;

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

                                       13
. adverse effects on existing business relationships with suppliers and
    customers;

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

  . potential loss of key employees, particularly those of the acquired
    organizations.

   We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future. Our failure to do so could have an adverse effect on our business,
financial condition and results of operations.

We may be subject to product returns and product liability claims resulting
from defects in our products, which could result in costly and time-consuming
litigation, financial liability to our customers or the failure of our products
to attain market acceptance.

   Our products are complex and may contain undetected bugs or defects, which
could result in product returns or product liability claims. Our contracts with
our customers generally contain provisions designed to limit our exposure to
potential product liability claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. A
product liability claim, however, whether successful or not, could seriously
impact our capital reserves, harm our reputation and direct the attention of
key personnel away from our operations, any of which could harm our business,
financial condition or results of operations.

Problems arising from use of our products in conjunction with other vendors'
products could disrupt our business and harm our financial condition.

   Our customers use our products in conjunction with products from other
vendors. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. The occurrence of hardware or software
errors, whether caused by our products or another vendor's products, may result
in the delay or loss of market acceptance of our products, and any necessary
corrections or modifications may cause us to incur significant expenditures.
The occurrence of these types of problems may seriously harm our business,
financial condition and results of operations.

We could become subject to litigation regarding intellectual property rights
which could seriously harm our business.

   Our industry is characterized by the existence of a large number of patents
and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, many leading companies in the
networking industry, including our competitors, have extensive patent
portfolios with respect to networking technology. From time to time, third
parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to our business. Third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to our existing or future
products. Any of these claims and any resulting lawsuit, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:

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

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

  . redesign those products that use such technology.

   If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. For additional information concerning
our intellectual property rights, see "Business--Intellectual Property."

                                       14
Our business could 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 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. While we have a number of
patent applications pending before the United States Patent and Trademark
Office, we currently hold no issued patents. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. Our future success will depend in part on our ability to
protect our proprietary rights and the technologies used in our principal
products. If we are unable to enforce and protect our intellectual property,
our business, financial condition and results of operations would be materially
adversely affected.

Necessary licenses of third-party technology may not be available to us or may
be very expensive.

   From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and 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.

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

   The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products, and those of our
customers, are subject to FCC rules and regulations. Current and future FCC
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, financial condition and results
of operations. Further, we cannot be certain that we will be successful in
obtaining or maintaining any regulatory approvals that may, in the future, be
required to operate our business.

We face a number of risks associated with year 2000 problems.

   The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to perform data
communications or engage in similar normal business activities.

   We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our product is generally integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of our customers' networks involves different
combinations of third party products. We cannot evaluate whether all of their
products are year 2000 compliant. We may face claims based on year 2000
problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no claims
of this kind have been made, we may in the future be required to defend our
products in legal proceedings which could be expensive regardless of the merits
of these claims.

                                       15
If our suppliers, vendors, manufacturer, customers and service providers
fail to correct any year 2000 problems, which they may have, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.

   Additionally, our customers' purchasing plans could be affected by year 2000
issues if they need to expend significant resources to fix their existing
systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. Further, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."

We may need additional capital to fund our future operations.

   The development and marketing of new products and the expansion of our
direct sales operation and associated support personnel is expected to require
a significant commitment of resources. If the market for our products develops
more slowly than anticipated, if we fail to establish significant market share
and achieve increased revenues, if our capital expenditure forecasts change or
prove inaccurate, or if we need to respond to unforeseen challenges or take
advantage of unanticipated opportunities, we may incur significant operating
losses and/or utilize significant amounts of capital. As a result, we may need
to raise substantial additional capital. To the extent that we raise additional
capital through the sale of equity or convertible 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, these
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of such debt could impose 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
operating results.

There has been no prior market for our common stock and a public market for our
securities may not develop or be sustained.

   Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. If an active public market for our common stock does not
develop, the liquidity of your investment may be limited. Further, the market
price of our common stock might fall below the initial public offering price.
The initial public offering price may bear no relationship to the price at
which the common stock will trade upon completion of this offering. The initial
public offering price will be determined based on negotiations between us and
the representatives of the underwriters, based on factors that may not be
indicative of future market performance. See "Underwriting."

Substantial shares of our common stock will be available for future sale and
such sales may depress our stock price.

   After this offering, assuming the number of outstanding shares as of June
30, 1999, we will have    shares of common stock outstanding. All the shares
sold in this offering will be freely tradable. The remaining      shares of
common stock outstanding after this offering are subject to lock-up agreements
that prohibit the sale of the shares for 180 days after the date of this
prospectus. Immediately after the 180 day lock-up period     shares which will
be outstanding after the offering will become available for sale. The remaining
shares of our common stock will become available at various times thereafter
upon the expiration of one-year holding periods and/or lapse of our repurchase
option. Sales of a substantial number of shares of common stock in the public
market after this offering or after the expiration of the lock-up and holding
periods could cause the market price of our common stock to decline. See
"Shares Eligible for Future Sale."

                                       16
Our officers and directors will continue to have substantial control over
Cerent after this offering and could delay or prevent a change in corporate
control.

   We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately  % of our
outstanding common stock following the completion of this offering. These
stockholders, if acting together, would be able to influence significantly all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other changes in corporate control.

We expect to experience volatility in our share price which could negatively
affect your investment.

   The market price of our common stock may fluctuate significantly in response
to a number of factors, some of which are beyond our control, including:

  . quarterly variations in operating results;

  . any loss of a major customer;

  . changes in market valuations of communications related companies;

  . changes in financial estimates by securities analysts;

  . announcements by us or our competitors of new products or of significant
    acquisitions, strategic partnerships or joint ventures;

  . additions or departures of key personnel;

  . any deviations in net revenues or in losses from levels expected by
    securities analysts;

  . future sales of common stock; and

  . volume fluctuations, which are particularly common among highly volatile
    securities of technology companies.

You will suffer immediate and substantial dilution.

   The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of their investment of approximately $       assuming an
initial public offering price of $   . To the extent that currently outstanding
options or warrants are exercised, there will be further dilution to your
investment.

                   NOTE REGARDING FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
Internet use and deployment of communications equipment. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. We undertake no obligation to update these statements
or publicly release the result of any revisions to the forward-looking
statements that we may make to reflect events or circumstances after the date
of this prospectus or to reflect the occurrence of unanticipated events. Our
actual results could differ materially from those anticipated in these forward-
looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this prospectus.

                                       17
USE OF PROCEEDS

   The net proceeds to us from the sale of the     shares of common stock
offered by us are estimated to be $   at an assumed public offering price of
$   per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses (assuming no exercise of the
underwriters' over-allotment option to purchase shares from us).

   We intend to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures. We may also use a
portion of the net proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so and are not currently engaged in any negotiations for any
such acquisition or joint venture. The amounts that we actually expend for
working capital purposes will vary significantly depending on a number of
factors, including future revenue growth, if any, and the amount of cash we
generate from operations. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering. Pending the uses described
above, we will most likely invest the net proceeds in short-term, interest-
bearing, investment-grade securities.

                                DIVIDEND POLICY

   We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current credit
facility prohibit us from paying dividends without lender consent.

                                       18
CAPITALIZATION

   The following table sets forth the following information:

  . the actual capitalization of Cerent as of June 30, 1999;

  . the pro forma capitalization of Cerent after giving effect to proceeds of
    $30.0 million received from the issuance of convertible promissory notes
    on July 21, 1999, and recorded the obligation net of a $12.9 million
    discount; and

  . the pro forma as adjusted capitalization of Cerent after giving effect to
    the conversion of all outstanding shares of convertible preferred stock
    into 32,990,691 shares of common stock, the automatic conversion of the
    convertible promissory notes into      shares of common stock upon
    completion of this offering, at an assumed initial public offering price
    of $   per share and the sale of    shares of common stock in this
    offering at an assumed initial public offering price of $    per share
    after deducting the estimated underwriting discounts and commissions and
    estimated offering expenses payable by us.

   This table should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
June 30, 1999
                                      ------------------------------------------
                                                                     Pro Forma
                                       Actual        Pro Forma      As Adjusted
                                      ------------  ------------   -------------
                                       (in thousands, except share data)
                                                  (unaudited)
Long-term debt, net of discount...... $      5,001   $     22,144
                                      ------------   ------------      --------
Stockholders' equity:
 Convertible preferred stock, $0.001
  par value per share, issuable in
  series: 37,709,088 shares
  authorized, 32,990,691 shares
  issued and outstanding, actual and
  pro forma: 10,000,000 shares
  authorized, none issued or
  outstanding, pro forma as
  adjusted...........................       64,989         64,989
 Common stock, $0.001 par value per
  share, 150,000,000 shares
  authorized, 33,612,476 shares
  issued and outstanding, actual and
      shares issued and outstanding
  pro forma, and 300,000,000 shares
  authorized and    shares issued and
  outstanding, pro forma as
  adjusted...........................       55,868         68,725
Notes receivable from stockholders...      (11,891)       (11,891)
Deferred stock compensation..........      (35,770)       (35,770)
Accumulated deficit..................      (59,712)       (59,712)
                                      ------------   ------------      --------
  Total stockholders' equity.........       13,484         26,341
                                      ------------   ------------      --------
  Total capitalization............... $     18,485   $     48,485
                                      ============   ============      ========
---------------------

   The above table is based on shares outstanding as of June 30, 1999. This
table excludes:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.

                                       19
DILUTION

   The pro forma net tangible book value of our common stock on June 30, 1999
was $      , or approximately $    per share. Pro forma net tangible book value
represents the amount of our total tangible assets less total liabilities
(after giving effect to the proceeds received from the issuance of the
convertible promissory notes on July 21, 1999), divided by the number of shares
of common stock outstanding after giving pro forma effect to the conversion of
all outstanding shares of convertible preferred stock into 32,990,691 shares of
common stock as of June 30, 1999 and the automatic conversion of the
convertible promissory notes into     shares of common stock upon completion of
this offering at an assumed initial public offering price of $    share.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately following this offering. After giving
effect to our sale of     shares of common stock at an assumed initial public
offering price of $     and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our
pro forma net tangible book value would have been $      , or approximately
$    per share. This represents an immediate increase in net tangible book
value of $        per share to existing stockholders and an immediate dilution
in net tangible book value of $    per share to new investors.
Assumed initial public offering price per share........................     $
  Pro forma net tangible book value per share as of June 30, 1999...... _  $
  Increase in pro forma net tangible book value per share attributable
   to new investors....................................................
Pro forma net tangible book value per share after this offering........
                                                                            ---
Dilution in pro forma net tangible book value per share to new
 investors.............................................................     $
                                                                            ===
The following table summarizes on a pro forma basis at June 30, 1999 after
giving effect to the conversion of all outstanding shares of our convertible
preferred stock into an aggregate of 32,990,691 shares of common stock
immediately prior to completion of this offering and the automatic conversion
of the convertible promissory notes into     shares of common stock upon
completion of this offering at an assumed initial public offering price of $
share, the difference between the number of shares of common stock purchased
from us, the total consideration paid to us and the average price paid per
share by existing stockholders and by new investors purchasing common stock in
this offering before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, assuming an initial
public offering price of $    per share:
Shares Purchased      Total Consideration
                         -------------------   ---------------------   Average Price
                         Number    Percent      Amount     Percent       Per Share
                         -------   ---------   ---------  ----------   -------------
Existing stockholders...                     %  $                    %      $
New investors...........
                          -------   ---------   --------   ----------
  Total.................                100.0%                  100.0%
                                    =========              ==========
The above tables are based on shares outstanding as of June 30, 1999. These
tables exclude:

  . 459,875 shares subject to outstanding options at a weighted average
    exercise price of $3.24 as of June 30, 1999, 1,426,337 shares of common
    stock available for future issuance under our 1997 Stock Plan and
    5,000,000 shares of common stock available for future issuance under our
    1999 Stock Plan;

  . 4,982,118 shares of common stock reserved for issuance on the exercise of
    warrants, of which 4,588,416 shares at a weighted average exercise price
    of $1.13 per share were outstanding as of June 30, 1999;

  . 500,000 shares of common stock available for issuance under our 1999
    Directors' Stock Option Plan; and

  . 500,000 shares of common stock available for issuance under our 1999
    Employee Stock Purchase Plan.

                                       20
SELECTED CONSOLIDATED FINANCIAL DATA

   The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data set forth below for the period from January 27, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the consolidated balance sheet data as of December 31, 1997 and 1998 have
been derived from the audited consolidated financial statements of Cerent
Corporation included elsewhere in this prospectus, which have been audited by
Ernst & Young LLP, Independent Auditors. The consolidated statement of
operations data for the six-month periods ended June 30, 1998 and 1999, and the
consolidated balance sheet data as of June 30, 1999, are unaudited. In the
opinion of management, all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
results of operations for these periods. The consolidated financial data for
the six-month period ended June 30, 1999 are not necessarily indicative of
results to be expected for any future period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Period from
                                            January 27,
                                                1997
                                            (inception)               Six Months Ended
                                                 to       Year Ended      June 30,
                                            December 31, December 31, -----------------
                                                1997         1998      1998      1999
                                            ------------ ------------ -------  --------
                                                                        (unaudited)
                                              (in thousands, except per share data)
Consolidated Statement of Operations Data:
 Revenue..................................    $     --    $     220   $    --  $  9,917
 Cost of revenue..........................          --        1,061        --     7,943
                                              --------    ---------   -------  --------
 Gross profit (loss)......................          --         (841)       --     1,974
 Operating expenses:
 Research and development.................       5,159       15,553     6,723     8,792
 Selling, general and administrative......       2,470        5,039     1,673    10,251
 Stock compensation.......................          --          510        --    10,800
                                              --------    ---------   -------  --------
  Total operating expenses................       7,629       21,102     8,396    29,843
                                              --------    ---------   -------  --------
 Operating loss...........................      (7,629)     (21,943)   (8,396)  (27,869)
 Interest expense and other, net..........        (229)        (607)     (268)   (1,435)
                                              --------    ---------   -------  --------
 Net loss.................................    $ (7,858)   $ (22,550)  $(8,664) $(29,304)
                                              ========    =========   =======  ========
 Basic and diluted net loss per share
  (1).....................................    $  (0.82)   $   (1.33)  $ (0.57) $  (1.36)
                                              ========    =========   =======  ========
 Shares used in computing basic and
  diluted net loss per share (1)..........       9,535       16,901    15,091    21,470
                                              ========    =========   =======  ========
 Pro forma basic and diluted net loss per
  share (1) (unaudited)...................                $   (0.67)           $  (0.54)
                                                          =========            ========
 Shares used in computing pro forma
  basic and diluted net loss per share (1)
  (unaudited).............................                   33,850              54,026
                                                          =========            ========
December 31,
                                              ----------------
                                               1997     1998   June 30, 1999
                                              ------- -------- -------------
                                                                (unaudited)
                                                        (in thousands)
Consolidated Balance Sheet Data:
 Cash and cash equivalents................... $ 6,758 $ 22,245    $ 5,794
 Working capital.............................   4,868   18,511      1,453
 Total assets................................  10,143   31,877     33,628
 Long-term debt, net of discount.............   3,718    4,229      5,001
 Total stockholders' equity..................   4,197   20,885     13,484
---------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
    of the determination of the number of shares used to compute per share
    data.

                                       21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

Overview

   We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our Cerent 454 efficiently integrates multiple voice and
data services in a single, compact platform and is designed to support any
transmission rate up to an aggregate of 240 Gbps. Our 454 supports multiple
service offerings from a single platform and provides flexibility and
scalability to accommodate the requirements of existing installed equipment and
growing bandwidth demands. The Cerent 454 provides a cost-effective solution
for our service provider customers and enables them to rapidly deploy a wide
range of applications and revenue generating services.

   We were incorporated in Delaware in January 1997 as Fiberlane
Communications, Inc. and commenced operations in April 1997. From our inception
through September 1998, our operating activities were primarily devoted to
increasing our research and development capabilities, designing our ASICs,
developing our software and developing and testing the Cerent 454. We also
staffed and trained our administrative, marketing and sales organizations. In
December 1998, we began shipping the Cerent 454 with volume shipments beginning
in the first quarter of 1999. As of June 30, 1999, we had shipped our 454 to 86
customers.

   Since our inception, we have incurred significant losses, and as of June 30,
1999, we had an accumulated deficit of $59.7 million. We have not achieved
profitability on a quarterly or an annual basis, and anticipate that we will
incur net losses for the foreseeable future. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, we will need to generate significantly higher
revenues to achieve and maintain profitability.

   Our revenue currently is derived from sales of one product, the Cerent 454.
We expect that a significant portion of our future revenue will continue to
come from sales of the Cerent 454. While we are developing and plan to
introduce future products and enhancements to our 454, we cannot assure you
that we will be successful in these efforts.

   We recognize revenue at the time of shipment, assuming that collectibility
is probable, unless we have future obligations or have to obtain customer
acceptance, in which case revenue is deferred until these obligations are met.
We provide for potential product returns and estimated warranty costs in the
period of the related sale.

   We currently sell the 454 through our direct sales force and have targeted
our initial sales efforts primarily to emerging IXCs, CLECs, independent
carriers and cable companies. We intend to pursue incumbent IXCs, RBOCs and
international carriers. In order to achieve significant revenue growth, we must
increase sales of our products to CLECs and the other small carriers and
effectively market and sell our products to large, established carriers, such
as RBOCs and incumbent IXCs. The expansion of our sales efforts to include
RBOCs and incumbent IXCs will necessitate the hiring of a significant number of
additional sales personnel. See "Risk Factors--Our future success depends on
our ability to increase sales of our products to CLECs and other relatively
small telecommunications carriers and to effectively market and sell our
products to large, established carriers."

   Our cost of revenue consists of amounts paid to third-party manufacturers,
manufacturing start-up and personnel and related costs. We outsource our
manufacturing and assembly requirements. Accordingly, a significant portion of
our cost of revenue consists of payments to a third-party contract
manufacturer. Manufacturing engineering and documentation control are conducted
at our facility in Petaluma, California. Our gross margins will be affected
primarily by the following factors:

  . demand for our products;

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

                                       22
. changes in our pricing policies and those of our competitors;

  . the mix of product configurations sold; and

  . the volume of manufacturing and the effect on manufacturing costs.

   Research and development expenses consist primarily of salaries and related
personnel costs, non-recurring engineering charges and prototype costs related
to the design, development, testing and enhancement of our products, including
our ASICs, software and system development. We expense our research and
development costs as they are incurred. Several components of our research and
development effort require significant expenditures, the timing of which can
cause significant quarterly variability in our expenses. Our ASIC development
requires an upfront payment of non-recurring engineering charges, regardless of
whether the integrated circuit works, and a per unit cost payable as ASICs are
purchased. Additionally, we incur significant expenses in connection with the
purchase of testing equipment for our products. With several complex ASICs in
our architecture, we will incur large non-recurring engineering and prototype
expenses with every enhancement of the Cerent 454 and any new product
development. We are devoting substantial resources to the continued development
and enhancement of the Cerent 454 and the introduction of new products. We
believe that research and development is critical to our strategic product
development objectives and intend to leverage our leading technology to meet
the changing requirements of our customers. As a result, we expect our research
and development expenses to increase in absolute dollars in the future.

   Selling, general and administrative expenses consist primarily of salaries
and related personnel costs of sales and marketing personnel, salaries and
related expenses for executive, finance, accounting, facilities, human
resources and information technology personnel, recruiting expenses and
professional fees, commissions and promotional and other marketing expenses. We
expect that sales and marketing expenses will increase substantially in
absolute dollars in the future as we increase our direct sales efforts, hire
additional sales and marketing personnel, initiate additional marketing
programs and establish sales offices in new locations. We expect that general
and administrative expenses will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company. We do not allocate general corporate
overhead expenses which include but are not limited to rent and utilities.

   In connection with the granting of certain stock options and warrants during
the year ended December 31, 1998 and the six-month period ended June 30, 1999,
we recorded deferred stock compensation of $2.8 million and $41.3 million,
respectively. Stock compensation primarily includes the amortization of stock
compensation charges resulting from the granting of stock options and warrants
with exercise prices below the deemed fair value of our common stock on the
date of grant. These amounts are being amortized using a graded vesting method
over the vesting periods of the applicable options or term of the related
warrants. We amortized $332,000 of deferred stock compensation during the year
ended December 31, 1998, and $5.7 million of deferred stock compensation during
the six-month period ended June 30, 1999. During the year ended December 31,
1998 and the six-month period ended June 30, 1999, we also recorded stock
compensation charges of $178,000 and $5.1 million, respectively, relating to
the issuance of convertible preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.
Including amounts recorded through June 30, 1999, we expect to amortize
approximately $23.3 million of this deferred compensation expense in 1999,
$15.7 million in 2000, $7.0 million in 2001 and $2.7 million in 2002. See Note
3 of Notes to Consolidated Financial Statements.

   In connection with our financing obligations, we recorded $338,000, $163,000
and $8.8 million as discounts on long-term debt for the period ended December
31, 1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, relating to the deemed fair value of warrants which were issued in
connection with our debt financings. The discounts are being amortized over the
term of the long-term debt as interest expense. We recorded $76,000, $139,000
and $1.0 million of amortization expense for the period ended December 31,
1997, year ended December 31, 1998 and the six-month period ended June 30,
1999, respectively. Including amounts amortized through June 30, 1999, we
expect to amortize approximately

                                       23
$2.8 million of this discount in 1999, $3.7 million in 2000 and $2.6 million in
2001. See Note 3 of Notes to Consolidated Financial Statements.

   As of December 31, 1998, we had approximately $20.4 million of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Such net operating loss carryforwards expire at various
dates beginning in 2012 to the extent that they are not utilized. We have not
recognized any benefit from the future use of loss carryforwards for these
periods, or for any other periods, since inception. Management's evaluation of
all the available evidence in assessing realizability of the tax benefits of
such loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize the tax benefits currently.

Results of Operations

 Revenue

   The quarter ended December 31, 1998 was the first quarter we recognized
revenue. Revenue was $220,000 for the year ended December 31, 1998 and $9.9
million for the six-month period ended June 30, 1999. The increase in revenue
was directly related to the increase in sales of the Cerent 454.

 Cost of Revenue

   Cost of revenue was $1.1 million for the year ended December 31, 1998 and
$7.9 million for the six-month period ended June 30, 1999. We began shipping
our product in the quarter ended December 31, 1998. Cost of revenue as a
percentage of revenue was very high during these periods due to the large cost
of initial start-up of production and the low volume of sales.

 Research and Development Expenses

   Research and development expenses were $15.6 million for the year ended
December 31, 1998, an increase of $10.4 million from $5.2 million for the
period ended December 31, 1997, and were $8.8 million for the six-month period
ended June 30, 1999, an increase of $2.1 million from $6.7 million for the
comparable period of 1998. The period-to-period increases were primarily due to
increased costs associated with a significant increase in personnel and
personnel-related expenses. An increase in non-recurring engineering costs and
an increase in prototype expenses also contributed to the period-to-period
increases. Development is essential to our future success and we expect that
research and development expenses will increase in absolute dollars in future
periods.

 Selling, General and Administrative Expenses

   Selling, general and administrative expenses were $5.0 million for the year
ended December 31, 1998, an increase of $2.5 million from $2.5 million for the
period ended December 31, 1997, and were $10.3 million in the six-month period
ended June 30, 1999, an increase of $8.6 million from $1.7 million for the
comparable period of 1998. The period-to-period increases were due primarily to
a significant increase in the number of sales and marketing and general and
administrative personnel, increased recruiting expenses and other related
personnel costs. An increase in professional fees and an increase in rent and
utilities also contributed to the period-to-period increases.

 Stock Compensation

   Stock compensation expenses were $510,000 and $10.8 million for the year
ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively. The increase was due primarily to an increase in the number of
options granted to our employees at exercise prices which were below the deemed
fair value of our common stock and $5.1 million of stock compensation expense
relating to the issuance of preferred stock to certain of our officers at an
exercise price which was below the deemed fair value of our common stock.

                                       24
Interest Expense and Other, Net

   Interest expense and other, net, relates primarily to expenses associated
with our financing obligations. Interest expense and other, net, totaled
$229,000 and $607,000 for the period ended December 31, 1997 and year ended
December 31, 1998, respectively, and $268,000 and $1.4 million for the six-
month periods ended June 30, 1998 and 1999, respectively. These increases were
due primarily to increased borrowings under financing obligations and related
amortization of discounts relating to warrants issued in connection with these
obligations.

Quarterly Results of Operations

   The following table presents our operating results for the quarters ended
September 30 and December 31, 1998 and March 31 and June 30, 1999. The 454 was
placed into production in the quarter ended September 30, 1998. The information
for each of these quarters is unaudited and has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with our audited
consolidated financial statements and the related notes appearing elsewhere in
this prospectus. These operating results are not necessarily indicative of the
results of any future period.
Quarter Ended
                                ---------------------------------------------
                                September 30, December 31, March 31, June 30,
                                    1998          1998       1999      1999
                                ------------- ------------ --------- --------
                                                 (unaudited)
                                               (in thousands)
Consolidated Statement of
 Operations Data:
 Revenue.......................    $    --      $   220     $ 2,442  $  7,475
 Cost of revenue...............        346          715       2,338     5,605
                                   -------      -------     -------  --------
 Gross profit (loss)...........       (346)        (495)        104     1,870
 Operating expenses:
  Research and development.....      4,312        4,518       4,191     4,601
  Selling, general and
   administrative..............      1,332        2,034       4,406     5,845
  Stock compensation...........         49          461         783    10,017
                                   -------      -------     -------  --------
   Total operating expenses....      5,693        7,013       9,380    20,463
                                   -------      -------     -------  --------
 Operating loss................     (6,039)      (7,508)     (9,276)  (18,593)
 Interest expense and other,
  net..........................       (214)        (125)       (149)   (1,286)
                                   -------      -------     -------  --------
 Net loss......................    $(6,253)     $(7,633)    $(9,425) $(19,879)
                                   =======      =======     =======  ========
Our revenues and operating results are likely to fluctuate significantly in
the future on a quarterly and an annual basis due to a number of factors, many
of which are outside of our control. The primary factors that may affect us
include the following:

  . variations in the timing and size of sales and shipments of our products;

  . delays or cancellations of product orders by our customers;

  . new product introductions by us or our competitors;

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

  . mix in product configurations that we sell;

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

  . our ability to obtain sufficient supplies of the sole or limited source
    components, including ASICs;

  . our ability to attain and maintain production volumes and quality levels
    for our current and future products;

  . our ability to control expenses and manufacturing costs;

                                       25
. costs related to acquisitions of technology or businesses; and

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

   We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, any unanticipated decline
in revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is likely that in some future quarters, our operating results may be below
the expectations of securities analysts and investors, which could cause the
price of our common stock to decline.

Liquidity and Capital Resources

   From inception through June 30, 1999, we have financed our operations
primarily through private sales of our capital stock totaling approximately
$50.5 million in net proceeds. We have also financed our operations through net
borrowings on long-term debt agreements totaling approximately $21.0 million.
On July 21, 1999, we received $30.0 million in proceeds through the issuance of
convertible promissory notes. At June 30, 1999, cash and cash equivalents
totaled $5.8 million. As of June 30, 1999, we had $10.0 million available under
long-term debt agreements.

   Cash used in operating activities for the year ended December 31, 1998 was
$19.8 million, an increase of $13.0 million from the $6.8 million used for the
period ended December 31, 1997. The increase was primarily due to an increase
in our net loss from $7.9 million in fiscal 1997 to $22.6 million in fiscal
1998, partially offset by increased non-cash operating charges in 1998. Cash
used in operating activities for the six-month period ended June 30, 1999 was
$17.3 million, an increase of $10.1 million from the $7.2 million used for the
six-month period ended June 30, 1998, as a result of an increase in our net
loss from $8.7 million for the six-month period ended June 30, 1998 to $29.3
million for the six-month period ended June 30, 1999, partially offset by
increased non-cash operating charges.

   Cash used in investing activities for the year ended December 31, 1998 was
$4.2 million, an increase of $0.6 million from the $3.6 million used for the
period ended December 31, 1997. Cash used in investing activities for the six-
month period ended June 30, 1999 was $9.3 million, an increase of $6.8 million
from the $2.5 million used for the six-month period ended June 30, 1998. Cash
used in investing activities for these periods primarily reflected the purchase
of computers and other equipment and software used in our development
activities and other equipment and furniture used in our operations.

   Cash provided by financing activities was $17.1 million for the period ended
December 31, 1997, $39.5 million for the year ended December 31, 1998 and $10.1
million for the six-month period ended June 30, 1999. Cash provided by
financing activities for these periods was derived primarily from private sales
of convertible preferred stock and long-term debt borrowings. See "Related
Party Transactions" and Notes 3, 6 and 9 of Notes to Consolidated Financial
Statements.

   We believe that the net proceeds from this offering, together with our
current cash and cash equivalents will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
12 months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may

                                       26
seek to sell additional equity or debt securities. If additional funds are
raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
term of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders, and we cannot be certain that additional
financing will be available in amounts or on terms acceptable to us, if at all.
If we are unable to obtain this 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.

Year 2000 Compliance

 Impact Of The Year 2000 Computer Problem

   The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

 State Of Readiness Of Our Products

   We have designed the Cerent 454 for use in the year 2000 and beyond and
believe it is year 2000 compliant. However, our products are generally
integrated into larger networks involving sophisticated hardware and software
products supplied by other vendors. Each of our customers' networks involves
different combinations of third party products. We cannot evaluate whether all
of their products are year 2000 compliant. We may face claims based on year
2000 problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no such
claims have been made, we may in the future be required to defend our products
in legal proceedings which could be expensive regardless of the merits of such
claims.

 State Of Readiness Of Our Internal Systems

   Our business may be affected by year 2000 issues related to non-compliant
internal systems developed by us or by third-party vendors. We have received
assurances that all material systems from third-party vendors in use by us are
year 2000 compliant. We are not currently aware of any year 2000 problem
relating to any of our material internal systems. We are in the process of
testing all such systems for year 2000 compliance and plan to complete such
testing before September 30, 1999. We do not believe that we have any
significant systems that contain embedded chips that are not year 2000
compliant. Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as our manufacturers,
suppliers, customers and other service providers. We believe that absent a
systemic failure outside our control, such as a prolonged loss of electrical or
telephone service, year 2000 problems at third parties such as manufacturers,
suppliers, customers and service providers will not have a material impact on
our operations. If our manufacturers, suppliers, vendors, partners, customers
and service providers fail to correct their year 2000 problems, these failures
could result in an interruption in, or a failure of, our normal business
activities or operations. If a year 2000 problem occurs, it may be difficult to
determine which party's products have caused the problem. These failures could
interrupt our operations and damage our relationships with our customers. Due
to the general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party manufacturers, suppliers and vendors, we are unable to
determine at this time whether year 2000 failures could harm our business and
our financial results. Our customers' purchasing plans could be affected by
year 2000 issues if they need to expend significant resources to fix their
existing systems to become year 2000 compliant. This situation may reduce funds
available to purchase our products. In addition, some customers may wait to
purchase our products until after the year 2000, which may reduce our revenue.

                                       27
Risks

   Failures of our internal systems to be year 2000 compliant could temporarily
prevent us from processing orders, issuing invoices and developing products and
could require us to devote significant resources to correcting such problems.
Due to the general uncertainty inherent in the year 2000 computer problem,
resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, we are unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on our business,
results of operations or financial condition.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which will be effective for the fiscal year ended
December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.

Quantitative and Qualitative Disclosures About Market Interest Rate Sensitivity

   Our exposure to market risk is principally confined to our cash and money
market accounts which have short maturities and, therefore, minimal and
immaterial risk.

                                       28
BUSINESS

Overview

   We are a leading provider of next-generation optical transport solutions
that enable network service providers to meet the demands resulting from the
rapid growth in the volume of communications traffic. We deliver an
evolutionary, multi-service optical transport platform designed to dramatically
lower network operating costs and increase the efficiency of bandwidth delivery
within today's congested transport networks. Our Cerent 454 efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate up to an aggregate of 240 Gbps.
The 454 provides a cost-effective solution for our service provider customers
and enables them to rapidly deploy a wide range of applications and revenue
generating services. As of June 30, 1999, we had shipped the Cerent 454 to 86
customers, including ALLTEL, Buckeye TeleSystem, Frontier Communications, GST
Telecom, Hutchinson Telephone, Nextlink, PSINet, Qwest Communications, RCN
Corp., Sho-Me Power Electric, TCI and Williams Communications.

Industry Background

 Dramatic Increase in the Volume of Data Traffic

   The volume of data traffic over communications networks has surpassed
traditional voice traffic and continues to grow dramatically. Industry sources
have predicted that voice will account for less than 1% of worldwide
communications traffic by 2004. The primary reason for the increase in data
traffic is the emergence of the Internet as an essential communications and
transaction medium. According to International Data Corporation, the number of
Internet users worldwide reached approximately 142 million in 1998 and is
forecasted to grow to approximately 502 million by the end of 2003. The
increasing use of the Internet among consumers and business users is primarily
attributable to easier and cheaper access to the Internet, greater diversity of
devices that are able to access the Internet and the demand for bandwidth-
intensive applications and enhanced services. E-commerce in particular is
generating enormous data traffic over communications networks as it is becoming
a critical element of many businesses' strategies. According to International
Data Corporation, e-commerce revenues are expected to grow from approximately
$32 billion at the end of 1998 to approximately $426 billion by the end of
2002.

   This increase in data traffic has placed significant constraints on the
existing communications infrastructure which was originally designed to carry
only voice traffic over the public switched telephone network, or PSTN. Such
constraints have manifested themselves in the form of network congestion,
decreases in reliability and an inability to scale effectively with an ever-
increasing volume of traffic.

   To accommodate the increase in data traffic as well as meet the demand for
bandwidth-intensive applications and enhanced services, service providers
recognize the need to upgrade their communications networks. With the advent of
telecommunications deregulation and the subsequent increased competition,
existing as well as emerging service providers are deploying new communications
infrastructure equipment to carry the increasing volume of data traffic while
optimizing the utilization of existing networks.

 The Communications Network

   Service provider communications networks consist of a complex set of several
interlinking networks: the Internet, the public switched telephone network and
private corporate networks. These networks consist of a vast conglomeration of
equipment, which is typically owned by communications service providers and
cannot be changed easily or comprehensively without an interruption of service.

   The communications networks can be conceptually classified into the
following three categories:

  . access network

  . optical transport network

                                       29
. optical backbone or core

[Graphic depicting the access, optical transport and optical backbone networks.
The access network is depicted as six access services, including IP/ATM, POTS,
DSL, cable modem, frame relay and analog/ISDN. The optical transport network is
depicted as a interconnected web of fiber optic transmission lines within a
cloud shape. The optical backbone is depicted as an interconnected web of fiber
optic transmission lines within a smaller cloud shape.

   The access network, often referred to as the last mile, carries electrical
signals via telephone copper twisted-pair wiring, coaxial cable and wireless
transmissions between end users' and service providers' networks. The optical
transport network consists of fiber optic transmission lines that aggregate the
multiple electronic signals from the access portion and interconnects these
aggregation points to the fiber optic backbone or core. The fiber optic
backbone consists of long-haul fiber optic lines designed to carry enormous
amounts of communications traffic over great distances.

 Access Network Upgrades Are Enabling High-Speed Broadband Delivery

   The access network connects individual end users and corporate local area
networks, or LANs, to service provider networks and was originally designed to
support low-bandwidth analog voice traffic. Due to the increased demands for
high-bandwidth data traffic and enhanced voice services that now must pass over
this traditional analog network, service providers have begun to install new
high-speed access equipment. These new higher speed broadband digital
transmission technologies include:

  . digital subscriber line, or DSL, over traditional copper twisted-pair
    wiring;

  . cable modem technology over coaxial cable; and

  . broadband wireless.

   Each of these technologies has substantially higher data transmission speeds
or bandwidth than traditional telephone lines and is being deployed at rapid
rates to meet the growing demands of end users. The Gartner Group estimates
that worldwide revenue for DSL equipment will increase from approximately $700
million in 1999 to approximately $3.2 billion by 2003 and that worldwide cable
modem shipments will increase from approximately 1.8 million in 1999 to
approximately 5.3 million by 2003. In addition to supporting multiple types of
emerging broadband traffic, access networks must also support standards such as
internet protocol, or IP, asynchronous transfer mode, or ATM, and frame relay.

   Many vendors focus exclusively on developing new technologies that serve the
access portion of the network. These vendors supply several separate devices to
handle disparate traffic types as existing equipment is unable to aggregate
multiple data types at multiple speeds. This traditional approach of accessing
service-provider networks via separate devices results in a complex access
solution that is expensive, consumes valuable space at a carrier's central
offices and a cable operator's headend locations and is difficult to manage and
maintain. These new broadband services operate in conjunction with traditional
voice technology and are incremental to the existing network resources. As a
result, legacy systems will continue to exist in the network. Accordingly, the
equipment linking the access network to the optical transport network must
provide the

                                       30
flexibility to support the coexistence of multiple broadband services as well
as voice traffic. We expect that this problem will be exacerbated as broadband
services become more pervasive.

 Backbone Network Upgrades Are Enabling Higher Capacity

   The backbone network is designed to carry the heaviest aggregated traffic
and has traditionally been dominated by a small number of incumbent inter-
exchange carriers, or IXCs, such as AT&T, MCI WorldCom and Sprint. More
recently, new backbone providers such as Level 3, Qwest Communications and
Williams Communications have emerged to support increased capacity and
performance demands. In recent years, carriers have invested significantly to
upgrade transmission capacity and equipment in the backbone. In order to meet
increased bandwidth demands, carriers have adopted and deployed new equipment
and enhanced technologies that include:

  . high performance frame relay and ATM switches and terabit IP routers that
    enable the networks to switch and route the increasing volumes of data
    traffic;

  . dense wave division multiplexing, or DWDM, systems that, depending on the
    commercial system deployed, enhances the capacity of existing fiber optic
    lines by a factor of 8, 32, 64 or 128;

  . optical transmission equipment that enables transition from slower
    speeds, such as the industry standard referred to as OC-3 operating at
    155 Mbps to the higher standards OC-48 operating at 2.5 Gbps and
    eventually OC-192 operating at 10 Gbps; and

  . high-capacity fiber optic cabling which maintains the integrity of a
    signal for longer distances.

   The advent of these new technologies continues to increase the capacity of
the fiber optic backbone. This increased capacity is placing increasing demands
on the optical transport network.

 Limitations of the Traditional Optical Transport Network

   The optical transport network consists of optical equipment that aggregates
multiple traffic types from the access network and interconnects these
aggregation points to the long-haul backbone portion of the network. Service
providers which own and deploy equipment in the transport portion of the
network include competitive local exchange carriers, or CLECs, independent
telephone companies, utility companies, cable companies, Internet service
providers, or ISPs, emerging IXCs such as Level 3, Qwest and Williams, as well
as traditional regional Bell operating companies, or RBOCs, and incumbent IXCs,
such as AT&T, MCI WorldCom and Sprint. In addition, international carriers are
also expanding their transport networks.

   The optical transport network consist within and interconnects metropolitan
area, regional, national and interoffice networks and currently consists
primarily of legacy voice-based technologies, such as add/drop multiplexers, or
ADMs, and digital cross-connects, or DCS, that aggregate access traffic and
place it onto the optical backbone. Current systems in the optical transport
network utilize legacy equipment that conforms to standard fiber-optic
transmission signals called synchronous optical network, or SONET. The
international variation of SONET is called synchronous digital hierarchy, or
SDH. Dataquest estimates that approximately $9 billion of SONET/SDH and DCS
equipment was deployed in the optical transport network in 1998.

   These legacy systems were designed for predictable analog voice traffic and
cannot efficiently handle the multiple data and voice service offerings enabled
by the proliferation of broadband access technologies. Currently, separate
equipment must be dedicated to each service type because existing equipment is
unable to aggregate multiple data types at multiple speeds. Changes or upgrades
to existing equipment are expensive, take up critical space in a service
providers' central office or headend location, require significant time and
effort to implement and increase the risk of network downtime. For example, the
mere upgrading from an OC-12 at 622 Mbps to an OC-48 at 2.5 Gbps SONET system
is very expensive and requires a replacement of existing SONET equipment,
potentially from multiple vendors. This upgrade can take several days to

                                       31
implement. Because service providers have no tolerance for network downtime,
they are consequently forced to build a second, fully redundant network to
ensure uninterrupted service.

   Traditional transport systems cannot evolve to accommodate the multiple
services and rapid growth that characterize networks in the Internet era. While
new devices and technologies have been introduced to address the increases in
data traffic over the access and backbone portions of the network, the
transport portion has not yet been similarly addressed with new broadband
optimized technologies and equipment.

 The Cerent Opportunity

   As new higher bandwidth access and backbone technologies proliferate on
either side of the transport network, service providers are increasingly
looking for transport equipment that:

  . supports multiple service offerings from a single platform;

  . offers scalability and flexibility to accommodate both the requirements
    of existing installed equipment and the rapidly increasing bandwidth
    demands of service providers' customers;

  . enables rapid deployment of new services and non-service affecting
    upgrades;

  . provides cost-effective installation and maintenance;

  . operates within the service providers' existing network management system
    for operations, administration, maintenance and provisioning; and

  . satisfies carrier-class reliability and system certifications.

The Cerent Solution

[Graphic depicting two of our Cerent 454 products connected by a line across a
cloud shape. Each of the Cerents 454's are in turn connected by lines to
various dots, which are labelled "Voice/TDM," "Video," "POS", "IP," "ATM" and
"Frame Relay."]

   We design, develop and market an evolutionary, multi-service optical
transport platform designed to dramatically lower network operating costs and
increase the efficiency of bandwidth delivery within today's congested
transport networks. Our high-speed solution, the Cerent 454, efficiently
integrates multiple voice and data services in a single, compact platform and
is designed to support any transmission rate to an aggregate of 240 Gbps. The
Cerent 454 provides a cost-effective solution for our service provider
customers and enables them to rapidly deploy a wide range of applications and
revenue generating services. We believe that our solution provides service
providers with the following key competitive advantages and benefits:

   Supports Multiple Service Offerings from a Single Platform. Our system
enables service providers to meet their optical transport equipment needs from
a single supplier instead of having to purchase a multitude of different
equipment from multiple vendors. While traditional SONET transport system
architectures have been optimized for voice-only based services, our system
efficiently supports voice services, as well as IP, ATM and frame relay in a
single, compact platform. It is also optimized for all emerging broadband
access traffic

                                       32
including DSL, cable modem and wireless. Our Cerent 454 platform efficiently
aggregates all widely used traffic types, operating at different speeds, and
efficiently delivers the data for transmission over the optical network. The
Cerent 454 integrates the functionality of traditional SONET add-drop
multiplexers, digital cross-connect systems and packet/cell switches on a
single platform.

   Scalable, Flexible, Evolutionary System. Our system is capable of easily and
quickly responding to unpredictable network growth and usage, enabling our
service provider customers to quickly take advantage of future revenue
opportunities. The Cerent 454 supports over-subscription of bandwidth by
utilizing statistical multiplexing and packet/cell switching to aggregate
bandwidth, thus avoiding wasted bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. Flexible slot utilization is
achieved via a plug-and-play architecture as the system's slots support all
Cerent 454 plug-ins and hence facilitate scalability to higher transmission
speeds. Our software-based provisioning system delivered within the 454 is
designed with maximum flexibility to support a comprehensive set of transport
layer protocols including SONET/SDH and DWDM. In addition, our Cerent 454
system supports the ring architectures of the current SONET/SDH networks as
well as the mesh network architectures that will be deployed as service
providers migrate to fully transparent optical network architectures. The
modular structure provides a migration path for service providers which allows
them to leverage their existing infrastructure as end-user requirements and
technologies evolve.

   Rapid Deployment of New Services and Non-Service Affecting Upgrades. Our
Cerent 454 system was designed to be shipped, installed and configured more
quickly than legacy transport equipment. We currently deliver the Cerent 454
within ten days of receipt of order and our customers have installed and turned
up the 454 in less than an hour. Rapid service initiation is achieved through
eliminating the need to make modifications to the hardware elements of the
network and through an innovative route assignment architecture that simplifies
the installation process and enhances the efficiency of sending information
across legacy transport networks. Our six proprietary application specific
integrated circuits, or ASICs, enable service providers to scale transmission
capacity from relatively low-speed OC-3 optical transport at 155 Mbps to higher
speed OC-12 optical transport at 622 Mbps to OC-192 optical transport at 10
Gbps without any changes in network hardware other than a modular line card
swap. This eliminates the need for a complete replacement of existing equipment
and thereby preserves existing investments and minimizes the risk of downtime
and the cost of equipment redundancy. Changes or upgrades to the system can be
performed without any interruption of service.

   Cost-Effective Deployment and Dramatically Lower Lifecycle Costs. Our system
provides customers with a solution that can be rapidly put to use with a modest
initial capital investment. Our Cerent 454 provides for cost-effective
deployment and significantly lower lifecycle costs, as compared to legacy
transport systems. The Cerent 454 supports any transmission speed from DS-1 at
1.5 Mbps to OC-48 at 2.5 Gbps at reduced cost and space requirements relative
to current generation optical transport equipment. The system's small size,
which is 18 1/2 inches tall by 19 inches wide by 12 inches deep, ensures
optimal rack space and power usage. This compares to legacy transport equipment
which can occupy multiple seven-foot racks. The lifecycle cost of the equipment
is further reduced with fewer card types, simplified installation and
maintenance procedures and easy upgrades. Our Cerent 454 has a graphical user
interface that works on any standard personal computer, thus managing our
Cerent 454 network does not require the purchase of an outboard workstation or
separate element management software.

   Interoperability with Existing Networks. The Cerent 454 offers
interoperability with other equipment in the optical transport network. We
actively participate in developing industry-wide standards to continue to
facilitate end-to-end interoperability. Our 454 operates within the service
provider's existing network management system for operations, administration,
maintenance and provisioning. In addition, to further reduce time to service
for service providers the Cerent 454 is compatible with existing service
provider operational systems and support, or OSS.

                                       33
High Reliability and Robustness. The Cerent 454 offers the level of
reliability demanded by the operators of the world's largest networks. Our
system combines the robustness required for customer premise equipment and
outside plant compliance with the stringent Bellcore specifications for central
office environments. The 454 is conditioned for a wide variety of environments
and is network equipment buildings standard, or NEBS, level 3 certified which
requires the 454 to be able to operate in severe environments, including
temperatures ranging from -40(degrees)C to +60(degrees)C. Additionally, the
Cerent 454 is rural utility services, or RUS, listed allowing rural independent
carriers to acquire our product using government loans. The Cerent 454 performs
reliably in a wide variety of physical locations within the optical transport
network, including Internet service providers' points of presence, carriers'
central offices and cable operators' headend locations, customer premises,
outside plant cabinets and multi-dwelling units.

The Cerent Strategy

   Our objective is to be the leading supplier of evolutionary optical
transport solutions. The key elements of our strategy include the following:

   Continue to Develop and Introduce Products that Address Service Providers'
Optical Transport Needs. We intend to continue developing products that provide
scalable, flexible and cost-effective optical transport solutions that will
operate reliably under a wide range of operating environments. The number of
services used to access the optical network is large and growing. We have
designed our initial product, the Cerent 454, to support all modes of access to
the optical network including IP, ATM, frame relay, DSL, cable modem and
wireless and to facilitate such access at multiple speeds without affecting
service. We will continue to focus our product development efforts on providing
transport solutions that accommodate all emerging types of access to the
optical network. At the same time, we intend to preserve the ability of such
products to accommodate traditional types of access so that our customers will
not be forced to make unnecessary upgrades to their existing network
infrastructure or change their preferred forms of access.

   Penetrate a Large Base of Customers with Targeted Direct Sales and
Support. We intend to continue selling our products direct to customers through
our internal sales force. We believe that it is important to take a targeted
approach to the implementation of our sales strategy and have focused initially
on emerging IXCs, CLECs, independent carriers and cable companies. We intend to
pursue incumbent IXCs, RBOCs and international carriers. By focusing our
initial sales efforts on the service providers that can move quickly to adopt
new technologies, we can more rapidly obtain a large installed user base. We
believe that the adoption and implementation of our products, such as the 454,
by a large number of CLECs and independent carriers will help promote the sale
of our products to the incumbent IXCs and RBOCs. Additionally, 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.

   Maintain and Extend Product and Technology Leadership. We believe that we
are currently a technology leader in developing optical transport solutions and
will continue to develop products that are designed to support multiple forms
of broadband access and all leading network technologies. Network service
providers require optical transport solutions that support existing
architectures and types of access and also permit migration to new or upgraded
versions of existing technologies. The Cerent 454 currently supports widely-
deployed, existing SONET architecture, and also can support a wide variety of
network technologies such as an all-optical mesh architecture. We intend to
continue to invest in the development of innovative network software, hardware
and ASIC designs to rapidly develop new products and product enhancements that
further increase the functionality of transport systems. We intend to continue
to build our research and development efforts, cross-leveraging our
intellectual property and technical expertise as we transition to a multi-site,
multi-project organization.

   Enable Fast and Cost-Effective Deployment of Products. Our objective is to
ensure rapid deployment of optical transport systems to our customers. In this
effort, we currently outsource manufacturing, are developing

                                       34
a Web-based ordering system and will continue to design rapidly-installable
products. We are currently able to deliver our product on the customer request
date, which is typically within ten days of receiving an order. Additionally,
by outsourcing manufacturing to a turnkey manufacturer, we can focus on our
core competencies of designing flexible, scalable transport solutions.

   Extend the Optical Transport Network. As the optical transport network
extends into areas traditionally referred to as the last mile, access providers
will require systems that link electrical access networks with the optical
backbone closer to the end user. We intend to continue to develop optical
transport products that will expand the traditional reach of the optical
transport network and create demand for our products in new markets.

Products and Technology

 Cerent 454

   The Cerent 454 is a powerful 240 Gbps next-generation optical transport
system designed to dramatically lower the cost and increase the efficiency of
bandwidth delivery within optical access and transport networks.

      [A photograph of the Cerent 454 with access and transmission rates.]

   The Cerent 454 base price ranges generally between $20,000 and $50,000 based
on configuration.

 Features of the Cerent 454

   Multiple Uses in Transport Networks. The Cerent 454 is designed for a broad
range of uses and locations in optical transport networks. The Cerent 454
aggregates a variety of voice, data and video services from access networks
over a SONET infrastructure. In backbone networks, the Cerent 454 interconnects
carrier exchanges, cable headends and Internet service provider POPs by
providing next-generation transport and integrated bandwidth management. The
system facilitates the transition of legacy SONET networks to the data
intensive networks of the future. The environmentally hardened platform is
certified at temperatures of -40(degrees)C to +60(degrees)C and can be deployed
in central office, equipment room, outside plant cabinet and customer premises
locations. The Cerent 454 is a fully NEBS level 3 and RUS certified, carrier-
class product.

   Low Cost Bandwidth. The Cerent 454 high-speed optical transport system
dramatically lowers the cost of bandwidth by supporting up to 240 Gbps from a
single shelf. Integration of access, transport and bandwidth management
capabilities in one platform results in significant first-cost and lifecycle-
cost advantages. Optical transport scales from OC-3 at 155 Mbps to OC-192 at 10
Gbps in a single assembly with no impact to service thereby eliminating costly
and cumbersome capacity upgrades. Cerent 454 plug-ins offer bandwidth in
modular increments to improve efficiency and reduce start-up costs. Capacity
can be added as needed, making it cost effective to deploy the system in low
and high-density applications. The system's compact size, minimal

                                       35
common control card slots, plug-and-play architecture and flexible card slots
ease system configuration, turn-up and use. The Cerent 454's powerful bandwidth
management and packet/cell switching features enable efficient use of
transportation facilities to further lower bandwidth costs.

   Efficient Bandwidth Management. The Cerent 454 significantly improves
bandwidth efficiency to ensure cost-effective transport. The Cerent 454 can
groom and aggregate traditional voice traffic, referred to as time division
multiplexing, or TDM, as well as bandwidth-intensive data traffic. A core
cross-connect matrix provides non-blocking TDM bandwidth management. These
extensive bandwidth management features allow each Cerent 454 to be deployed as
a distributed broadband digital cross-connect. Additionally, the Cerent 454
utilizes statistical multiplexing and packet and cell switching to aggregate
bandwidth. This prevents wasting bandwidth that is otherwise dedicated to
accommodating peak volumes of data traffic. The system may be oversubscribed
with IP, ATM and frame relay access interfaces when only a fraction of the
bandwidth needs to be transported. Packet and cell switching engines are
distributed to the interface cards to enable locally switched traffic. Packets
and cells from access interfaces are concentrated in standard SONET/SDH
payloads if needed for transport onto the fiber network.

   Multiple Configurations. Because every Cerent 454 card from a DS1 or E1 to
an OC192 or STM64 can be installed in a single shelf, each terminal can provide
transport and access interfaces and can be configured to support one-to-one or
one-to-several protection for electrical access.

   Cerent 454 systems can be deployed in any combination of the following
network configurations:

  . terminal mode for access agreggation;

  . add-drop mode, or ADM, for traffic grooming and agreggation;

  . ring architecture for SONET/SDH transport.

   Cerent 454 systems can also host systems in any of these configurations.

   The Cerent 454 high speed SONET/SDH transport system supports 240 Gbps of
TDM, IP, ATM and frame relay in any combination of configurations from a single
platform.

   Network Management. Typical network management systems require external
platforms. However, our management system for the Cerent 454 is Java-based and
allows the 454 to interface with an off-the-shelf Internet browser, eliminating
the need for an external workstation. Our management system supports standard
network management protocols such as simple network management protocol, or
SNMP, and transaction language 1, or TL-1.

 Technology

   Our unique, single-platform optical transport solution is enabled by key
technology capabilities, including the following:

   Plug-And-Play Architecture. The Cerent 454 incorporates extensive
integration and modular architecture designed to offer significant economic
savings. The Cerent 454 combines in a single platform: high-speed SONET/SDH
transport; VT and STS bandwidth management; TDM, IP, ATM and frame relay
access; and packet/cell switching. The Cerent 454 chassis is a compact assembly
with minimal common control card slots. Flexible slot utilization is achieved
via a plug-and-play architecture allowing any Cerent 454 to seamlessly manage
TDM, IP, ATM and frame relay traffic.

   ASIC Integration. We have currently developed six proprietary ASICs, all of
which are included in our product architecture. These ASICs have significant
component integration with gate counts per ASIC ranging from 500,000 to 2.5
million. Our ASIC technology enables support for add-drop-multiplexer
functionality, digital cross-connect functionality and packet/cell switching.

                                       36
High Speed Optics. Optical connection components with support for speeds
higher than OC-12, operating at 622 Mbps, cannot be sourced with off-the-shelf
components. Therefore, we have developed discrete OC-48, operating at 2.5 Gbps
ASICs, and are developing OC-192, operating at 10 Gbps, ASICs, to optimize
size, thermal performance and manufacturing capability. By customizing our
discrete optics designs we are able to enhance our in-house packaging expertise
which will allow us to scale to even higher optical speeds in a cost-effective
manner. In addition, this capability can serve as the basis for future DWDM
enhancement efforts.

   Gigabit Data Switching. The Cerent 454 allocates bandwidth via an innovative
multi-layer point-to-point backplane architecture that switches traffic across
two high-speed planes: a SONET/SDH plane and a data plane. The data plane
features 160 Gbps aggregate bandwidth to allow intercard communication and
traffic management for data cards utilizing one and three Gbps links. The data
plane features an extremely low latency, fully meshed, point-to-point fabric
between each card to provide a fully nonblocking data switch backplane.
Furthermore, each card can work independently, allowing the customer to create
a sub-network that can support a specific service.

   Software. The Cerent 454 incorporates significant software content within
our A to Z provisioning system, which enables carriers to offer point-to-point
services across their networks. For example, provisioning new services and/or
modifying existing services can be accomplished instantaneously through a point
and click design. Our operating system is based on Wind River's VX-Works real-
time operating system. Major software releases for the 454 are generally
released every six months. Our software supports the standard SONET software
requirement.

   Integrated DCS. The SONET plane gives each card slot full access to the core
cross-connect matrix. Cerent 454 full nonblocking cross-connect modules can
groom traffic in STS, up to STS-192, and VT, up to 1344 VT1.5, payloads to any
port on any card. This feature maximizes bandwidth efficiency by making it
possible to groom SONET/SDH traffic in STS or VT increments. Using redundant
cross-connect slots, the Cerent 454 can also be configured as a fully protected
digital cross-connect.

Customers

   We began commercial shipments of our products in December 1998 and as of
June 30, 1999, had shipped to 86 customers. The following is a representative
list of our customers as of June 30, 1999:
Emerging IXCs      CLECs                   Independent Carriers    Cable Operators
Frontier           Advanced TelCom Group   ALLTEL                  Buckeye TeleSystem
  Communications
  GST Telecom        Allegheny               Atlantic Telephone      Cablevision Lightpath
                     Communications Connect
  MEANS              Cavalier Telephone      Chibardun Telephone     Charter
                                                                     Communications
  Qwest              Kratz Communications    Citizens Telephone      TCI
  Communications     Nextlink                Commonwealth Telephone
  IXC Communications Ovation Communications  Conneaut Telephone
  Williams           Primelink               Federated Telephone
  Communications     RCN Corp.               Fiber Four
                     Sho-Me Power Electric
                     Sikeston Light & Water  Fort Bend Long
                                             Distance
                                             Grand River Mutual
                                             Telephone
                                             Gulf Telephone
                                             Hutchinson Telephone
                                             NTS Communications
                                             Paul Bunyan Rural
                                             Telephone
                                             Surry Telephone
                                             Triangle Telephone
                                             Tularosa Basin
                                             Telephone
37
Customer Applications

   Set forth below are examples of typical uses of our Cerent 454 by different
types of service providers.

 A CLEC Building Out New Networks

   CLECs have recently begun building out thousands of miles of fiber and
communications networks to reach their service objectives. Traditionally,
network providers have had to turn to multiple vendors to satisfy all of their
optical transport needs, purchasing one piece of equipment for OC-48 backbone
transport, a second and third piece of equipment to support OC-12 and OC-3
metropolitan rings, and a fourth piece of equipment for the digital cross-
connect segment of the network. Thus, a CLEC would potentially acquire four
pieces of equipment from multiple vendors. However, a CLEC deploying the
Cerent 454 in its network is capable of integrating the backbone and various
speeds of metropolitan SONET rings into one transport management platform.

[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation"
illustration appears on the left side of the graphic, and shows four cubes
labelled "OC-48" around an oval-shaped ring. One cube is connected by three
lines to a rectangle labelled "3/1 Digital Cross Connect," which is in turn
connected to two circles labelled "Metropolitan Network." One circle has three
boxes labelled "OC-3" around its circumference; the other has three boxes
labelled "OC-12" around its circumference. The words "Four Distinct Equipment
Pieces Required" appear beneath the graphic.

The "Implementation With Our Solution" graphic appears on the right side of
the page and is depicted as three rings connected by our Cerent 454 in the
center of the rings. One ring is labelled "Backbone Transport"; the other two
are labelled "Metropolitan Network." The words "One Network Element For All
Transport Needs" appear beneath the graphic.]

                             [CHART APPEARS HERE]

   With the Cerent 454, a CLEC is able to deploy one network element to
satisfy its transport needs and is able to realize more optimal network build-
out costs. The Cerent 454 provides a single optical transport network platform
to service and maintain the network on an ongoing basis, enabling a CLEC to
realize significant life-cycle cost benefits, as compared to legacy, multi-
product and multi-vendor transport solutions.

 A Cable Company Offering Multiple Services

   Cable companies are seeking to leverage their hybrid fiber coaxial, or HFC,
networks to move beyond video-only services to deliver voice and data services
at rates significantly lower than those of incumbent carriers. Historically,
if a cable operator wanted to offer multiple services, it would have to deploy
separate transport network infrastructures and three separate fiber rings to
support each of video, data and voice traffic. With the advent of the Cerent
454, a cable operator is able to support multiple services with one common
platform.

[Side by side graphical juxtaposition of traditional implementation versus
implementation with our solution. The "Traditional Implementation" graphic is
two overlapping oval-shaped rings with squares representing data, voice and
video around the circumference of the rings. The words "Multiple Fiber
Overlays to Support Various Services" appear beneath this graphic. The
"Implementation with Our Solution" graphic is one ring representing data,
video and voice with four Cerent 454's around its circumference. The words
"Single Infrastructure for Voice, Data and Video" appear beneath this graphic.

                             [CHART APPEARS HERE]

   With one single optical transport platform that supports existing video
services as well as new voice and data services, a cable company realizes
significant incremental revenue streams at minimal first-time and life-cycle
support costs. Compared to multiple networks, the single multi-purpose optical
transport network enabled by the Cerent 454 is easier to build, install, use
and maintain on an ongoing basis.

                                      38
An Emerging IXC Efficiently Grooming Traffic

   Emerging inter-exchange carriers, or IXCs, often referred to as the
carrier's carrier, face the challenge of effectively managing disparate data
fed by multiple carrier customers. No matter how service is delivered to and
from the emerging IXC, whether over its own network or handed off from another
carrier, the traffic needs to be groomed, or separated and uniquely
distributed, to the appropriate equipment for further processing. If an
emerging IXC wanted to support multiple traffic types with legacy transport
systems, it would have to install multiple switches, groomers and routers, or
in the case of private line services, an interconnection to another optical
network or carrier hand-off. In traditional networks, one would have to install
numerous pieces of equipment to provide satisfactory grooming capability for
the network. With the Cerent 454, which in this case is deployed as a stand-
alone piece of equipment, an IXC can remove a whole network layer and separate
different optical and electric traffic types within one piece of equipment and
send such traffic to individually specified locations.

                              [CHART APPEARS HERE]
[Left side of page:
Traditional Implementation
Voice/TDM Digital Switch OC-3 IP IP Router
OC-12 ATM ATM Switch OC-48 Frame Relay Frame Relay Switch OC-192
Numerous Required Networking Equipment
Right side of page:
Implementation with Our Solution
Voice/TDM OC-3
IP Cerent 454
OC-12 ATM OC-48
Frame Relay OC-192
Single, Multi-Purpose Traffic Groomer

   The Cerent 454 supports any traffic interface and any optical transport
speed, therefore eliminating the need for numerous pieces of networking
equipment. As a result, the Cerent 454 offers an emerging IXC significant size
advantages as well as initial deployment and life-cycle cost benefits.

Research And Product Development

   Our future success depends on our continued ability to develop and introduce
new products, product enhancements and technology that can support a broad
array of network protocols and access methods. Our success in meeting these
objectives is dependent on the efforts of our research and development team. To
this end, we have assembled a team of highly-skilled engineers with extensive
experience in a variety of network system architecture disciplines that work in
parallel on several projects. These individuals have been drawn from leading
computer data networking and telecommunications companies. As a result of our
development efforts, we believe that we have created an industry-leading
optical transport system to cost-effectively increase the efficiency of
bandwidth delivery within today's congested transport network.

   We have invested, and intend to continue to invest, significant time and
resources on our research and development activities. We intend to continue to
build our research and development efforts cross-leveraging our intellectual
property and technical expertise to transition to a multi-site multi-project
organization. At present, our engineers are focused on improving our existing
product offering, the Cerent 454, developing next-generation hardware and
software products and designing ASICs that will better integrate our products
with the networks maintained by current and future customers.

   As of June 30, 1999, we employed 112 people in our research and development
group.

   Our research and development expenses totaled $5.2 million for the period
ended December 31, 1997, $15.6 million for the year ended December 31, 1998,
and $8.8 million for the six month period ended June 30, 1999.

   See "Risk Factors--Our future success depends on our ability to develop
innovative products and product enhancements that gain market acceptance," "--
Our products are new and face rapid technological changes and evolving
standards and if we do not respond in a timely manner, our business could be
harmed" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Sales And Marketing

   We sell and market our products exclusively through our direct sales
organization. Our direct sales organization establishes and maintains direct
relationships with our customers. In addition, we have a team of consulting
engineers who provide our customers with guidance and assistance with the
deployment of our

                                       39
product. These consulting engineers also help define the features that are
required for our product to be successful in specific applications. A key
feature in our selling effort is the relationship we establish with individuals
at various levels in our customers' organization. For example, our sales team
maintains contact with key individuals at our customers and prospective
customers who have service planning and infrastructure buildout responsibility.
Our marketing efforts are centered around building brand awareness with a
targeted customer base. We also build our brand name through continued targeted
publicity and referral efforts in both media and industry-centered activities,
including editorial presence in various trade magazines, press releases, public
speaking opportunities, national and regional trade show participation,
advertising, Internet-based communication and promotion, media sponsorships and
participation in industry standards activities.

   To date, sales activities have been focused primarily on emerging IXCs,
CLECs, independent carriers and cable companies. We intend to target RBOCs and
incumbent IXCs in the near future. Additionally, we have designed our product
to permit deployment in the international marketplace and we intend to pursue
international carriers.

   As of June 30, 1999, we employed 39 people in our sales and marketing
organizations.

   See "Risk Factors--Our future success depends on our ability to increase
sales of our products to CLECs and other relatively small telecommunications
carriers and to effectively market and sell our products to large, established
carriers" and "--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Customer Service And Support

   We are committed to providing our customers with high levels of service and
support. Our service and support organization provides support through a
variety of mechanisms. Telephonic support is available on a 24 hours a day,
seven days a week basis. Customers can obtain repair and replacement of
equipment either on a 15-day, 3-day or 24-hour turnaround, depending on the
urgency of the request. We also provide on-site field engineering services if
our customers require the presence of one of our trained engineers. In
addition, we provide a variety of training courses either at our headquarters
in Petaluma, California or on-site at the customer's facilities. One key
advantage of the Cerent 454 is that customers need only be trained on one piece
of network equipment and thus can save substantially on training costs.

   As of June 30, 1999, we employed 22 people in our customer service and
support organization.

   See "Risk Factors--If we do not expand substantially our customer service
and support organization, we will be unable to significantly increase our
product sales."

Competition

   We compete in a relatively new, rapidly evolving and highly competitive
market. The market historically has been dominated by Alcatel, Fujitsu, Lucent,
NEC, Nortel and Tellabs. Some of these companies, including Nortel, have
announced products that may be competitive with the 454. In addition, a number
of private companies provide products, technologies and/or services that are
competitive to ours. We believe that the principal competitive factors in this
market include, or are likely to include, product performance, initial and
lifecycle cost, installation time, flexibility, scalability, service and
support and interoperability with a broad range of network systems.

   See "Risk Factors--Our markets are highly competitive and dominated by large
corporations and we cannot assure you that we will be able to compete
effectively."

                                       40
Patents and Intellectual Property Rights

   Our success and ability to compete are substantially dependent upon our
internally developed technology and know-how. We currently hold no issued
patents, but we have nine patent applications pending in the United States and
we are currently preparing a number of additional patent applications seeking
protection for our technology. Our software was developed internally and is
protected by United States and other copyright laws.

   While we will use patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent
product enhancements and reliable product maintenance are essential to
establishing and maintaining a technology leadership position.

   See "Risk Factors--Our business could be adversely affected it we are unable
to protect our intellectual property rights from third party challenges," "--
Necessary licenses of third party technology may not be available to us or may
be very expensive" and "--We could become subject to litigation regarding
intellectual property rights which could seriously harm our business."

Manufacturing

   We currently outsource our entire manufacturing and assembly operation to
PCB Assembly. PCB Assembly is a third-party manufacturer of telecommunications
and data networking equipment, which has a high-capacity ISO 9002-registered
facility and specializes in the manufacture of high-end telecom and data
networking equipment. PCB Assembly provides full turnkey production including
material procurement and handling, final assembly, integrated circuit and
functional testing, box build, quality control and shipment to our customers.
We design, specify and monitor all of the tests that are required to meet
functional requirements. Pursuant to the terms of our agreement with PCB
Assembly, PCB Assembly is required to manufacture, assemble and test our
products based on our monthly forecasts. PCB Assembly is required to ship the
finished products, at our direction, to us or directly to our customers upon
submission of purchase orders. Our agreement with PCB Assembly expires in April
2000, subject to automatic renewal for successive one-year periods unless
either we or PCB Assembly provides prior notice of intent to terminate. This
arrangement provides us with the following key benefits:

  . we provide manufacturing capabilities to our customers without dedicating
    any space to manufacturing operations;

  . we conserve the capital that would be required for funding inventory and
    equipment acquisition and maintenance;

  . we can adjust manufacturing volumes quickly to meet changes in demand;
    and

  . we can quickly deliver products to customers through PCB Assembly's
    turnkey manufacturing and drop shipment capabilities.

   Several key components for our platform including our ASICs are acquired
from single or limited sources. For example, we rely on LSI Logic as a sole-
source foundry for certain of our ASICs and KLSI as a sole-source foundry for
certain other of our ASICs.

   See "Risk Factors--We currently depend on one contract manufacturer and have
no internal manufacturing capabilities," "--If we fail to accurately predict
our manufacturing requirements, we could incur additional costs or experience
delays" and "--We are dependent on sole source and limited source suppliers for
several key components, including ASICs, and if we are unable to obtain these
components on a timely basis, we will be unable to meet our customers' product
delivery requirements."

                                       41
Employees

   As of June 30, 1999, we had 210 full-time employees, 112 of whom were
engaged in research and development, 39 in sales and marketing, 22 in customer
service and support and 37 in operations, finance and administration. None of
our employees is represented by a labor union. We have not experienced any work
stoppages and we consider our relations with our employees to be good.

   See "Risk Factors--If we lose key personnel or are unable to hire additional
qualified personnel as necessary, our business may be adversely affected."

Facilities

   We lease approximately 82,000 square feet of office space in Petaluma,
California pursuant to a lease that expires in March 31, 2007. We believe that
by 2001, we will need additional space to accommodate our growth. The
commercial real estate market in the San Francisco Bay Area is volatile and
unpredictable in terms of available space, rental fees, occupancy rates and
preferred locations. We cannot be certain that additional space will be
available when we require it, or that it will be affordable or in a preferred
location.

   See "Risk Factors--If we fail to manage our rapid growth effectively, our
business, financial conditions and results of operations could be seriously
harmed."

Legal Proceedings

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

                                       42
MANAGEMENT

Executive Officers and Directors

   The following table sets forth information with respect to our executive
officers and directors as of June 30, 1999:
Name                         Age                    Position
----                         ---                    --------
Carl Russo (1)..............  42 President, Chief Executive Officer and Director
Michael Ashby...............  50 Chief Financial Officer
Ajaib Bhadare...............  39 Vice President, Engineering
Terry Brown.................  36 Vice President, Field Operations
Tom Corker..................  34 Vice President, Product Marketing
Scott Lester................  42 Vice President and General Counsel
Richard Roney...............  54 Vice President, Operations
Vinod Khosla (1)............  44 Chairman of the Board of Directors
Kevin Compton (2)...........  40 Director
Donald Green (2)............  68 Director
Promod Haque (1)............  51 Director
---------------------
(1) Member of compensation committee
(2) Member of audit committee

   Carl Russo has served as President and Chief Executive Officer of Cerent
since June 1998 and has served as a director of Cerent since May 1998. From May
1995 to May 1998, Mr. Russo was employed by Xircom, Inc., a manufacturer of
mobile networking equipment, most recently as Chief Operating Officer
responsible for sales, marketing, development and manufacturing of Xircom
products. Mr. Russo has also held executive management positions at Network
Systems Corporation, a networking company, most recently as Senior Vice
President and General Manager, Channel Networking Group, a networking company,
and at AT&T Paradyne, Inc., a manufacturer of broadband network access
products, where he was most recently Vice President and General Manager, Data
Networking Products Division. Mr. Russo is a director of Xircom, Inc.

   Michael Ashby has served as Chief Financial Officer of Cerent since July
1999 and served as a consultant to Cerent from May 1999 to July 1999. Prior to
joining Cerent, Mr. Ashby was Executive Vice President and Chief Financial
Officer of Ascend Communications, Inc., a networking company, from November
1997 to June 1999. Mr. Ashby has agreed to continue to work with Lucent
Technologies, Inc. through January 31, 2000, to assist in the transition
related to Lucent's acquisition of Ascend. Before joining Ascend, Mr. Ashby was
Vice President and Chief Financial Officer at Pacific Telesis Enterprise and
subsequently at Pacific Bell, a communications company, from September 1995 to
December 1997. Mr. Ashby was Chief Financial Officer and then President and
Chief Executive Officer of Network Systems Corporation, a networking company,
from September 1992 to September 1995. Mr. Ashby is a director of Xircom, Inc.

   Ajaib Bhadare, a co-founder of Cerent, has served as Vice President,
Engineering for Cerent since January 1997. Prior to joining Cerent, Mr. Bhadare
was Senior Director of Engineering with DSC Communications, a networking
company, from March 1988 to January 1998. Prior to DSC, Mr. Bhadare was an
engineer at Optilink Corporation, a networking company. Mr. Bhadare received
his B.S.C. degree from the University of London. Mr. Bhadare also holds a
patent for improving register robustness against software failure.

   Terry Brown has served as Vice President, Field Operations for Cerent since
July 1997. From 1993 to 1997, Mr. Brown led the sales effort of Advanced Fibre
Communications, a manufacturer of telecommunications systems. Mr. Brown
received his B.S.E.E. from the University of Notre Dame and his M.M. degree in
marketing and economics from Northwestern University's Kellogg School of
Management.

                                       43
Tom Corker has served as Vice President, Product Marketing for Cerent since
January 1999. From July 1997 to January 1999, Mr. Corker was the Director of
Product Management at Cerent. From 1991 to 1997, Mr. Corker was the Director,
Product Marketing at Advanced Fibre Communications, Inc. and held various
engineering roles at DSC Communications and Nortel, a networking company. Mr.
Corker received his B.S.E.E. and M.S.E.E. from the Georgia Institute of
Technology.

   Scott Lester has served as Vice President and General Counsel of Cerent
since July 1999. From October 1984 to July 1999, Mr. Lester was an attorney
with the law firm of Brobeck, Phleger & Harrison LLP, where he was a partner
since January 1989. From August 1981 to October 1984, he was an attorney with
Milbank, Tweed, Hadley & McCloy. Mr. Lester received his J.D. from Georgetown
University Law School.

   Richard Roney has served as Vice President, Operations for Cerent since
November 1998. From May 1997 to October 1998, Mr. Roney was Vice President of
Manufacturing at VINA Technologies, a networking company. From June 1995 to
October 1996, Mr. Roney was Vice President of Operations at Netro Corporation,
a communications company. From January 1993 to May 1995, Mr. Roney served as
Vice President of Operations at Ericsson-Raynet Corporation, a
telecommunications company. Mr. Roney received his B.S. from Cornell University
and his M.B.A. from Stanford Graduate School of Business.

   Vinod Khosla has served as Chairman of the Board of Directors of Cerent
since April 1997. Mr. Khosla has been a general partner of Kleiner Perkins
Caufield & Byers, a venture capital firm, since 1987. Mr. Khosla was a co-
founder of Daisy Systems Corporation, an electronic design automation company,
and the founding Chief Executive Officer of Sun Microsystems, Inc., a computer
and data networking company. Mr. Khosla also serves on the boards of Concentric
Network Corporation, Corio Inc., Corvis Corporation, Juniper Networks, Inc. and
Qwest Communications International Inc., as well as several other private
companies. Mr. Khosla received his B.S.E.E. from the Indian Institute of
Technology in New Delhi, an M.S.E. from Carnegie-Mellon University, and an
M.B.A. from the Stanford Graduate School of Business.

   Kevin Compton has served as a director of Cerent since March 1999. Mr.
Compton joined Kleiner Perkins Caufield & Byers, a venture capital firm, in
1990 and has been a general partner since 1994. Mr. Compton serves on the
Boards of Citrix Systems, Corsair Communications, OneWorld Systems, formerly
Global Village Communication, Rhythms NetConnections and VeriSign, as well as
several other private companies. He received his B.S. from University of
Missouri.

   Donald Green has served as a director of Cerent since August 1997. Mr. Green
has been the Chairman of the Board and a director of Advanced Fibre
Communications, Inc. since June 1998. Mr. Green also served as the Chief
Executive Officer of Advanced Fibre Communications, Inc. from May 1992 until
May 1999 and as the President from May 1992 until June 1998. Mr. Green also
serves on the boards of Larscom Corporation and TCSI. He received his B.S.E.E.
equivalent from British Institute of Electrical Engineers.

   Promod Haque has served as a director of Cerent since July 1998. Mr. Haque
joined Norwest Venture Partners, a venture capital firm, in November 1990 and
is currently Managing General Partner of Norwest Venture Partners VII, General
Partner of Norwest Venture Partners VI and General Partner of Norwest Equity
Partners IV and V. Mr. Haque currently serves as a director of Extreme
Networks, Inc., Information Advantage, Inc., Primus Knowledge Solutions, Inc.,
Transaction Systems Architects, Inc., Showcase Corporation, and several other
privately held companies. Mr. Haque holds a Ph.D. from Northwestern University,
an M.B.A. from the J. L. Kellogg Graduate School of Management, Northwestern
University and a B.S.E.E. from the University of Delhi, India.

   The board of directors elects executive officers on an annual basis.
Executive officers serve until their successor has been duly elected and
qualified. There are no family relationships among any of the directors,
officers or key employees of Cerent.

                                       44
Board Composition

   Our board of directors currently consists of five members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified.

 Board Committees

   The board of directors has a compensation committee and an audit committee.

   Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Carl Russo, Vinod Khosla and Promod Haque. Since the
current members of the compensation committee do not meet the definition of
"non-employee directors" for purposes of SEC Rule 16(b)(3), the full board of
directors will continue to approve stock option grants for our officers in
order to qualify the option grants for an exemption from "short-swing" trading
rules.

   Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent accountants, and our compliance with
legal matters that have a significant impact on our financial reports. The
current members of the audit committee are Donald Green and Kevin Compton.

 Compensation Committee Interlocks and Insider Participation

   The board of directors established its compensation committee in April 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.

 Board Compensation

   We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the 1997 Stock Plan. Upon completion of this offering,
nonemployee directors will also be eligible to participate in our 1999
Directors' Stock Option Plan. See "--Incentive Stock Plans" for a description
of the 1997 Stock Plan and the 1999 Directors' Stock Option Plan.

                                       45
Executive Compensation

   Summary Compensation. The following table sets forth the compensation
received for services rendered to Cerent for the year ended December 31, 1998
by our Chief Executive Officer and each of the other four most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the year ended December 31, 1998 (collectively, the "Named
Executive Officers").

                           Summary Compensation Table
Long-Term
                                                                   Compensation
                                       Annual Compensation            Awards
                                ---------------------------------- ------------
                                                                    Securities
                                                    Other Annual    Underlying     All Other
Name and Principal Position(1)  Salary($) Bonus($) Compensation($)  Options(#)  Compensation($)
------------------------------  --------- -------- --------------- ------------ ---------------
Carl Russo(2)...........        $111,537  $58,331      $54,912(3)   2,700,000          --
 President and Chief
  Executive Officer
Ajaib Bhadare...........        $159,858  $    --      $    --             --          --
 Vice President,
  Engineering
Terry Brown.............        $137,865  $48,500      $44,249(4)          --          --
 Vice President, Field
  Operations
Tom Corker..............        $111,538  $31,486      $    --        240,000          --
 Vice President, Product
  Marketing
Richard Roney...........        $ 20,192  $20,000      $53,966(5)     600,000          --
 Vice President,
  Operations
---------------------
(1) Michael Ashby became employed by Cerent in July 1999, as Cerent's Chief
    Financial Officer at an annual base salary of $160,000, and a bonus of up
    to 25% of his base salary per year based on the achievement of business
    goals.
(2) Mr. Russo joined Cerent in April 1998. Prior to that, Vinod Khosla served
    as acting Chief Executive Officer.
(3) Represents interest payments made by Cerent on Carl Russo's behalf in
    connection with a loan obtained by Mr. Russo for the purchase of his home.
(4) Represents reimbursement for relocation and automobile expenses.
(5) Represents reimbursement for relocation expenses.

   Option Grants. The following table sets forth certain information with
respect to stock options granted to each of the Named Executive Officers in the
year ended December 31, 1998. In accordance with the rules of the Securities
and Exchange Commission, also shown below is the potential realizable value
over the term of the option (the period from the grant date to the expiration
date) based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts are based on certain assumed rates of appreciation and
do not represent our estimate of future stock price. Actual gains, if any, on
stock option exercises will depend on the future performance of the common
stock.
Potential Realizable
                                                            Value at Assumed
                                                             Annual Rates of
                                                           Stock Appreciation
                           Individual Grants               For Option Term($)
               ------------------------------------------ ---------------------
                          % of Total
               Number of   Options
               Securities Granted to
               Underlying Employees  Exercise
                Options     During     Price   Expiration
Name           Granted(#) Period(1)  ($/share)    Date        5%        10%
----           ---------- ---------- --------- ---------- ---------- ----------
Carl Russo.... 2,700,000    39.3%     $0.1333     6/7/08  $  226,345 $  573,604
Ajaib
 Bhadare......        --       --          --         --          --         --
Terry Brown...        --       --          --         --          --         --
Tom Corker....   240,000     3.5%      0.6667   12/22/08     100,628    255,012
Richard
 Roney........   600,000     8.7%      0.2833   11/23/08     106,900    270,904
Option Grants in Last Fiscal Year

---------------------
(1) Based on an aggregate of 6,876,000 options granted by Cerent during the
    year ended December 31, 1998 to our employees, including the Named
    Executive Officers.

                                       46
(2) Options were granted at an exercise price equal to the fair market value of
    our common stock, as determined in good faith by our board of directors on
    the grant date based upon such factors as the purchase price paid by
    investors for shares of our preferred stock, the absence of a trading
    market for our securities and our financial outlook and results of
    operations.
(3) These stock options were granted under the 1997 Stock Plan and were
    immediately exercisable. The options granted to Carl Russo and Richard
    Roney were exercised prior to December 31, 1998. We retain the right to
    repurchase at cost any shares that remain unvested at the time of the
    officer's cessation of employment. The shares vest at a rate of 1/4th of
    the total number of shares on the first anniversary of the vesting
    commencement date, and 1/48th of the total number of shares monthly
    thereafter, as long as each continues to provide services to Cerent.
(4) The potential realizable value is based on the term of the option at its
    time of grant, which is ten (10) years, and assumes that the fair market
    value of our common stock on the date of grant appreciates at the indicated
    annual rate compounded annually for the entire term of the option and that
    the option is exercised and sold on the last day of its term for the
    appreciated stock price.

   Aggregate Option Exercises and Option Values. The following table provides
summary information with respect to our Named Executive Officers in 1998. As of
December 31, 1998, all options granted the Named Executive Officers were
granted under our 1997 Stock Plan, all were immediately exercisable. We retain
the right to repurchase at cost any shares that remain unvested at the time of
the officer's cessation of employment. The shares currently vest at a rate of
1/4th of the total number of shares on the first anniversary of the vesting
commencement date, and 1/48th of the total number of shares monthly thereafter,
as long as each continues to provide services to Cerent.

     Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
                                                       Underlying Unexercised     Value of Unexercised
                                                             Options at          In-the-Money Options at
                            Shares                      December 31, 1998 (#)   December 31, 1998 ($)(1)
                         Acquired on       Value      ------------------------- -------------------------
Name                     Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----                     ------------ --------------- ----------- ------------- ----------- -------------
Carl Russo..............  2,700,000     $1,440,180           --         --           --           --
Ajaib Bhadare...........         --             --           --         --           --           --
Terry Brown.............         --             --           --         --           --           --
Tom Corker..............         --             --      240,000         --           --           --
Richard Roney...........    600,000        230,040           --         --           --           --
---------------------
(1) Based on a value of $0.6667 per share, the fair market value of our common
    stock as of December 31, 1998 as determined by the board of directors,
    minus the per share exercise price, multiplied by the number of shares
    issued upon exercise of the option.

Stock Plans

   1999 Stock Plan. Our 1999 Stock Plan was adopted by the board of directors
in July 1999 and will be submitted for approval by our stockholders prior to
the completion of this offering. A total of 5,000,000 shares of common stock
has been reserved for issuance under the 1999 Stock Plan, all of which remain
available for future option grants. In addition, the number of shares reserved
under the plan will automatically be increased on the first day of each of our
fiscal years in 2000, 2001, 2002, 2003 and 2004 by an amount equal to the
lesser of (a) 15,000,000 shares, (b) six percent of the shares outstanding on
the last day of the preceding fiscal year or (c) a lesser number of shares as
is determined by the board of directors. The purposes of the 1999 Stock Plan
are to attract and retain the best available personnel to Cerent Corporation,
to provide additional incentives to our employees and consultants and to
promote the success of our business. Our board of directors intends to
determine from time to time whether it is necessary or advisable given our
hiring and growth expectations and the competitive factors affecting the
networking industry to allow the maximum or some lesser number of shares under
the above "evergreen" formula to become available for issuance under the 1999
Stock Plan.

                                       47
The 1999 Stock Plan provides for the grant of incentive stock options to
employees, including officers and directors, and nonstatutory stock options and
stock purchase rights to employees and consultants, including nonemployee
directors. If not terminated earlier, the 1999 Stock Plan will terminate in
July 2009.

   The 1999 Stock Plan may be administered by the board of directors or a
committee of the board. The administrator determines the terms of options and
stock purchase rights granted under the 1999 Stock Plan, including the number
of shares subject to the award, exercise or purchase price, term and
exercisability. In no event, however, may an individual employee receive option
grants or stock purchase rights for more than 5,000,000 shares under the 1999
Stock Plan in any fiscal year.

   The exercise price of all incentive stock options granted under the 1999
Stock Plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of any incentive stock option granted
to an optionee who owns stock representing more than 10% of the total combined
voting power of all classes of outstanding capital stock of Cerent or any
parent or subsidiary corporation of Cerent must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of a
nonstatutory stock option granted to our chief executive officer or one of our
other four most highly compensated officers will generally equal at least 100%
of the fair market value of the common stock on the date of grant. The exercise
prices of nonstatutory stock options granted to other persons will be specified
by the administrator at the time of grant. Payment of the exercise price may be
made in cash or other consideration as determined by the administrator.

   The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a 10%
stockholder. Generally, no option may be transferred by the optionee other than
by will or the laws of descent or distribution. However, the administrator may
in its discretion permit limited transferability of nonstatutory stock options
granted under the 1999 Stock Plan. The administrator determines when options
become exercisable. Options granted under the 1999 Stock Plan generally vest
over a four-year period at a rate of 1/4th of the total number of shares
subject to the option twelve months after the vesting commencement date and
1/4th of the total number of shares subject to the options each month
thereafter.

   In addition to stock options, the administrator may issue to employees,
directors and consultants stock purchase rights under the 1999 Stock Plan. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting Cerent an option to
repurchase the shares at cost upon termination of the recipient's relationship
with us. This repurchase right generally lapses on the same schedule as options
vest.

   If we sell all or substantially all of our assets, merge with another
corporation or engage in specified reorganizations, each outstanding option and
stock purchase right will be assumed or an equivalent option or stock purchase
right substituted by the successor corporation. However, if the successor
corporation does not agree to assume or substitute an option or stock purchase
right, then the option or stock purchase right will automatically terminate as
of the closing of the transaction. The administrator has the authority to amend
or terminate the 1999 Stock Plan as long as the amendment or termination does
not adversely affect any outstanding option or stock purchase right and
provided that stockholder approval shall be obtained to the extent it is
required by applicable law.

   1997 Stock Plan. Our 1997 Stock Plan was originally adopted by our board of
directors and stockholders in July 1997. The plan has been amended a number of
times since its adoption. Currently, a total of 18,477,000 shares of our common
stock have been reserved for issuance under the 1997 Stock Plan. As of June 30,
1999, options to purchase 459,875 shares of common stock were outstanding at a
weighted average exercise price of $3.24 per share, 16,590,788 shares had been
issued upon exercise of outstanding options, 1,936,122 shares of

                                       48
which have been repurchased by Cerent pursuant to its repurchase rights,
1,426,337 shares remained available for future grant and no shares had been
issued pursuant to restricted stock purchase rights. We expect that following
the date of this offering we will make most of our option and stock purchase
right grants to employees and consultants from our 1999 Stock Plan.

   The purposes of the 1997 Stock Plan is to attract and retain the best
available personnel to Cerent Corporation, to provide additional incentives to
our employees and consultants and to promote the success of our business. The
plan provides for the grant of incentive stock options to employees, including
officers and directors, and nonstatutory stock options and stock purchase
rights to employees and consultants, including nonemployee directors. If not
terminated earlier, the 1997 Stock Plan will terminate in July 2007.

   The terms of options and stock purchase rights issued under the 1997 Stock
Plan are generally the same as those which may be issued under the 1999 Stock
Plan, except with respect to the following features. Prior to the date of this
offering, options granted under the 1997 Stock Plan allowed the optionee to
exercise the option immediately after its grant date, including with respect to
shares that were not yet vested. We have been given a repurchase right at the
optionee's exercise price with respect to any shares purchased upon exercise of
an option prior to its vesting. Our repurchase right lapses over the same
period of time as the vesting schedule that applied to the option prior to its
exercise.

   Similar to our 1999 Stock Plan, our 1997 Stock Plan imposes an annual
limitation on the number of shares that may be subject to options and stock
purchase rights granted to an individual employee during any one fiscal year of
5,000,000 shares.

   1999 Directors' Stock Option Plan. The 1999 Directors' Stock Option Plan was
adopted by the board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Directors' Stock Option Plan, all of which remain available for future grants.

   The 1999 Directors' Stock Option Plan provides for the grant of nonstatutory
stock options to nonemployee directors of Cerent. The 1999 Directors' Stock
Option Plan is designed to work automatically without administration; however,
to the extent administration is necessary, it will be performed by the board of
directors. To the extent they arise, it is expected that conflicts of interest
will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which the director has a personal
interest.

   The 1999 Directors' Stock Option Plan provides that each person who becomes
a nonemployee director of Cerent after the effective date of this offering will
be granted a nonstatutory stock option to purchase 20,000 shares of common
stock on the date on which the optionee is first appointed or elected to our
board of directors. In addition, on the date of our annual stockholders meeting
each year, each nonemployee director will be granted an additional option to
purchase 10,000 shares of common stock if, on such date, he or she has served
on our board of directors for at least six months.

   The 1999 Directors' Stock Option Plan sets neither a maximum nor a minimum
number of shares for which options may be granted to any one nonemployee
director, but does specify the number of shares that may be included in any
grant and the method of making a grant. No option granted under the 1999
Directors' Stock Option Plan is transferable by the optionee other than by will
or the laws of descent or distribution or pursuant to a qualified domestic
relations order. Each option is exercisable, during the lifetime of the
optionee, only by the optionee or pursuant to a qualified domestic relations
order.

   The 1999 Directors' Stock Option Plan provides that all options granted
under this plan shall be fully exercisable as to 100% of the total number of
shares on the date of grant. If a nonemployee director ceases to serve as a
director of Cerent for any reason other than death or disability, he or she may
within 90 days after the date he or she ceases to be a director, exercise an
option granted under the 1999 Directors' Stock Option

                                       49
Plan to the extent that he or she was entitled to exercise it at the date of
termination. The exercise price of all stock options granted under the 1999
Directors' Stock Option Plan shall be equal to the fair market value of a share
of our common stock on the date of grant of the option. Options granted under
the 1999 Directors' Stock Option Plan have a term of ten years.

   In the event that we are acquired by another company, each option
outstanding under the plan will terminate if not exercised prior to
consummation of the transaction, if the acquiring entity does not assume or
substitute the option. The board of directors may amend or terminate the 1999
Directors' Stock Option Plan at any time as long as such action does not
adversely affect any outstanding option and stockholder approval is obtained
for any amendment as required by applicable law. If not terminated earlier, the
1999 Directors' Stock Option Plan will have a term of ten years.

   1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was
adopted by our board of directors in July 1999 and will be submitted for
approval by our stockholders before completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the 1999
Employee Stock Purchase Plan. The number of shares reserved for issuance under
the 1999 Employee Stock Purchase Plan will automatically increase on the first
day of each of our fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 by
an amount equal to the lesser of 500,000 shares, one percent of the total
shares outstanding on the last day of the immediately preceding fiscal year, or
a lesser number of shares as determined by the Board.

   The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000, with subsequent purchase periods ending on October 31,
2000, April 30, 2000 and October 31, 2001. The 1999 Employee Stock Purchase
Plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or
employees of any majority-owned subsidiary designated by the board, are
eligible to participate in the 1999 Employee Stock Purchase Plan if they are
employed by us or a subsidiary of ours for at least 20 hours per week and more
than five months per year. The 1999 Employee Stock Purchase Plan permits
eligible employees to purchase common stock through payroll deductions, which
initially may not exceed 10% of an employee's base salary, commissions and
bonus. The purchase price is equal to the lower of 85% of the fair market value
of the common stock at the beginning of each offering period or at the end of
each purchase period. In circumstances specified in the 1999 Employee Stock
Purchase Plan, the purchase price may be adjusted during an offering period to
avoid our incurring adverse accounting charges. Employees may end their
participation in the 1999 Employee Stock Purchase Plan at any time during an
offering period, and participation ends automatically on termination of
employment.

   An employee cannot be granted an option under the 1999 Employee Stock
Purchase Plan if immediately after the grant the employee would own stock
and/or hold outstanding options to purchase stock equalling 5% or more of the
total voting power or value of all classes of our stock or stock of our
subsidiaries, or if the option would permit an employee to purchase stock under
the 1999 Employee Stock Purchase Plan at a rate that exceeds $25,000 in fair
market value of stock for each calendar year in which the option is
outstanding. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 Employee Stock Purchase Plan in any one purchase
period. If the fair market value of the common stock on a purchase date is less
than the fair market value at the beginning of the offering period, each
participant in that offering period shall automatically be withdrawn from the
offering period as of the end of the purchase date and re-enrolled in the new
offering period beginning on the first business day following the purchase
date.

                                       50
If we are acquired by another company, each right to purchase stock under
the 1999 Employee Stock Purchase Plan will be assumed or an equivalent right
substituted by our successor corporation. However, the board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 Employee Stock Purchase Plan are exercised prior to the
transaction in the event that our successor corporation refuses to assume each
purchase right or to substitute an equivalent right of the acquiring
corporation. The board of directors has the power to amend or terminate the
1999 Employee Stock Purchase Plan and to change or terminate offering periods
as long as this action does not adversely affect any outstanding rights to
purchase stock thereunder. However, the board of directors may amend or
terminate the 1999 Employee Stock Purchase Plan or an offering period even if
it would adversely affect outstanding options in order to avoid our incurring
adverse accounting charges.

   401(k) Plan. Effective January 27, 1997, we adopted the Cerent 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by Cerent, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan, and so that contributions by Cerent, if any, will be deductible by Cerent
when made. Under the 401(k) plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1999)
and to have the amount of such reduction contributed to the 401(k) plan. The
401(k) plan permits, but does not require, additional matching contributions to
participants' 401(k) plan accounts by Cerent on behalf of all participants in
the 401(k) plan. To date, we have not made any matching contributions to the
401(k) plan.

Limitations on Liability and Indemnification

   Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

  . any breach of their duty of loyalty to the corporation or its
    stockholders;

  . acts or omissions not in good faith or which involve intentional
    misconduct or a knowing violation of law;

  . unlawful payments of dividends or unlawful stock repurchases or
    redemptions; or

  . any transaction from which the director derived an improper personal
    benefit.

   This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

   Our certificate of incorporation and bylaws provide that Cerent shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.

   We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director or officer of
Cerent, any subsidiary of Cerent or any other company or enterprise to which
the person provides services at the request of Cerent. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.

                                       51
RELATED PARTY TRANSACTIONS

   Some stock option grants to directors and executive officers of Cerent are
described under the caption "Management--Executive Compensation."

   Since our inception in January 1997, we have issued and sold shares of our
preferred stock as follows: an aggregate of 1,800,000 shares of Series A
preferred stock at $0.03 per share in March 1997, an aggregate of 3,286,668
shares of Series B preferred stock, and warrants to purchase an aggregate of
1,500,000 shares of Series B preferred stock, at $0.67 per share in April 1997,
an aggregate of 6,450,000 shares of Series C preferred stock, and warrants to
purchase an aggregate of 967,500 shares of Series C preferred stock, at $1.33
per share in August 1997, an aggregate of 9,165,051 shares of Series D
preferred stock at $1.43 per share in July 1998 and November 1998, an aggregate
of 12,288,972 shares of Series E preferred stock at $2.17 per share in November
1998 and May 1999. The following table summarizes the shares of common stock
and preferred stock purchased by our Chief Executive Officer and five-percent
stockholders and persons and entities associated with them in these
transactions:
Series B            Series C
                                     Series A  Series B  Preferred Series C  Preferred Series D  Series E
                            Common   Preferred Preferred   Stock   Preferred   Stock   Preferred Preferred
Investor (1)                Stock      Stock     Stock   Warrants    Stock   Warrants    Stock     Stock
------------              ---------- --------- --------- --------- --------- --------- --------- ---------
Carl Russo..............   2,700,000     --           --        --        --       --    179,550   573,528
Kleiner Perkins Caufield
 & Byers (2)............  13,333,332     --    3,166,668 1,500,000 1,500,000  225,000    697,674   600,000
Advanced Fibre
 Communications,
 Inc. (2)...............          --     --           --        -- 2,250,000  337,500    450,000   633,678
Norwest Venture
 Partners (2)...........          --     --           --        --        --       --  6,279,069 1,310,604
Cisco Systems (2).......          --     --           --        --        --       --         -- 6,000,000
---------------------
(1) Shares held by affiliated persons and entities have been added together for
    the purposes of this chart. See "Principal Stockholders" for a chart of
    beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.

   In October 1998, Cerent entered into a technology license agreement with
Siara Systems, Inc. pursuant to which Cerent granted limited license rights to
Siara to use technology developed by Cerent related to two ASICs. Siara was
established in 1998 by former employees of Cerent and was initially financed by
Kleiner Perkins Caufield & Byers, which is a significant stockholder of Cerent.
Vinod Khosla, our chairman of the board of directors and a general partner of
Kleiner Perkins Caufield & Byers, and Promod Haque, a director of Cerent, are
also directors of Siara. In February 1999, Cerent and Siara entered into an
amendment and supplement to the technology license agreement pursuant to which
Siara agreed to pay Cerent $403,000 and a royalty of 2% of its gross revenues
resulting from sales of products incorporating the licensed technology, up to a
maximum of $500,000.

   On May 15, 1998, in connection with the hiring of Carl Russo as our
President and Chief Executive Officer, we entered into an agreement with Mr.
Russo pursuant to which we agreed to assist Mr. Russo in obtaining a line of
credit of up to $1.0 million and we agreed to pay the interest on this loan for
three years from the date of the loan. In July 1998, in connection with the
exercise of an option to purchase 2,700,000 shares of our common stock, we
loaned Mr. Russo $359,100 in exchange for a full-recourse promissory note which
bears interest at a rate of 5.6% per annum. The principal and interest under
this note become due and payable on the earlier of July 7, 2002 or the date of
termination of Mr. Russo's employment or consulting relationship with us.

                                       52
Mr. Russo purchased 179,550 shares of our Series D preferred stock in
November 1998 at $1.433 per share. Additionally, in May 1999, Mr. Russo
purchased 573,528 shares of our Series E preferred stock at $2.167 per share.
Mr. Russo paid an amount of $1,242,644 to us through the issuance of a full-
recourse promissory note, with an interest rate of 5.22% per annum, which is
secured by the Series E preferred stock held by Mr. Russo pursuant to the terms
of a security agreement. The principal and interest under this note become due
and payable on the earlier of May 17, 2004 or promptly upon the sale of shares
of Cerent's stock forming the security interest under the security agreement.

   To facilitate the exercise of stock options, we loaned the following
executive officers the following amounts in exchange for full-recourse
promissory notes: Michael Ashby--$2,599,600; Terry Brown--$24,875, and
$324,950; Tom Corker--$159,920; Scott Lester--$1,999,800; and Richard Roney--
$169,800. Each of these notes accrues interest at the minimum federal rate and
matures on the four-year anniversary of the date of issuance. The principal and
interest under these notes become due and payable on the earlier of their
respective maturity dates or the date of termination of the holder's
employment. These notes are secured by the stock purchased with the loaned
amounts.

   All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.

   We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification" for a description of the indemnification obligations.

                                       53
PRINCIPAL STOCKHOLDERS

   The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 1999, by (a) each person or entity
who is known by us to own beneficially more than 5% of our outstanding common
stock, (b) each of the Named Executive Officers, (c) each of our directors and
(d) all directors and executive officers of Cerent as a group.
Name and Address of                                  Percentage of Shares
Beneficial Owner          Number of Shares            Beneficially Owned
-------------------         Beneficially   ----------------------------------------
                             Owned (1)     Prior to the Offering After the Offering
                          ---------------- --------------------- ------------------
Kleiner Perkins Caufield
 & Byers (2)............     21,022,674            30.8%

Norwest Venture Partners
 VI, LP (3).............      7,589,673            11.4

Cisco Systems, Inc.
 (4)....................      6,000,000             9.0

Advanced Fibre
 Communications, Inc.
 (5)....................      3,671,178             5.5

Carl Russo (6)..........      3,453,078             5.2

Ajaib Bhadare (7).......      1,586,250             2.4

Terry Brown (8).........        525,000              *

Tom Corker (9)..........        435,000              *

Richard Roney (10)......        600,000              *

Vinod Khosla (11).......     21,022,674            30.8

Kevin Compton (12)......     21,022,674            30.8

Promod Haque (13).......      7,589,673            11.4

Donald Green (14).......      4,102,428             6.1

All directors and
 officers as a group
 (11 persons) (15)......     61,736,777            87.6
---------------------
*Less than 1% of the outstanding shares of common stock.
(1) Applicable percentage ownership in the above table is based on 66,603,167
    shares of common stock outstanding as of June 30, 1999, as adjusted to
    reflect the conversion of all outstanding shares of preferred stock into
    common stock upon the closing of this offering and as adjusted to reflect
    the sale of common stock offered hereby. Beneficial ownership is determined
    in accordance with the rules of the Securities and Exchange Commission. In
    computing the number of shares beneficially owned by a person and the
    percentage ownership of that person, shares of common stock subject to
    options or warrants held by that person that are currently exercisable or
    will become exercisable within 60 days after June 30, 1999 are deemed
    outstanding, while such shares are not deemed outstanding for purposes of
    computing percentage ownership of any other person. To our knowledge and
    except as otherwise indicated, we believe that the beneficial owners of the
    common stock listed above, based on information furnished by such owners,
    have sole voting power and investment power with respect to such shares,
    subject to community property laws where applicable. Unless otherwise
    indicated, the address for each stockholder listed in the table is c/o
    Cerent Corporation, 1450 North McDowell Blvd., Petaluma, California 94954.
(2) Represents 17,785,860 shares held by Kleiner Perkins Caufield & Byers VIII,
    1,029,372 shares held by KPCB VIII Founders Fund, 482,442 shares held by
    KPCB Information Sciences Zaibatsu Fund II, warrants to purchase 1,589,868
    shares of common stock held by Kleiner Perkins Caufield & Byers VIII,
    warrants to purchase 92,007 shares of common stock held by KPCB VIII
    Founders Fund and warrants to

                                       54
purchase 43,125 shares of common stock held by KPCB Information Sciences
    Zaibatsu Fund II. The address of these stockholders is 2750 Sand Hill
    Road, Menlo Park, California 94025.
(3) Norwest Venture Partners VI, LP is located at 245 Lytton Avenue, Suite
    250, Palo Alto, California 94301.
(4) Cisco Systems, Inc. is located at 170 West Tasman Drive, San Jose,
    California 95134.
(5) Represents 3,333,678 shares and a warrant to purchase 337,500 shares of
    common stock. Advanced Fibre Communications, Inc. is located at One Willow
    Brook Court, Petaluma, California 94954.
(6) Includes 2,700,000 shares subject to a stock pledge agreement in favor of
    Cerent, 1,968,750 of which are subject to our right to repurchase at cost
    upon cessation of employment. Also includes 573,528 shares subject to a
    security agreement in favor of Cerent.
(7) Includes a warrant to purchase 11,250 shares of common stock and 437,719
    shares which are subject to our right to repurchase at cost upon cessation
    of employment.
(8) The shares listed are subject to stock pledge agreements in favor of
    Cerent, 345,313 of which are subject to our right to repurchase at cost
    upon cessation of employment.
(9) Includes 240,000 shares subject to a stock pledge agreement in favor of
    Cerent, 125,000 of which are subject to our right to repurchase at cost
    upon cessation of employment. Also includes 101,563 shares subject to our
    right to repurchase at cost upon cessation of employment
(10) The shares listed are subject to a stock pledge agreement in favor of
     Cerent, all of which are subject to our right to repurchase at cost upon
     cessation of employment.
(11) Mr. Khosla is a general partner of KPCB VIII Associates, LP. which is the
     general partner of Kleiner Perkins Caufield & Byers VIII and KPCB VIII
     Founders Fund. Mr. Khosla is also a general partner of KPCB VII
     Associates, L.P., which is the general partner of KPCB Information
     Sciences Zaibatsu Fund II. Mr. Khosla's address is c/o Kleiner Perkins
     Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
     shares listed represent 17,785,860 shares held by Kleiner Perkins
     Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
     482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
     warrants to purchase 1,589,868 shares of common stock held by Kleiner
     Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
     common stock held by KPCB VIII Founders Fund and warrants to purchase
     43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
     Fund II. Mr. Khosla disclaims beneficial ownership of these shares,
     except to the extent of his pecuniary interest therein.
(12) Mr. Compton is a general partner of KPCB VIII Associates, L.P., which is
     the general partner of Kleiner Perkins Caufield & Byers VIII and KPCB
     VIII Founders Fund. Mr. Compton is also a general partner of KPCB VII
     Associates, L.P. which is the general partner of KPCB Information
     Services Zaibatsu Fund II. Mr. Compton's address is c/o Kleiner Perkins
     Caufield & Byers, 2750 Sand Hill Road, Menlo Park, California 94025. The
     shares listed represent 17,785,860 shares held by Kleiner Perkins
     Caufield & Byers VIII, 1,029,372 shares held by KPCB VIII Founders Fund,
     482,442 shares held by KPCB Information Sciences Zaibatsu Fund II,
     warrants to purchase 1,589,868 shares of common stock held by Kleiner
     Perkins Caufield & Byers VIII, warrants to purchase 92,007 shares of
     common stock held by KPCB VIII Founders Fund and warrants to purchase
     43,125 shares of common stock held by KPCB Information Sciences Zaibatsu
     Fund II. Mr. Kompton disclaims beneficial ownership of these shares,
     except to the extent of his pecuniary interest therein.
(13) Mr. Haque is a partner of Itasca VC Partners VI, LLP, the general partner
     of Norwest Venture Partners VI. The shares listed represent shares held
     by Norwest Venture Partners VI. Mr. Haque disclaims beneficial ownership
     of these shares, except to the extent of his pecuniary interest therein.
     Mr. Haque's address is c/o Norwest Venture Partners, 245 Lytton Avenue,
     Suite 250, Palo Alto, California 94301.
(14) Mr. Green is the Chairman of the Board and a director of Advanced Fibre
     Communications, Inc. The shares listed represent 3,333,678 shares held by
     Advanced Fibre Communications, Inc. and a warrant to purchase 337,500
     shares of common stock held by Advanced Fibre Communications, Inc. Mr.
     Green disclaims beneficial ownership of these shares, except to the
     extent of his pecuniary interest therein. Also includes 375,000 shares
     held in Mr. Green's retirement account and a warrant to purchase 56,250
     shares of common stock held in Mr. Green's retirement account. Mr.
     Green's address is c/o Advanced Fibre Communications, Inc., One Willow
     Brook Court, Petaluma, California 94954.

                                      55
(15) See footnotes (1) through (14). Also includes shares beneficially owned by
     certain officers who joined Cerent subsequent to June 30, 1999.

                                       56
DESCRIPTION OF CAPITAL STOCK

   Upon completion of this offering, we will be authorized to issue 300,000,000
shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated
preferred stock, $0.001 par value. The following description of our capital
stock is not complete and is qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.

Common Stock

   As of June 30, 1999, there were 66,603,167 shares of common stock
outstanding that were held of record by approximately 250 stockholders after
giving pro-forma effect to the conversion of our preferred stock into common
stock at a one-to-one ratio and assuming no exercise or conversion of
outstanding convertible securities after June 30, 1999. There will be
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise or conversion of outstanding convertible
securities after June 30, 1999) after giving effect to the sale of the shares
of common stock offered hereby.

   The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Cerent, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued upon the closing of this offering will be fully paid and
nonassessable.

   On July 20, 1999, Cerent entered into a convertible note purchase agreement
with certain entities affiliated with MSD Capital, L.P., the private investment
firm for Michael S. Dell. Pursuant to this agreement, Cerent issued $30,000,000
of convertible notes, which will be automatically convertible into shares of
Cerent's common stock upon completion of the initial public offering. In
connection with the sale of the convertible notes, the investors were granted
certain other rights, including registration rights with respect to the shares
issuable upon the conversion of the convertible notes.

Preferred Stock

   Effective upon the closing of this offering, the board of directors will
have the authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects might include, among
other things, restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
and delaying or preventing a change in control of Cerent without further action
by the stockholders. We have no present plans to issue any shares of preferred
stock.

Warrants

   As of June 30, 1999, we had warrants outstanding that, following the
completion of this offering, will be exercisable for up to an aggregate of
4,014,618 shares of common stock including 393,702 shares reserved for issuance
in connection with drawdowns on a credit line. In addition, as of June 30,
1999, we also had warrants outstanding to purchase an aggregate of 967,500
shares of Series C convertible preferred stock that, to the extent not
exercised, will expire upon the completion of this offering.

                                       57
Registration Rights of Certain Holders

   The holders of 49,193,898 shares of common stock, 4,982,118 shares issuable
upon exercise of warrants and      shares to be issued upon automatic
conversion of convertible promissory notes, assuming an initial public offering
price of $   per share (the "registrable securities"), or their permitted
transferees, are entitled to certain rights with respect to registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between Cerent and the holders of registrable securities. Under
these registration rights, beginning on the earlier of August 15, 2002, or six
months after the effective date of the offering contemplated by this
prospectus, holders of at least 51% of the then-outstanding registrable
securities may require on two occasions that Cerent register at least 30% of
the registrable securities then outstanding for public resale. In addition,
holders of at least 30% of the then-outstanding registrable securities may
require that we register their shares for public resale on Form S-3 or similar
short-form registration, provided we are eligible to use Form S-3 or similar
short-form registration statement and provided further that the value of the
securities to be registered is at least $500,000. Furthermore, in the event
Cerent elects to register any of its shares of common stock for purposes of
effecting any public offering, the holders of registrable securities are
entitled to include their shares of common stock in the registration, subject
however to our right to reduce the number of shares proposed to be registered
in view of market conditions. All expenses in connection with any registration
(other than underwriting discounts and commissions) will be borne by us. All
registration rights will terminate five years after the date of this public
offering or, with respect to each holder of registrable securities, at such
time as the holder is entitled to sell all of its shares in any three month
period under Rule 144 of the Securities Act or another similar exemption.

Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions

   Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of Cerent by a third party and the
removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire
control of Cerent to first negotiate with us. We believe that the benefits of
increased protection of our ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure Cerent outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.

   We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

  . the board of directors approved the transaction in which such stockholder
    became an interested stockholder prior to the date the interested
    stockholder attained such status;

  . upon consummation of the transaction that resulted in the stockholder's
    becoming an interested stockholder, he or she owned at least 85% of the
    voting stock of the corporation outstanding at the time the transaction
    commenced, excluding shares owned by persons who are directors and also
    officers; or

  . on or subsequent to such date the business combination is approved by the
    board of directors and authorized by 66 2/3% vote at an annual or special
    meeting or stockholders.

   A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.

                                       58
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Cerent. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Cerent.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is U.S. Stock Transfer
Corporation. The transfer agent's address is 1745 Gardena Avenue, 2nd Floor,
Glendale, CA 91204, and its telephone number is (818) 502-1404.

Listing

   We have applied to list our common stock on The Nasdaq National Market under
the trading symbol "CERE."

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.

   Upon completion of this offering and based on shares outstanding at June 30,
1999, we will have outstanding           shares of common stock. Of these
shares, all the shares sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.

   The remaining       shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below.

   Our directors, officers and stockholders have entered into lock-up
agreements with the underwriters of this offering generally providing that they
will not offer, sell, contract to sell, pledge or otherwise dispose of our
shares of common stock or any securities exercisable for or convertible into
our common stock owned by them prior to this offering for a period of 180 days
after the date of this offering without the prior written consent of Credit
Suisse First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by Credit Suisse First Boston
Corporation. Taking into account the lock-up agreements, and assuming Credit
Suisse First Boston Corporation does not release stockholders from these
agreements prior to the expiration of the 180 day lock-up period, the following
shares will be eligible for sale in the public market at the following times:

  . Beginning on the effective date of the registration statement, only the
         shares sold in this offering, will be immediately available for sale
    in the public market;

                                       59
. Beginning 180 days after the effective date,           additional shares
    will become eligible for sale under Rule 701, Rule 144 and Rule 144(k),
    subject to volume restrictions as described below, of which all but
               shares are held by affiliates;

  . An additional           shares will be eligible for sale pursuant to Rule
    701 at various times beginning 180 days after the effective date when
    these shares are released from our repurchase option with respect to
    these shares, of which, all but           shares are held by affiliates;
    and

  . An additional 573,528 shares will be eligible for sale pursuant to Rule
    144 in May 2000, and an additional 6,000 shares will be eligible for sale
    pursuant to Rule 144 in June 2000.

   In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:

  . 1% of the number of shares of common stock then outstanding, which will
    equal approximately      shares immediately after this offering; or

  . the average weekly trading volume of our common stock during the four
    calendar weeks preceding the filing of a Form 144 with respect to such
    sale.

Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
Cerent. Under Rule 144(k), a person who is not deemed to have been an affiliate
of Cerent at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.

   Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors, or consultant who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, we intend to file
registration statements under the Securities Act as promptly as possible after
the completion of this offering to register approximately 7,886,212 shares to
be issued pursuant to our employee benefit plans. As a result, any options or
rights exercise under the 1997 Stock Plan, the 1999 Employee Stock Purchase
Plan or the 1999 Directors' Stock Option Plan after the effectiveness of the
registration statements will be available for sale in the public market 180
days after the effective date of this offering upon the expiration of lock-up
agreements. However, such shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of June
30, 1999, there were outstanding options for the purchase of 459,875 shares of
our common stock under the 1997 stock Plan and 1,426,337 shares were available
for future grant.

   Also beginning 6 months after the date of this offering, holders of
           restricted shares and certain holders of warrants to purchase
          shares of common stock will be entitled to certain registration
rights. See "Description of Capital Stock--Registration Rights." Registration
of such shares under the Securities Act would result in such shares becoming
freely tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.

                                       60
UNDERWRITING

   Under the terms and subject to the conditions contained in an underwriting
agreement dated   , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
and Warburg Dillon Read LLC are acting as representatives, the following
respective numbers of shares of common stock:
Number
          Underwriter                                                  of Shares
          -----------                                                  ---------
Credit Suisse First Boston Corporation...........................
     BancBoston Robertson Stephens Inc................................
     Dain Rauscher Wessels............................................
     Warburg Dillon Read LLC..........................................
                                                                          ---
       Total..........................................................
                                                                          ===
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

   We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to       additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.

   The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $     per share. The
underwriters and selling group members may allow a discount of $     per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.

   The following table summarizes the compensation and estimated expenses we
will pay.
Per Share                       Total
                          ----------------------------- -----------------------------
                             Without          With         Without          With
                          Over-allotment Over-allotment Over-allotment Over-allotment
                          -------------- -------------- -------------- --------------
Underwriting discounts
 and commissions payable
 by us..................       $              $              $              $
Expenses payable by us..       $              $              $              $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

   We, our officers and directors and our stockholders have agreed that we and
they will not offer, sell, contract to sell, announce an intention to sell,
pledge or directly or indirectly dispose of, or file with the Commission a
registration statement under the Securities Act relating to, any additional
shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus.

                                       61
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.

   We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "CERE."

   Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between us
and the underwriters. The principal factors to be considered in determining the
public offering price include:

  . the information set forth in this prospectus and otherwise available to
    the underwriters;

  . the history and the prospects for the industry in which we will compete;

  . the ability of our management;

  . the prospects for our future earnings;

  . the present state of our development and our current financial condition;

  . the general condition of the securities markets at the time of this
    offering; and

  . the recent market prices of, and the demand for, publicly traded common
    stock of generally comparable companies.

   The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.

  . Over-allotment involves syndicate sales in excess of the offering size,
    which creates a syndicate short position.

  . Syndicate covering transactions involve purchases of the common stock in
    the open market after the distribution has been completed to cover
    syndicate short positions.

  . Penalty bids permit the representatives to reclaim a selling concession
    from a syndicate member when the common stock originally sold by the
    syndicate member are purchased in a syndicate covering transaction to
    cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market and, if commenced, may be discontinued
at any time.

                                       62
NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

   The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.

Representations of Purchasers

   Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."

Rights of Action (Ontario Purchasers)

   The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission of rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

   All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or persons outside of Canada.

Notice to British Columbia Residents

   A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that a purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility of Investment

   Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

                                 LEGAL MATTERS

   The validity of the common stock offered hereby will be passed upon for
Cerent by Venture Law Group, A Professional Corporation, Menlo Park,
California. Joshua L. Green, a director of Venture Law Group, is the

                                       63
Secretary of Cerent. Legal matters in connection with this offering will be
passed upon for the underwriters by Wilson Sonsini Goodrich and Rosati,
Professional Corporation, Palo Alto, California. As of the date of this
prospectus, an investment partnership associated with Venture Law Group owns an
aggregate of 37,500 shares of our common stock, and one director of Venture Law
Group beneficially owns 7,500 shares of our common stock.

                                    EXPERTS

   The consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (January 27, 1997) through December 31, 1997 and for
the year ended December 31, 1998 included in this prospectus and in the related
financial statement schedule included elsewhere in the registration statement,
have been included in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

                       CHANGE IN INDEPENDENT ACCOUNTANTS

   Effective June 17, 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our Board of Directors on June 17, 1999. Prior to June 17, 1999, our former
auditors issued a report on the period from inception (January 27, 1997) to
December 31, 1997. The report of our former auditors did not contain an adverse
opinion or disclaimer of opinion qualified or modified as to audit scope or
accounting principle. The auditor's opinion did contain an uncertainty as to
substantial doubt regarding the Company's ability to continue as a going
concern. In connection with the audit for the period from inception (January
27, 1997) through December 31, 1997 and through June 17, 1999, there were no
disagreements with our former auditors on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of our former auditors,
would have caused them to make reference thereto in their report. Our former
auditors have not audited or reported on any of the financial statements or
information included in this prospectus. Prior to June 17, 1999, we had not
consulted with Ernst & Young LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our financial
statements. We have requested that our former auditors furnish us with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of this letter is filed as an exhibit to the registration
statement of which this prospectus forms a part.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to Cerent and such
common stock, we refer you to the registration statement and to the exhibits
and schedules filed therewith. Statements contained in this prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.

                                       64
CONSOLIDATED FINANCIAL STATEMENTS

                               CERENT CORPORATION

                                    CONTENTS
Report of Ernst & Young LLP, Independent Auditors........................... F-2

Audited Consolidated Financial Statements
  Consolidated Balance Sheets............................................... F-3
  Consolidated Statements of Operations..................................... F-4
  Consolidated Statements of Stockholders' Equity........................... F-5
  Consolidated Statements of Cash Flows..................................... F-6
  Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Cerent Corporation

   We have audited the accompanying consolidated balance sheets of Cerent
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from January 27, 1997 (inception) through December 31, 1997 and for the year
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position
of Cerent Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the period from January 27,
1997 (inception) through December 31, 1997 and for the year ended December 31,
1998, in conformity with generally accepted accounting principles.

                                          /s/ Ernst & Young LLP

Walnut Creek, California
July 19, 1999, except for Note 9, as to which the date is
September   , 1999

                                      F-2
CERENT CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                      (in thousands except par value data)
Pro Forma
                                                                  Stockholders'
                                     December 31,                   Equity at
                                   -----------------   June 30,     June 30,
                                    1997      1998       1999         1999
                                   -------  --------  ----------- -------------
                                                      (unaudited)  (unaudited)
ASSETS
Current assets:
  Cash and cash equivalents....... $ 6,758  $ 22,245   $  5,794
  Accounts receivable, net of
   allowance for doubtful accounts
   of $0 at December 31, 1998 and
   $200 at June 30, 1999..........      --       231      5,827
  Inventories.....................      --     2,013      4,418
  Prepaid expenses and other
   current assets.................     338       785        557
                                   -------  --------   --------
Total current assets..............   7,096    25,274     16,596
Property and equipment, net.......   3,003     5,996     14,179
Other assets......................      44       607      2,853
                                   -------  --------   --------
Total assets...................... $10,143  $ 31,877   $ 33,628
                                   =======  ========   ========
  LIABILITIES AND STOCKHOLDERS'
              EQUITY
Current liabilities:
  Accounts payable................ $   526  $  3,481   $  8,676
  Accrued compensation and related
   liabilities....................     167       210      1,046
  Accrued expenses................     144       800      1,601
  Current portion of long-term
   debt...........................   1,391     2,272      3,820
                                   -------  --------   --------
Total current liabilities.........   2,228     6,763     15,143
Long-term debt, net of discount...   3,718     4,229      5,001
                                   -------  --------   --------
Total liabilities.................   5,946    10,992     20,144
Commitments
Stockholders' equity:
  Convertible preferred stock,
   $0.00033 par value, issuable in
   series: 19,570, 37,597 and
   37,709 shares authorized at
   December 31, 1997 and 1998 and
   June 30, 1999, respectively
   (10,000 shares pro forma);
   11,537, 32,417 and 32,991
   shares issued and outstanding
   at December 31, 1997 and 1998
   and June 30, 1999, respectively
   (none pro forma); aggregate
   liquidation preference of
   $50,614 at June 30, 1999 (none
   pro forma).....................  11,124    49,878     64,989     $     --
  Common stock, $0.00033 par
   value, 67,986 shares authorized
   at December 31, 1997 and 1998
   and 150,000 shares authorized
   at June 30, 1999 (300,000
   shares pro forma); 25,194,
   28,744 and 33,612 shares issued
   and outstanding at December 31,
   1997 and 1998 and June 30,
   1999, respectively (66,603
   shares pro forma)..............   1,247     4,905     55,868      120,857
  Notes receivable from
   stockholders...................    (316)   (1,023)   (11,891)     (11,891)
  Deferred stock compensation.....      --    (2,467)   (35,770)     (35,770)
  Accumulated deficit.............  (7,858)  (30,408)   (59,712)     (59,712)
                                   -------  --------   --------     --------
Total stockholders' equity........   4,197    20,885     13,484     $ 13,484
                                   -------  --------   --------     ========
Total liabilities and
 stockholders' equity............. $10,143  $ 31,877   $ 33,628
                                   =======  ========   ========
See accompanying notes.

                                      F-3
CERENT CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands except per share amounts)
Period from
                            January 27,                 Six Months Ended
                          1997 (inception)  Year Ended      June 30,
                          to December 31,  December 31, -----------------
                                1997           1998      1998      1999
                          ---------------- ------------ -------  --------
                                                          (unaudited)
Revenue.................      $    --        $    220   $    --  $  9,917
Cost of revenue.........           --           1,061        --     7,943
                              -------        --------   -------  --------
Gross profit (loss).....           --            (841)       --     1,974
Operating expenses:
  Research and
   development..........        5,159          15,553     6,723     8,792
  Selling, general and
   administrative.......        2,470           5,039     1,673    10,251
  Stock compensation....           --             510        --    10,800
                              -------        --------   -------  --------
Total operating
 expenses...............        7,629          21,102     8,396    29,843
                              -------        --------   -------  --------
Operating loss..........       (7,629)        (21,943)   (8,396)  (27,869)
Interest income.........          122             249        91       197
Interest expense........         (351)           (749)     (394)   (1,471)
Other income (expense)..           --            (107)       35      (161)
                              -------        --------   -------  --------
Net loss................      $(7,858)       $(22,550)  $(8,664) $(29,304)
                              =======        ========   =======  ========
Basic and diluted net
 loss per share.........      $ (0.82)       $  (1.33)  $ (0.57) $  (1.36)
                              =======        ========   =======  ========
Shares used in computing
 basic and diluted net
 loss per share.........        9,535          16,901    15,091    21,470
                              =======        ========   =======  ========
Pro forma basic and
 diluted net loss per
 share (unaudited)......                     $  (0.67)           $  (0.54)
                                             ========            ========
Shares used in computing
 pro forma basic and
 diluted net loss per
 share (unaudited)......                       33,850              54,026
                                             ========            ========
See accompanying notes.

                                      F-4
CERENT CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)
Convertible                        Notes
                          Preferred Stock  Common Stock      Receivable    Deferred                   Total
                          --------------- ----------------      from        Stock     Accumulated Stockholders'
                          Shares  Amount  Shares   Amount   Stockholders Compensation   Deficit      Equity
                          ------ -------- ------  --------  ------------ ------------ ----------- -------------
Issuance of common stock
 to founders............     --  $     --  8,073  $      2   $      --    $      --    $      --    $      2
Issuance of Series A
 convertible preferred
 stock, net of issuance
 costs..................   1,800       60    --        --          --           --           --           60
Issuance of Series B
 convertible preferred
 stock, net of issuance
 costs..................   3,287    2,167    --        --          --           --           --        2,167
Issuance of warrants to
 purchase Series B and C
 convertible preferred
 stock..................     --       338    --        --          --           --           --          338
Issuance of Series C
 convertible preferred
 stock, net of issuance
 costs..................   6,450    8,559    --        --          --           --           --        8,559
Issuance of common stock
 to third-party.........     --       --  13,333       890         --           --           --          890
Exercise of stock
 options by employees...     --       --   4,881       363        (316)         --           --           47
Repurchase of common
 stock from employees
 and founders...........     --       --  (1,093)       (8)        --           --           --           (8)
Net loss and
 comprehensive loss.....     --       --     --        --          --           --        (7,858)     (7,858)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances of December 31,
 1997...................  11,537   11,124 25,194     1,247        (316)         --        (7,858)      4,197
Issuance of Series D
 convertible preferred
 stock, net of issuance
 costs..................   9,165   13,277    --        --          --           --           --       13,277
Issuance of warrants to
 purchase Series D
 convertible preferred
 stock..................     --       163    --        --          --           --           --          163
Issuance of Series E
 convertible preferred
 stock, net of issuance
 costs..................  11,715   25,314    --        --          --           --           --       25,314
Exercise of stock
 options by employees...     --       --   6,827     1,010        (707)         --           --          303
Repurchase of common
 stock from employees
 and founders...........     --       --  (3,277)     (151)        --           --           --         (151)
Deferred stock
 compensation...........     --       --     --      2,799         --        (2,799)         --          --
Amortization of deferred
 stock compensation.....     --       --     --        --          --           332          --          332
Net loss and
 comprehensive loss.....     --       --     --        --          --           --       (22,550)    (22,550)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances of December 31,
 1998...................  32,417   49,878 28,744     4,905      (1,023)      (2,467)     (30,408)     20,885
Issuance of Series E
 convertible preferred
 stock, net of issuance
 costs (unaudited)......     574    6,300    --        --       (1,243)         --           --        5,057
Issuance of warrants to
 purchase Series D and E
 convertible preferred
 stock (unaudited)......     --     8,811    --        --          --           --           --        8,811
Issuance of warrants to
 purchase common stock
 (unaudited)............     --       --     --      2,350         --           --           --        2,350
Exercise of stock
 options by employees
 (unaudited)............     --       --   4,889     9,646      (9,625)         --           --           21
Repurchase of common
 stock from employees
 (unaudited)............     --       --     (21)       (1)        --           --           --           (1)
Deferred stock
 compensation
 (unaudited)............     --       --     --     38,968         --       (38,968)         --          --
Amortization of deferred
 stock compensation
 (unaudited)............     --       --     --        --          --         5,665          --        5,665
Net loss and
 comprehensive loss
 (unaudited)............     --       --     --        --          --           --       (29,304)    (29,304)
                          ------ -------- ------  --------   ---------    ---------    ---------    --------
Balances at June 30,
 1999 (unaudited).......  32,991 $ 64,989 33,612  $ 55,868   $ (11,891)   $ (35,770)   $ (59,712)   $ 13,484
                          ====== ======== ======  ========   =========    =========    =========    ========
See accompanying notes.

                                      F-5
CERENT CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
                                  January 27,                 Six Months Ended
                                1997 (inception)  Year Ended      June 30
                                to December 31,  December 31, -----------------
                                      1997           1998      1998      1999
                                ---------------- ------------ -------  --------
                                                                (unaudited)
Operating activities
 Net loss.....................      $(7,858)       $(22,550)  $(8,664) $(29,304)
 Adjustments to reconcile net
  loss to net cash used in
  operating activities:
 Depreciation and
  amortization................          563           1,670       758     1,116
 Amortization of discount on
  long-term debt related to
  issuance of warrants........           76             139        --     1,041
 Stock compensation...........           --             510        --    16,800
 Loss on sale of property and
  equipment...................           --              56        --        --
 Changes in operating assets
  and liabilities:
  Accounts receivable.........           --            (231)      (21)   (5,596)
  Inventories.................           --          (2,013)       --    (2,405)
  Prepaid expenses and other
   current assets.............         (338)           (447)       61       228
  Other assets................          (44)           (563)     (322)      (26)
  Accounts payable............          526           2,955     1,295     5,195
  Accrued compensation and
   related liabilities........          167              43      (167)      836
  Accrued expenses............          144             656      (144)      801
                                    -------        --------   -------  --------
Net cash used in operating
 activities...................       (6,764)        (19,775)   (7,204)  (17,314)
Investing activities
 Purchases of property and
  equipment...................       (3,566)         (4,312)   (2,541)   (9,299)
 Proceeds from sale of
  property and equipment......           --              87        --        25
                                    -------        --------   -------  --------
Net cash used in investing
 activities...................       (3,566)         (4,225)   (2,541)   (9,274)
Financing activities
 Proceeds from issuance of
  preferred stock.............       10,786          38,413        --        --
 Proceeds from issuance of
  common stock................          937             303       822        20
 Repurchase of common stock
  from employees..............           (8)           (151)      (76)       --
 Proceeds from issuance of
  long-term debt..............        5,640           2,632     2,979    11,824
 Payments on long-term debt...         (267)         (1,710)       --    (1,707)
                                    -------        --------   -------  --------
Net cash provided by financing
 activities...................       17,088          39,487     3,725    10,137
                                    -------        --------   -------  --------
Net increase (decrease) in
 cash and cash equivalents....        6,758          15,487    (6,020)  (16,451)
Cash and cash equivalents at
 beginning of period..........           --           6,758     6,758    22,245
                                    -------        --------   -------  --------
Cash and cash equivalents at
 end of period................      $ 6,758        $ 22,245   $   738  $  5,794
                                    =======        ========   =======  ========
Supplemental disclosures of
 cash flow information
 Cash paid for interest.......      $   204        $    610   $   302  $    442
                                    =======        ========   =======  ========
Noncash financing activities
 Acquisition of equipment
  under capital leases........      $    --        $    351   $    --  $     --
                                    =======        ========   =======  ========
 Warrants issued in connection
  with long-term debt
  agreements and customer
  commitments.................      $   338        $    163   $    --  $ 11,161
                                    =======        ========   =======  ========
 Employee notes issued in
  exchange for the exercise of
  stock options and
  convertible preferred
  stock.......................      $   316        $    707   $    58  $ 10,868
                                    =======        ========   =======  ========
See accompanying notes.

                                      F-6
CERENT CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

1. Organization and Summary of Significant Accounting Policies

 The Company

   The Company was incorporated on January 27, 1997 as Fiberlane
Communications, Inc. in Petaluma, California, under the laws of the State of
Delaware. The Company subsequently changed its name to Cerent Corporation (the
Company).

   The Company develops and delivers a multi-service optical transport platform
designed to lower network operating costs and increase the efficiency of
bandwidth delivery within today's transport networks. The Company was in the
development stage until December 1998, when sales of its sole product, the
Cerent 454, commenced. The Company's target market includes emerging inter-
exchange carriers, the local exchange carriers, independent carriers and cable
companies. The Company markets its products through direct sales.

 Unaudited Interim Financial Information

   The accompanying consolidated financial statements as of June 30, 1999 and
for the six months ended June 30, 1998 and 1999 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its consolidated financial
position, operating results, and cash flows for the interim date and periods
presented. Results for the six months ended June 30, 1999 are not necessarily
indicative of results for the entire fiscal year or future periods.

 Basis of Presentation

   The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.

 Use of Estimates

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

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents consisted of money market accounts at December 31, 1998 and 1997.

 Concentrations of Credit Risk and Credit Risk Evaluations

   Financial instruments which potentially subject the Company to credit risk
consist of demand deposit accounts, money market accounts, trade accounts
receivable and long-term debt. The Company maintains its demand deposit
accounts and its money market accounts primarily with one financial
institution. The Company has partially financed its operations through long-
term debt issuance through a lending institution. The Company generally does
not require collateral for sales to customers. The Company maintains reserves
for potential credit losses. For the year ended December 31, 1998, one customer
accounted for 62% and a second customer accounted for 38% of the Company's
revenue. No customer accounted for more than 10% of the Company's revenue for
the six months ended June 30, 1999.

                                      F-7
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

 Suppliers

   The Company receives certain custom semi-conductor chips from two sole
sources. Additionally, the Company relies on one hardware manufacturer for the
production of its product and does not have an internal manufacturing facility.
The inability of the supplier or manufacturer to fulfill supply requirements of
the Company could negatively impact future results.

 Inventories

   Inventories consist of raw materials, work-in-process and finished products.
Inventories are recorded at the lower of cost or market using the first-in,
first-out method. Finished products principally consist of items shipped to
customers that are subject to completion of obligations or customer acceptance.

 Property and Equipment

   Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three years, or
the lease term of the respective assets.

 Software Development Costs

   The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" (FAS 86) under
which certain development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. To date, the Company has not capitalized any
development costs related to software products, as the costs incurred
subsequent to the establishment of technological feasibility have not been
significant and all software development costs have been charged to product
development expense in the accompanying consolidated statements of operations.

 Revenue Recognition

   The Company generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless the Company has future
obligations or is required to obtain customer acceptance, in which cases
revenue is deferred until these obligations are met.

 Warranty Obligations

   The Company's products generally carry a three-year warranty that includes
factory repair services as needed for replacement parts. Estimated expenses for
warranty obligations are accrued as revenue is recognized.

 Income Taxes

   The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

 Research and Development

   Costs to develop the Company's products are expensed as incurred in
accordance with Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," (FAS 2) which establishes accounting and
reporting standards for research and development.

                                      F-8
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

 Other Comprehensive Income

   The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the period ended December 31, 1997 and the
year ended December 31, 1998 does not differ from the reported net loss.

 Stock-Based Compensation

   The Company accounts for its stock options and equity awards in accordance
with the provisions of the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and has elected to follow
the "disclosure only" alternative prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123).

 Fair Value of Financial Instruments

   The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms, degrees
of risk, and remaining maturities. The carrying values of these obligations
approximate their fair values.

 Net Loss Per Share

   Basic net loss per share and diluted net loss per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period, less
the weighted average number of shares of common stock issued to founders,
investors and employees that are subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the consolidated statements of
operations, have been computed as described above and also give effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance, using an assumed initial public offering price of $    per
share to calculate the conversion ratio for convertible preferred stock.

                                      F-9
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

   The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
Period from
                                 January 27,                 Six Months Ended
                               1997 (inception)  Year Ended      June 30,
                               to December 31,  December 31, -----------------
                                     1997           1998      1998      1999
                               ---------------- ------------ -------  --------
                                                               (unaudited)
Historical:
     Net loss.................     $(7,858)       $(22,550)  $(8,664) $(29,304)
                                   =======        ========   =======  ========
     Weighted-average shares
      used in computing basic
      and diluted net loss per
      share...................       9,535          16,901    15,091    21,470
                                   =======        ========   =======  ========
     Basic and diluted net
      loss per share..........     $ (0.82)       $  (1.33)  $ (0.57) $  (1.36)
                                   =======        ========   =======  ========
   Pro forma:
     Net loss.................                    $(22,550)           $(29,304)
                                                  ========            ========
     Shares used above........                      16,901              21,470
     Pro forma adjustment to
      reflect the weighted
      effect of the assumed
      conversion of
      convertible preferred
      stock...................                      16,949              32,556
                                                  --------            --------
     Shares used in computing
      pro forma basic and
      diluted net loss per
      share (unaudited).......                      33,850              54,026
                                                  --------            --------
     Pro forma basic and
      diluted net loss per
      share (unaudited).......                    $  (0.67)           $  (0.54)
                                                  ========            ========
Unaudited Pro Forma Stockholders' Equity

   If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma stockholders' equity at June 30, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at June 30, 1999 is disclosed
on the consolidated balance sheets.

 Business Segments

   The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (FAS
131). The Company operates solely in one segment, the development and marketing
of communications infrastructure equipment; and therefore, there are no
separate disclosures required for segment information as required by FAS 131.

                                      F-10
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

 Computer Software

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. To date SOP 98-1 has had no material impact on its
consolidated financial position, results of operations, or cash flows.

 Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which will be effective for the fiscal year
ended December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company has not
evaluated the impact of FAS 133, however, it believes the adoption of FAS 133
will not have a material effect on the consolidated financial position, results
of operations, or cash flows as the Company has not entered into any derivative
contracts.

2. Balance Sheet Details

   The components of inventories consist of the following (in thousands):
December 31,  June 30,
                                                            1998        1999
                                                        ------------ -----------
                                                                     (Unaudited)
Raw materials.......................................    $  210      $  186
   Work-in-process.....................................     1,179         --
   Finished products...................................       624       4,232
                                                           ------      ------
                                                           $2,013      $4,418
                                                           ======      ======
Property and equipment consists of the following (in thousands):
December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
Computer equipment............................................ $1,770 $4,379
   Furniture and fixtures........................................    189    432
   Software......................................................  1,575  3,238
   Leasehold improvements........................................     32     37
                                                                  ------ ------
                                                                   3,566  8,086
   Less accumulated depreciation and amortization................    563  2,090
                                                                  ------ ------
                                                                  $3,003 $5,996
                                                                  ====== ======
F-11
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

   Certain computer and office equipment are recorded under capital leases that
aggregated $351,000 as of December 31, 1998 (none as of December 31, 1997).
Accumulated amortization on the assets recorded under capital leases aggregated
$12,000 as of December 31, 1998 (none as of December 31, 1997).

   Accrued expenses consist of the following (in thousands):
December 31,
                                                                  -------------
                                                                   1997   1998
                                                                  ------ ------
Customer support and warranty expenses........................ $   -- $  207
   Other accrued expenses........................................    144    593
                                                                  ------ ------
                                                                  $  144 $  800
                                                                  ====== ======
3. Stockholders' Equity

 Stock Split

   In June 1999, the Company's Board of Directors approved a 3-for-1 stock
split of the Company's authorized, issued and outstanding common and
convertible preferred stock. All common and convertible preferred share and per
share amounts in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the stock split.

 Common Stock

   In 1997, the Company entered into Stock Purchase Agreements with its
founders to initially capitalize the Company. The Company has the right to
repurchase, at the original issue price, a declining percentage of certain of
the shares of common stock issued. The repurchase right generally declines on a
percentage basis over four years based on the length of the founder's and each
respective employee's continued employment with the Company. As of December 31,
1997 and 1998, 7,101,000 and 1,572,000 shares, respectively, of common stock
issued under this agreement were subject to repurchase.

 Convertible Preferred Stock

   Convertible preferred stock consists of the following series (in thousands
except per share amounts):
Shares Issued
                                            and Outstanding at           Per share           Aggregate     Aggregate
                               Shares     ---------------------- -------------------------  Liquidation   Liquidation
                            Designated at December 31,                                     Preference at Preference at
                            December 31,  ------------- June 30, Noncumulative Liquidation December 31,    June 30,
   Series                       1998       1997   1998    1999     Dividend    Preference      1998          1999
   ------                   ------------- ------ ------ -------- ------------- ----------- ------------- -------------
A.......................     1,800      1,800  1,800   1,800      $--          $ .03       $    60       $    60
   B.......................     5,552      3,287  3,287   3,287       .07           .67         2,191         2,191
   C.......................     7,418      6,450  6,450   6,450       .13          1.33         8,600         8,600
   D.......................    10,212        --   9,165   9,165       .14          1.43        13,136        13,136
   E.......................    12,615        --  11,715  12,289       .22          2.17        25,383        26,627
                               ------     ------ ------  ------                               -------       -------
                               37,597     11,537 32,417  32,991                               $49,370       $50,614
                               ======     ====== ======  ======                               =======       =======
F-12
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

   The holders of Series A, B, C, D, and E convertible preferred stock are
entitled to annual noncumulative dividends per share as shown above when-and-if
declared by the Board of Directors. In the event of any voluntary or
involuntary liquidation of the Company, the Series A, B, C, D, and E
convertible preferred stockholders are entitled to a liquidation preference per
share as shown above plus any undeclared but unpaid dividends, all in
preference to the holders of the common stock. Upon the completion of a
distribution, the holders of the common stock will receive any and all
remaining assets of the Company.

   The holders of Series A, B, C, D and E convertible preferred stock have the
right, at any time after the date of issuance to convert each of their shares
into common shares at a pre-defined conversion ratio, initially set at a ratio
of 1:1. Convertible preferred stock is anti-dilutive for the Series C Warrants
and upon the earlier of i) August 2000, ii) sale or merger of the Company or
substantially all of the Company's assets, or iii) the closing of an initial
public offering of the Company's common stock. The holders of each share of
convertible preferred stock have the right to one vote for each share of common
stock into which the preferred stock can be converted.

   Convertible preferred shares automatically convert into shares of common
stock at the conversion price in effect upon the earlier of the Company's sale
of its common stock in a public offering with cash proceeds to the Company of
at least $10,000,000 and an offering price of which is not less than $2.87 per
share or upon the agreement of the holders of a majority of the outstanding
shares of Series A, B, C, D and E convertible preferred stock, voting together
as a class.

   In November 1998, in connection with the issuance of 343,000 shares of
Series D convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $178,000 for the difference between
the exercise price and the fair value of the convertible preferred stock.
Additionally, in May 1999, in connection with the issuance of 574,000 shares of
Series E convertible preferred stock to the Company's executives, the Company
recognized a stock compensation expense of $5,057,000 for the difference
between the exercise price and the fair value of the convertible preferred
stock.

 Warrants

   In connection with the issuance of Series B and Series C convertible
preferred stock in April and August 1997, the Company issued warrants to
purchase 1,500,000 shares of Series B convertible preferred stock at an
exercise price of $0.67 per share and 967,000 shares of Series C convertible
preferred stock at an exercise price of $1.33 per share, respectively. The
warrants are immediately exercisable and expire in April 2000.

   In connection with the long-term debt agreements entered into in May 1997
and October 1998, the Company issued warrants to purchase 765,000 shares of
Series B convertible preferred stock at an exercise price of $0.67 per share
and 174,000 shares of Series D convertible preferred stock at an exercise price
of $1.43 per share. The Company imputed a value for the Series B and Series D
warrants using the Black Scholes valuation model of $338,000 and $163,000,
respectively, which amounts were recorded as a discount on the long-term debt.
These discounts are being amortized over the term of the long-term debt to
interest expense. The warrants are immediately exercisable and expire between
April and June 2000.

   In connection with a long-term debt agreement entered into in April 1999,
the Company issued warrants to purchase 520,000 shares of Series D convertible
preferred stock at an exercise price of $1.43 per share and 233,000 shares of
Series E convertible preferred stock at an exercise price of $2.17 per share.
The warrants are immediately exercisable and expire in April 2006. The Company
may be required to issue additional warrants of Series D and Series E preferred
stock, respectively depending upon the type and amount of outstanding

                                      F-13
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

borrowings under the agreement. In May 1999, the Company borrowed $10,000,000
for working capital purposes and issued warrants to purchase 213,000 shares of
Series D convertible preferred stock at an exercise price of $1.43 per share
and 90,000 shares of Series E convertible preferred stock at an exercise price
of $2.17 per share in connection with the borrowing. The Company imputed a
value for these warrants using the Black Scholes model of $8,811,000 which
amount was recorded as a discount on the long term debt, and is being amortized
over the term of the long-term debt to interest expense. The warrant described
above to acquire 174,000 shares of Series D convertible preferred stock which
was issued in October 1998 was canceled as part of this agreement.

   In connection with a customer sales arrangement entered into in April 1999,
the Company issued warrants to purchase 300,000 shares of common stock at an
exercise price of $2.17 per share. The warrants are immediately exercisable and
expire in December 2004. The Company recorded a deferred charge of $2,350,000
reflecting the value of the warrants as determined using the Black Scholes
model. This asset is included in other assets in the accompanying consolidated
balance sheet and is being amortized over the term of the sales arrangement.
The Company recognized a charge of $78,000 for amortization of the deferred
long-term asset for the six months ended June 30, 1999 which is included in
stock compensation in the accompanying consolidated statement of operations.

 Notes Receivable from Stockholders

   Notes receivable from stockholders for common and convertible preferred
stock issued in 1997 and 1998 bear interest at interest rates ranging from
4.47% to 6.14% and are generally due four years after issuance. All notes
receivable are full recourse to the assets of the borrower.

 Shares of Common Stock Reserved for Future Issuance

   Common stock reserved for future issuance consist of the following (in
thousands):
December 31, June 30,
                                                             1998       1999
                                                         ------------ --------
Common stock reserved for:
     Convertible preferred stock........................    32,417     32,991
     1997 stock option plan.............................     3,319      1,880
     Convertible preferred stock warrants (as converted
      into common stock)................................     3,406      4,288
     Common stock warrants..............................       --         300
                                                            ------     ------
                                                            39,142     39,459
                                                            ======     ======
4. Stock Plan

   In July 1997, the Company established the 1997 Stock Plan (the 1997 Plan)
under which incentive stock options may be granted to employees, directors and
consultants of the Company to purchase up to 14,127,000 shares of common stock.
In October 1998 and April 1999, the Board of Directors of the Company increased
the number of shares authorized for issuance under the 1997 Plan to 15,027,000
and 18,477,000, respectively. Under the 1997 Plan, stock purchase rights may be
issued either alone, in addition to, or in tandem with other awards granted
under the 1997 Plan and/or cash awards made outside of the 1997 Plan.
Nonstatutory stock options (the NSO) and stock purchase rights may be granted
to employees and consultants, and incentive stock options (the ISO) may be
granted only to employees. In the case of an ISO that is granted to an employee
who, at the time of the grant of such option, owns stock representing more than
10% of the

                                      F-14
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is Unaudited)

total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair market value per
share on the date of grant or, granted to any other employee, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant. In the case of a NSO that is granted to a person who, at the
time of the grant of such option, owns stock representing more than 10% of the
total combined voting power of all classes of stock of the Company, the per
share exercise price shall not be less than 110% of the fair value per share on
the date of grant or, granted to an executive of the Company, the per share
exercise price shall not be less than 100% of the fair value per share on the
date of grant, or, granted to another person, the per share exercise price
shall not be less than 85% of the fair value per share on the date of grant.

   For the period from inception (January 27, 1997) through December 31, 1997,
for the year ending December 31, 1998 and for the six months ending June 30,
1999, 120,000, 1,715,000 and 21,000 shares were repurchased under the 1997
Plan, respectively, at the original issuance price.

   The 1997 Plan will continue in effect for a term of ten years unless
terminated by the Company's Board of Directors at an earlier date. Any option
granted under the 1997 plan shall be exercisable at such times and under such
conditions as determined by the Company's Board of Directors.

   Options issued under the 1997 Plan are immediately exercisable and shares
issued upon exercise of an option are subject to a right of repurchase by the
Company at the original issuance price. The repurchase right lapses as
determined by the Company's Board of Directors, generally 25% after one year
and 2.08% per month thereafter. At December 31, 1997 and 1998 and at June 30,
1999, the Company had 4,671,000, 7,146,000, and 10,443,000 outstanding common
shares which were subject to repurchase rights under the 1997 Plan,
respectively.

   Option activity is as follows (in thousands except per share amounts):
Outstanding Options
                                                        ------------------------
                                                                    Weighted-
                                                        Number of    Average
                                                         Shares   Exercise Price
                                                        --------- --------------
Options granted...................................   7,459       $ .08
     Options exercised.................................  (4,881)        .07
     Options canceled..................................    (450)        .07
                                                         ------       -----
   Balance at December 31, 1997........................   2,128         .10
     Options granted...................................   6,876         .17
     Options exercised.................................  (6,827)        .15
     Options canceled..................................  (1,879)        .11
                                                         ------       -----
   Balance at December 31, 1998........................     298         .51
     Options granted (unaudited).......................   5,069        2.18
     Options exercised (unaudited).....................  (4,889)       1.98
     Options canceled (unaudited)......................     (18)       2.17
                                                         ------       -----
   Balance at June 30, 1999 (unaudited)................     460        3.24
                                                         ======       =====
At December 31, 1997 and 1998, the weighted average remaining contractual
life of options outstanding is 9.62 and 9.82 years, respectively. At June 30,
1999, 1,426,000 shares were available for future option grants under the 1997
Plan.

                                      F-15
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is Unaudited)

   During the year ended December 31, 1998 and the six months ended June 30,
1999, the Company recorded deferred stock compensation of $2,799,000 and
$38,968,000, respectively, representing the difference between the exercise
price and the deemed fair value of the Company's common stock on the date such
stock options were granted. For the year ended December 31, 1998 and the six
months ended June 30, 1999, the company recorded amortization of deferred stock
compensation of $332,000 and $5,665,000, respectively. At December 31, 1998 and
June 30, 1999, the Company had $2,467,000 and $35,770,000, respectively, of
remaining unamortized deferred compensation. Such amount is included as a
reduction of stockholders' equity and is being amortized over the corresponding
period of each respective option.

 Pro Forma Disclosures of the Effect of Stock-Based Compensation

   Pro forma information regarding results of operations and net loss per share
is required by FAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of FAS 123. The fair value for each options granted was estimated
at the date of grant using the Black Scholes valuation model with the following
weighted-average assumptions: a risk-free interest rate of 5.50%, and 5.69%,
respectively for the period ended December 31, 1997 and the year ended December
31, 1998, no dividend yield and an exercisable life of 5 years for 1997 and
1998.

   The option valuation models were developed for use in the estimation of the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

   For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
Period from
                                                 January 27, 1997
                                                  (inception) to   Year Ended
                                                   December 31,   December 31,
                                                       1997           1998
                                                 ---------------- ------------
Pro forma net loss...........................     $(7,878)       $(22,631)
                                                     =======        ========
   Pro forma basic and diluted net loss per
    share.......................................     $ (0.83)       $  (1.34)
                                                     =======        ========
The weighted average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.02 and $0.04 for options
granted for the period ended December 31, 1997 and the year ended December 31,
1998, respectively.

   The pro forma impact of options on the net loss for the period ended
December 31, 1997 and the year ended December 31, 1998 is not representative of
the effects on net income (loss) for future years, as future years will include
the effects of additional years of stock option grants.

                                      F-16
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

5. Income Taxes

   There has been no provision for U.S. federal, U.S. state, or foreign income
taxes for any period as the Company has incurred operating losses in all
periods and for all jurisdictions.

   A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying consolidated statements of
operations is as follows:
Year Ended
                                                                 December 31,
                                                                 --------------
                                                                  1997    1998
                                                                 ------  ------
U.S. federal taxes:
     At statutory rate..........................................   34.0%   34.0%
     State......................................................    5.8     5.8
     Valuation allowance........................................  (39.8)  (39.8)
                                                                 ------  ------
   Total........................................................    0.0%    0.0%
                                                                 ======  ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows (in thousands):
December 31,
                                                              -----------------
                                                               1997      1998
                                                              -------  --------
Deferred tax assets:
     Net operating loss carry forwards....................... $ 2,120  $  8,157
     Capitalized expenditures................................     890     2,989
     Research and development credits........................     390       697
     Accrued expenses........................................      --       804
                                                              -------  --------
   Total deferred tax assets.................................   3,400    12,647
   Valuation allowance.......................................  (3,400)  (12,647)
                                                              -------  --------
   Net deferred tax assets................................... $    --  $     --
                                                              =======  ========
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $3,400,000 and $9,247,000 during 1997 and
1998, respectively.

   As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $20,392,000 which expire in
the years 2012 through 2018 and federal research and development tax credits of
approximately $394,000 which also expire in the years 2012 through 2018.

   The Company also had net operating loss carryforwards for state income tax
purposes of approximately $20,392,000 expiring in 2005 and state research tax
credits of approximately $303,000 which carryforward indefinitely.

   Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.

                                      F-17
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

6. Long-Term Debt

   In May 1997, the Company entered into a financing agreement with a financial
institution which provides for borrowings of up to $3,000,000 for working
capital purposes and up to $3,000,000 for the purchase of equipment.
Outstanding borrowings for working capital purposes bear interest at 4.60%,
mature in April 2000, and are secured by the general assets of the Company.
Outstanding borrowings for the purchase of equipment bear interest at 6.60%,
mature in April 2002, and are secured by the equipment purchased.

   In October 1998, the Company entered into a financing agreement with the
same financial institution for borrowings of up to $5,000,000 for either
working capital purposes or for the purchase of equipment. Outstanding
borrowings bear interest at 7.50%, mature in December 1999, and are secured by
either the general assets of the Company or the equipment purchased depending
upon the type of borrowing.

   In April 1999, the Company entered into a financing agreement with a group
of lenders led by the same financial institution for borrowings up to
$15,000,000 for working capital purposes and up to $10,000,000 for the purchase
of equipment. In addition, the Company canceled the October 1998 agreement and
transferred the amounts outstanding under this agreement to the new management.
Outstanding borrowings for working capital purposes bear interest at rates
ranging from 7.42% to 12.27%, mature in December 2001 and are secured by the
general assets of the Company. Outstanding borrowings for the purchase of
equipment bear interest at rates ranging from 8.05% to 8.46%, mature in various
dates ranging from June 2002 to January 2003, and are secured by the equipment
purchased.

   At December 31, 1997 and 1998, the Company has outstanding debt balances,
including obligations under capital leases, in the amount of $5,109,000 and
$6,501,000 respectively, related to these financing agreements, net of
discounts of $262,000 and $286,000, respectively.

   Future payments due on the long-term debt obligations, including obligations
under capital leases, are as follows as of December 31, 1998: 1999--$2,400,000;
2000--$2,456,000; 2001--$1,530,000; 2002--$401,000.

7. Lease Commitments

   The Company leases certain facilities and equipment under noncancelable
operating and capital leases. Future minimum lease payments under operating and
capital leases are as follows (in thousands):
Operating Capital
                                                              Leases   Leases
                                                             --------- -------
Year ending December 31,
     1999...................................................  $  407    $ 51
     2000...................................................     438      44
     2001...................................................     446       5
     2002...................................................     460       5
     2003 and thereafter....................................   1,447       5
                                                              ------    ----
   Total minimum lease payments.............................  $3,198     110
                                                              ======
   Less amount representing interest........................              15
                                                                        ----
   Present value of minimum lease payments..................              95
   Less current portion of obligations under capital
    leases..................................................              66
                                                                        ----
   Obligations under capital leases, excluding current
    portion.................................................            $ 29
                                                                        ====
F-18
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

   Amounts outstanding under capital lease obligations are classified as long-
term debt in the accompanying consolidated balance sheets.

   Rent expense for the period ended December 31, 1997 and the year ended
December 31, 1998, was $410,000 and $480,000, respectively.

8. Defined Contribution Plan

   The Company has a defined contribution retirement plan qualified under
Section 401(k) of the Internal Revenue Code which covers substantially all
employees. Eligible employees may contribute amounts to the plan, via payroll
withholdings, subject to certain limitations. To date, the Company has not
matched contributions by plan participants.

9. Subsequent Events

 Proposed Public Offering of Common Stock

   On July 19, 1999, the Company's Board of Directors authorized the Company to
proceed with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock.

 Convertible Note Financing

   On July 21, 1999, the Company entered into three separate subordinated
convertible promissory note agreements ("notes") for a total of $30 million.
These notes i) bear interest at 10%, ii) have interest and principal due on the
earlier of September 28, 2000, the receipt of $30 million of proceeds from new
debt or equity financings or the closing of a debt or equity facility of not
less than $30 million, iii) have principal that is automatically convertible
into the Company's common stock upon the closing of an initial public offering
on or before June 30, 2000 at 70% of the public offering price or, at the
option of the holder and subject to an independent appraisal, the notes
principal and interest can be converted into the Company's common stock at 70%
of the appraised value. In connection with these notes, the Company will record
a $12.9 million discount on the notes in the third quarter of fiscal 1999. This
discount will be amortized to interest expense over fifteen months. Should the
Company complete an initial public offering on or before June 30, 2000, any
remaining unamortized discount on the notes will be immediately amortized to
interest expense.

 1999 Employee Stock Purchase Plan

   In July, 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Employee Stock Purchase Plan. The plan becomes
effective upon the completion of the Company's initial public offering of its
common stock. A total of 500,000 shares of common stock have been reserved for
issuance under the plan, plus an automatic annual increase on the first day of
each of the Company's fiscal years from 2000 through 2005 equal to the lesser
of: i) 500,000 shares, ii) one percent of the Company's outstanding common
stock on the last day of the preceding fiscal year, or iii) a lesser number of
shares as determined by the Company's Board of Directors. Under the plan,
eligible employees may purchase common stock through payroll deductions, which
in any event may not exceed 10% of an employee's compensation, at a price equal
to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or at the end of each purchase period. The
overlapping offering periods will last for a duration of

                                      F-19
CERENT CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
            (Information as of June 30, 1999 and for the six months
                   ended June 30, 1998 and 1999 is unaudited)

twenty-four months. The initial offering period will begin on the closing of
the Company's initial public offering and end on April 30, 2000.

 1999 Directors' Stock Option Plan

   In July 1999, the Company's Board of Directors adopted, subject to
stockholder approval, the 1999 Directors' Stock Option Plan. A total of 500,000
shares of common stock have been reserved for issuance under the plan. Under
the plan, each person who becomes a non-employee director after the effective
date of the Company's initial public offering will receive an automatic initial
grant of an option to purchase 20,000 shares of common stock, that immediately
vest, on appointment or election to the Board of Directors and all non-employee
directors will receive an additional grant, that immediately vest, to purchase
10,000 shares of common stock on the date of each annual meeting provided the
Director has served in this capacity for the previous six month period.

 1999 Stock Plan

   The 1999 Stock Plan was adopted by the Board of Directors in July 1999 and
will be submitted for approval by our stockholders prior to the completion of
this offering. A total of 5,000,000 shares of common stock have been reserved
for issuance under the 1999 Stock Plan, all of which remain available for
future option grants. In addition, the number of shares reserved under the plan
will automatically be increased on the first day of each of our fiscal years in
2000, 2001, 2002, 2003 and 2004 by an amount equal to the lesser of (a)
15,000,000 shares, (b) six percent of the shares outstanding on the last day of
the preceding fiscal year or (c) a lesser number of shares as is determined by
the Board of Directors. The Plan's terms are similar to the 1997 Stock Option
Plan.

                                      F-20
[LOGO]
PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Cerent in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.
Amount
                                                                     to be Paid
                                                                     ----------
SEC registration fee............................................. $27,800.00
   NASD filing fee..................................................  10,563.00
   Nasdaq National Market listing fee...............................          *
   Printing and engraving expenses..................................          *
   Legal fees and expenses..........................................          *
   Accounting fees and expenses.....................................          *
   Blue Sky qualification fees and expenses.........................          *
   Transfer Agent and Registrar fees................................          *
   Miscellaneous fees and expenses..................................          *
                                                                     ----------
     Total..........................................................          *
---------------------
   * To be filed by amendment

Item 14. Indemnification of Directors and Officers

   Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article XIII of
Cerent's certificate of incorporation and sections 6.1 and 6.2 of Article VI of
Cerent's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Cerent has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Cerent, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. The underwriting agreement (Exhibit 1.1 hereto)
also provides for cross indemnification among Cerent and the underwriters with
respect to certain matters, including matters arising under the 1933 Act.

Item 15. Recent Sales of Unregistered Securities

   (a) Since inception in January 1997, Cerent has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:

     (1) In March 1997, registrant issued and sold 8,073,000 shares of common
  stock to 28 purchases for a total offering price of $2,691.

     (2) In March 1997, registrant issued and sold shares of Series A
  preferred stock convertible into a total of 1,800,000 shares of common
  stock to one purchaser for an offering price of $60,000.

     (3) In April 1997, registrant issued and sold 13,333,332 shares of
  common stock to a total of 2 investors for an aggregate purchase price of
  $888,889, including the cancellation of indebtedness in the amount of
  $400,000. Registrant also issued and sold shares of Series B preferred
  stock convertible into a total of 3,166,668 shares of common stock to a
  total of five investors for an aggregate purchase price of $2,111,112.
  Registrant also issued warrants to purchase shares of Series B preferred
  stock convertible into 1,500,000 shares of common stock to two investors
  for a total purchase price of $500 in connection with the preferred stock
  financing.

                                      II-1
(4) In May and June of 1997, registrant issued warrants to purchase
  shares of Series B preferred stock convertible into a total of 765,000
  shares of common stock in connection with a credit line.

     (5) In August 1997, registrant issued and sold shares of Series C
  preferred stock convertible into a total of 6,450,000 shares of common
  stock to a total of 14 investors for an aggregate purchase price of
  $8,600,000. Registrant also issued warrants to purchase shares of Series C
  preferred stock convertible into 967,500 shares of common stock to 14
  investors for a total purchase price of $322.50 in connection with the
  preferred stock financing.

     (6) In July 1998, registrant issued and sold shares of Series D
  preferred stock convertible into a total of 8,822,091 shares of common
  stock to a total of seven investors for an aggregate purchase price of
  $12,644,997.10. In November 1998, registrant issued and sold shares of
  Series D preferred stock convertible into a total of 342,960 shares of
  common stock to two investors for a total purchase price of $491,576.

     (7) In November 1998, registrant issued and sold shares of Series E
  preferred stock convertible into a total of 11,715,444 shares of common
  stock to a total of ten investors for a total purchase price of
  $25,383,462. In May 1999, registrant issued and sold shares of Series E
  preferred stock convertible into a total of 573,528 shares of common stock
  to one investor for a total purchase price of $1,242,644, which price was
  paid for by the issuance of a promissory note.

     (8) In April 1999, registrant issued warrants to purchase shares of
  Series D preferred stock convertible into a total of up to 1,010,241 shares
  of common stock and warrants to purchase shares of Series E preferred stock
  convertible into a total of up to 439,377 shares of common stock in
  connection with an equipment lease and working capital credit line,
  including the transfer of a warrant to purchase shares of Series D
  preferred stock convertible into 174,000 shares of common stock issued in
  connection with a credit line in October 1998. As of June 30, 1999,
  registrant has drawn down $15,000,000 under this credit facility and has
  issued warrants to purchase shares of Series D preferred stock convertible
  into 733,410 shares of common stock and warrants to purchase shares of
  Series E preferred stock convertible into 322,506 shares of common stock.

     (9) In April 1999, registrant issued a warrant to purchase 300,000
  shares of common stock in connection with a corporate partnership
  agreement.

     (10) In July 1999, registrant issued and sold convertible promissory
  notes in the total principal amount of $30,000,000 convertible into shares
  of common stock.

     (11) From September 1997 to June 30, 1999, registrant issued 16,590,788
  shares of common stock in connection with option exercises.

   (b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).

   The issuances described in Items 15(a)(1)-(10) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Item 15(a)(11) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about Cerent.

                                      II-2
Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits
1.1   Form of Underwriting Agreement.
  3.1   Amended and Restated Certificate of Incorporation of Cerent.
  3.2   Form of Amended and Restated Certificate of Incorporation of Cerent, to
        be filed and effective upon completion of this offering.
  3.3   Bylaws of Cerent, as amended.
  3.4   Proposed Bylaws of Cerent.
  4.1*  Form of Cerent's common stock certificate.
  5.1*  Opinion of Venture Law Group, A Professional Corporation.
 10.1   1997 Stock Plan, as amended.
 10.2   1999 Stock Plan.
 10.3   1999 Employee Stock Purchase Plan.
 10.4   1999 Directors' Stock Option Plan.
 10.5   Form of Indemnification Agreement between Cerent and each of its
        officers and directors.
 10.6   Amended and Restated Investors' Rights Agreement dated July 20, 1999.
 10.7   Promissory Note and Security Agreement dated May 7, 1999, executed by
        Carl Russo in connection with a loan from Cerent in connection with
        purchase of Series E preferred stock.
 10.8   Form of Promissory Note and Pledge and Security Agreement issued by
        employees in connection with the exercise of options to purchase common
        stock.
 10.9   Promissory Note and Pledge and Security Agreement dated July 8, 1998,
        executed by Carl Russo in connection with a loan from Cerent in
        connection with the exercise of options to purchase common stock.
 10.10* Offer Letter dated November 20, 1996, between Cerent and Ajaib Bhadare.
 10.11* Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
 10.12* Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
 10.13  Full Service Lease dated April 22, 1998, between Cerent and G &
        W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
        Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
        21, 1999.
 10.14  Net Lease dated March 30, 1999, between Cerent and G & W/Copley Redwood
        Business Park, L.P. for offices at 1455 N. McDowell Blvd., Petaluma, CA
        94954
 10.15  Standard Sublease dated June 30, 1999, between Cerent and Advanced
        Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
        Petaluma, CA 94954.
 10.16+ Purchase Agreement dated April 23, 1999, between Cerent and Williams
        Communications, Inc., together with the Amendment dated as of April 28,
        1999 and the form of Warrant to Purchase Common Stock.
 10.17+ Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
        Assembly, Inc.
 10.18+ Custom Product Development and Production Agreement dated November 10,
        1997, between Cerent and Hamilton Hallmark.
 10.19+ Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
        Inc., together with the Nondisclosure Agreement dated July 10, 1998.
 10.20  Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
        together with Amendment No. 1 dated July 22, 1999.
 10.21* Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
 10.22* Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
 16.1   Change in Independent Accountants.
 23.1   Consent of Ernst & Young LLP, Independent Auditors.
 23.2*  Consent of Counsel (see Exhibit 5.1).
 24.1   Power of Attorney (see page II-5).
II-3
27.1 Financial Data Schedule for the six-month periods ended June 30, 1998 and
      1999 (EDGAR-filed version only).
 27.2 Financial Data Schedule for the period ended December 31, 1997 and the
      year ended December 31, 1998 (EDGAR-filed version only).
---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.

   (b) Financial Statement Schedules

Item 17. Undertakings

   The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

   The undersigned Registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Act, the
  information omitted from the form of prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in the form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
  or 497(h) under the Act shall be deemed to be a part of this Registration
  Statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Act, each
  post-effective amendment that contains a form of prospectus shall be deemed
  to be a new registration statement relating to the securities offered
  therein, and this offering of such securities at that time shall be deemed
  to be the initial bona fide offering thereof.

                                      II-4
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Petaluma, State of California, on July 22, 1999.

                                          Cerent Corporation

                                                       /s/ Carl Russo
                                          By: _________________________________
                                                         Carl Russo
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl Russo and Michael Ashby, and each one of
them, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and any and all registration
statements filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, in connection with or related to the offering contemplated by this
registration statement and its amendments, if any, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. This Power of Attorney may be signed in
several counterparts.

   Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
Signature                          Title                   Date
              ---------                          -----                   ----
/s/ Carl Russo             President, Chief Executive    July 22, 1999
______________________________________  Officer and Director
              Carl Russo                (Principal Executive
                                        Officer)

          /s/ Michael Ashby            Chief Financial Officer       July 22, 1999
______________________________________  (Principal Financial and
            Michael Ashby               Accounting Officer)

           /s/ Vinod Khosla            Chairman of the Board of      July 22, 1999
______________________________________  Directors
             Vinod Khosla

          /s/ Kevin Compton            Director                      July 22, 1999
______________________________________
            Kevin Compton

           /s/ Donald Green            Director                      July 22, 1999
______________________________________
             Donald Green

           /s/ Promod Haque            Director                      July 22, 1999
______________________________________
             Promod Haque
II-5
EXHIBIT INDEX
Exhibit
   No.   Exhibit Name
 ------- ------------
1.1    Form of Underwriting Agreement.
  3.1    Amended and Restated Certificate of Incorporation of Cerent.
  3.2    Form of Amended and Restated Certificate of Incorporation of Cerent,
         to be filed and effective upon completion of this offering.
  3.3    Bylaws of Cerent, as amended.
  3.4    Proposed Bylaws of Cerent.
  4.1*   Form of Cerent's common stock certificate.
  5.1*   Opinion of Venture Law Group, A Professional Corporation.
 10.1    1997 Stock Plan, as amended.
 10.2    1999 Stock Plan.
 10.3    1999 Employee Stock Purchase Plan.
 10.4    1999 Directors' Stock Option Plan.
 10.5    Form of Indemnification Agreement between Cerent and each of its
         officers and directors.
 10.6    Amended and Restated Investors' Rights Agreement dated July 20, 1999.
 10.7    Promissory Note and Security Agreement dated May 7, 1999, executed by
         Carl Russo in connection with a loan from Cerent in connection with
         purchase of Series E preferred stock.
 10.8    Form of Promissory Note and Pledge and Security Agreement issued by
         employees in connection with the exercise of options to purchase
         common stock.
 10.9    Promissory Note and Pledge and Security Agreement dated July 8, 1998,
         executed by Carl Russo in connection with a loan from Cerent in
         connection with the exercise of options to purchase common stock.
 10.10*  Offer Letter dated November 20, 1996, between Cerent and Ajaib
         Bhadare.
 10.11*  Offer Letter dated June 23, 1997, between Cerent and Terry Brown.
 10.12*  Offer Letter dated July 2, 1997, between Cerent and Tom Corker.
 10.13   Full Service Lease dated April 22, 1998, between Cerent and G &
         W/Copley Redwood Business Park, L.P. for offices at 1450 N. McDowell
         Blvd., Petaluma, CA 94954, together with Amendment No. 1 dated January
         21, 1999.
 10.14   Net Lease dated March 30, 1999, between Cerent and G & W/Copley
         Redwood Business Park, L.P. for offices at 1455 N. McDowell Blvd.,
         Petaluma, CA 94954
 10.15   Standard Sublease dated June 30, 1999, between Cerent and Advanced
         Fibre Communications, Inc. for offices at 1440 N. McDowell Blvd.,
         Petaluma, CA 94954.
 10.16+  Purchase Agreement dated April 23, 1999, between Cerent and Williams
         Communications, Inc., together with the Amendment dated as of April
         28, 1999 and the form of Warrant to Purchase Common Stock.
 10.17+  Manufacturing Agreement dated April 1, 1999, between Cerent and P.C.B.
         Assembly, Inc.
 10.18+  Custom Product Development and Production Agreement dated November 10,
         1997, between Cerent and Hamilton Hallmark.
 10.19+  Agreement dated May 19, 1999, between Cerent and Kawasaki LSI U.S.A.
         Inc., together with the Nondisclosure Agreement dated July 10, 1998.
 10.20   Offer Letter dated May 15, 1998, between Cerent and Carl Russo,
         together with Amendment No. 1 dated July 22, 1999.
 10.21*  Offer Letter dated October 8, 1998, between Cerent and Richard Roney.
 10.22*  Offer Letter dated July 1, 1999, between Cerent and Michael Ashby.
 16.1    Change in Independent Accountants.
 23.1    Consent of Ernst & Young LLP, Independent Auditors.
 23.2*   Consent of Counsel (see Exhibit 5.1).
 24.1    Power of Attorney (see page II-5).
 27.1    Financial Data Schedule for the six-month periods ended June 30, 1998
         and 1999 (EDGAR-filed version only).
Exhibit
   No.   Exhibit Name
 ------- ------------
27.2    Financial Data Schedule for the period ended December 31, 1997 and the
         year ended December 31, 1998 (EDGAR-filed version only).
---------------------
* To be supplied by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Such confidential portions have been provided separately to the
Securities and Exchange Commission.