<PAGE>

================================================================================

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

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

                                    FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the Quarterly Period Ended September 30, 2000

                                       OR

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the Transition Period from ___________ to
    ___________.

                        Commission File Number 000-30633

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

                                ONI SYSTEMS CORP.
             (Exact name of registrant as specified in its charter)

                      Delaware                                 77046-9657
           (State or other jurisdiction of                  (I.R.S. employer
          incorporation or organization)                  identification no.)


         166 Baypointe Parkway San Jose, California                95134-1621
          (Address of principal executive offices)                 (zip code)
     Registrant's telephone number, including area code:         (408) 965-2600

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

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

     There were 131,776,411 shares of the Company's common stock, par value
$0.0001, outstanding on October 31, 2000.

================================================================================
<PAGE>

                                ONI SYSTEMS CORP.

                                    FORM 10-Q

                    Quarterly Period Ended September 30, 2000

                                Table of Contents

                          PART I. Financial Information

<TABLE>
<CAPTION>
                                                                                                                       Page
                                                                                                                       ----
<S>                                                                                                                    <C>
Item 1.     Financial Statements (unaudited)

            Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999....................    3

            Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
            2000 and 1999...........................................................................................    4

            Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and
            1999....................................................................................................    5

            Notes to Condensed Consolidated Financial Statements....................................................    6

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations...................   11

Item 3.     Quantitative and Qualitative Disclosures about Market Risk..............................................   23

                                             PART II. Other Information

Item 1.    Legal Proceedings.......................................................................................    24

Item 2.    Changes in Securities and Use of Proceeds...............................................................    25

Item 3.    Defaults Upon Senior Securities.........................................................................    25

Item 4.    Submission of Matters to Vote of Security Holders.......................................................    25

Item 5.    Other Information.......................................................................................    25

Item 6.    Exhibits and Reports on Form 8-K........................................................................    26

Signatures........................................................................................................     27

Exhibit Index.....................................................................................................     28
</TABLE>

                                       2
<PAGE>

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

                                ONI SYSTEMS CORP.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                          September 30,       December 31,
                                                                          -------------       ------------
                                                                              2000                1999
                                                                              ----                ----
                                         ASSETS
                                         ------

<S>                                                                           <C>                 <C>
Cash and cash equivalents..................................................     197,005           $  80,023
Accounts receivable........................................................      16,218                 163
Inventory, net.............................................................      51,362               9,649
Property and equipment, net................................................      37,737               5,315
Prepaid expenses and other assets..........................................       8,162               5,792
                                                                              ---------           ---------
   Total assets............................................................   $ 310,484           $ 100,942
                                                                              =========           =========


                            LIABILITIES AND STOCKHOLDERS' EQUITY
                            ------------------------------------

Accounts payable and accrued liabilities...................................   $  22,522           $   8,681
Deferred revenue...........................................................         283                  --
Capital lease obligations..................................................         380                 534
                                                                              ---------          ----------
   Total liabilities.......................................................      23,185               9,215
                                                                              ---------          ----------
Capital stock..............................................................     451,553             147,350
Accumulated deficit........................................................    (164,254)            (55,623)
                                                                              ---------          ----------
   Total stockholders' equity..............................................     287,299              91,727
                                                                              ---------          ----------
   Total liabilities and stockholders' equity..............................   $ 310,484           $ 100,942
                                                                              =========          ==========
</TABLE>

                                       3
<PAGE>

                                ONI Systems Corp.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                      Three months ended                Nine months ended
                                                                         September 30,                    September 30,
                                                                         -------------                    -------------
                                                                       2000           1999              2000          1999
                                                                       ----           ----              ----          ----
<S>                                                                <C>            <C>             <C>             <C>
Revenue .....................................................   $     16,381     $        742     $     29,498    $    1,707
     Cost of goods sold......................................         11,126              206           20,845           964
                                                               -------------------------------------------------------------
Gross profit.................................................          5,255              536            8,653           743
Operating expenses:
     Research and development................................         13,469            7,147           37,814        14,443
     Sales and marketing.....................................          7,164            1,100           16,092         2,429
     General and administrative..............................          4,364              777           11,894         1,818
     Amortization of deferred stock compensation*............         18,000            3,380           50,065         6,326
     Amortization of goodwill and intangibles................            860              807            2,734           807
     Common stock warrant expense............................             --               --            4,545            --
                                                               -------------------------------------------------------------
          Total operating expenses...........................         43,857           13,211          123,144        25,823
                                                               -------------------------------------------------------------
          Operating loss.....................................        (38,602)         (12,675)        (114,491)      (25,080)
Other income, net ...........................................          3,515              125            5,861           476
                                                               -------------------------------------------------------------
               Loss before income taxes......................        (35,087)         (12,550)        (108,630)      (24,604)
Income taxes.................................................             --               --                2             1
                                                               -------------------------------------------------------------
               Net loss......................................        (35,087)         (12,550)        (108,632)      (24,605)
Beneficial conversion of preferred stock.....................             --               --            4,242            --
                                                               -------------------------------------------------------------
               Net loss attributable to common
                  stockholders...............................   $    (35,087)    $    (12,550)    $   (112,874)   $  (24,605)
                                                               =============    =============    =============  ============
Basic and diluted net loss per share.........................   $      (0.30)    $      (0.63)    $      (1.01)   $    (1.64)
                                                               =============    =============    =============  ============
Weighted average shares outstanding used in
   computing basic and diluted net loss per share............        118,774           20,065          111,739        14,965
                                                               =============    =============    =============  ============

__________________________
     * Amortization of deferred stock compensation:

       Cost of good sold.....................................   $    2,286       $       --       $     6,359    $       --
       Research and development..............................        9,029            2,510            25,113         4,698
       Sales and marketing...................................        3,584              348             9,968           651
       General and administrative............................        3,101              522             8,625           977
                                                                -----------------------------------------------------------
                                                                $   18,000       $    3,380       $    50,065    $    6,326
</TABLE>

                                       4
<PAGE>

                                ONI SYSTEMS CORP.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                              Nine months ended
                                                                                                September 30,
                                                                                                ------------
                                                                                               2000       1999
                                                                                               ----       -----
Cash flows from operating activities:
<S>                                                                                         <C>          <C>
     Net loss.............................................................................   $(108,632)   $ (24,605)
     Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization...................................................       8,839        1,030
          Amortization of deferred stock compensation.....................................      50,065        6,326
          In-process research and development.............................................          --          170
          Loss on disposal of property and equipment......................................         112           --
          Value of leased facilities received in exchange for preferred stock.............          85           61
          Amortization of debt financing costs............................................          33           64
          Common stock warrant expense....................................................       4,545           --
          Stock-based compensation for non-employees......................................         241           --
          Changes in operating assets and liabilities:
               Accounts receivable........................................................     (16,055)       1,118
               Inventory..................................................................     (41,713)      (2,060)
               Prepaid expenses and other assets..........................................      (4,726)        (355)
               Accounts payable and accrued liabilities...................................      13,841        4,025
               Deferred revenue...........................................................         283           50
                                                                                             ---------    ---------
     Net cash used in operating activities................................................     (93,082)     (14,176)
                                                                                             ---------    ---------

Cash flows used in investing activities:

     Purchase of property and equipment...................................................     (39,222)      (2,408)
     Proceeds from disposal of property and equipment.....................................         173           --
     Acquisition of Object-Mart, net of cash acquired.....................................          --       (1,744)
                                                                                             ---------    ---------
     Net cash used in investing activities................................................     (39,049)      (4,152)
                                                                                             ---------    ---------

Cash flows from financing activities:
     Payments under capital lease obligations.............................................        (153)         (30)
     Proceeds from issuance of preferred stock, net of issuance costs.....................      21,961       22,234
     Proceeds from repayment of shareholder loans.........................................         178           --
     Proceeds from issuance of common stock, net of issuance costs........................     227,127          133
                                                                                             ---------    ---------
     Net cash provided by financing activities............................................     249,113       22,337
                                                                                             ---------    ---------
     Net increase (decrease) in cash and cash equivalents.................................     116,982        4,009
Cash and cash equivalents at beginning of period..........................................      80,023       19,091
                                                                                             ---------    ---------
Cash and cash equivalents at end of period................................................   $ 197,005    $  23,100
                                                                                             =========    =========
</TABLE>

                                       5
<PAGE>

                                   ONI SYSTEMS CORP.

             NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   September 30, 2000

1. Description of Business

     ONI Systems Corp. develops, markets and sells optical communications
equipment to communications service providers in the metropolitan and regional
area markets.

     ONI was originally incorporated in California, as Optical Networks,
Incorporated, on October 20, 1997, and through November 1999, was considered to
be in the development stage, principally engaged in research and development,
raising capital and building its management team. ONI recognized its first
commercial sale in the fourth quarter of 1999 with the licensing of its network
operating system. Historically, ONI also recognized revenue derived from
research and development contracts with agencies of the United States
government. These contracts were completed in June 1999. ONI was reincorporated
in Delaware and changed its name to ONI Systems Corp. in April 2000. Share
capital information for all periods has been retroactively adjusted to reflect
the par value of common and preferred stock and amounts of paid-in capital.

2. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and, therefore, do not include all the information and
footnotes necessary for a complete presentation of ONI's results of operations,
financial position, and cash flows in conformity with generally accepted
accounting principles. The unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position at September 30, 2000 and the operating results for the three and nine
months ended September 30, 2000 and 1999, and cash flows for the nine months
ended September 30, 2000 and 1999. These financial statements and notes should
be read in conjunction with ONI's audited financial statements and notes
thereto, included in ONI's Registration Statements on Form S-1 declared
effective by the Securities and Exchange Commission on October 23, 2000. The
condensed consolidated balance sheet at December 31, 1999 has been derived from
audited financial statements as of that date.

     The results of operations for the interim periods ended September 30, 2000
and 1999 are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year ending December 31, 2000.

3. Completion of Initial Public Offering

     In June 2000, ONI completed its initial public offering, or IPO, in which
it sold 9,200,000 shares of common stock, including 1,200,000 shares in
connection with the exercise of the underwriters' over-allotment option, at $25
per share. Concurrently with the completion of the offering, ONI sold in two
private placements an aggregate of 560,000 shares of common stock to Internet
Initiative Japan Inc. and CCT Telecom Holdings Limited for $25 per share. The
net proceeds of the IPO and private placements, after deducting underwriters'
discount and other offering expenses, were approximately $226.1 million. Upon
the completion of the IPO, all outstanding convertible preferred stock converted
into an aggregate of 80,164,597 shares of common stock. Subsequent to the IPO,
ONI's authorized capital consisted of 700,000,000 shares of common stock,
$0.0001 par value, and 10,000,000 shares of preferred stock, $0.0001 par value.
There were 126,056,209 shares of common stock outstanding as of September 30,
2000.

4. Revenue Recognition

     ONI recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.

                                       6
<PAGE>

                               ONI SYSTEMS CORP.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                              September 30, 2000

     ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
and SOP 98-9, Software Revenue Recognition with Respect to Certain Arrangements.
Accordingly, ONI recognizes revenue from licenses of software products provided
that a purchase order has been received, the software and related documentation
have been shipped, collection of the resulting receivable is deemed probable,
and the fee is fixed and determinable.

     Services revenue consists primarily of training and installation services.
Revenues from training and installation services are recognized as the services
are performed. To date, service revenue has not been significant.

     Deferred revenue represents amounts billed in excess of revenue recognized.

     In 1999, ONI derived most of its revenue from research and development
contracts with agencies of the United States government. These contracts include
cost-plus and fixed price contracts, and revenue is recorded as earned as
defined within the specific agreements. Revenue from cost-plus contracts is
billed and recognized at the time the costs are incurred. Revenue for fixed
price contracts is recognized when milestones are completed and product or
reports, if any, committed for the milestones are shipped, which approximates
the percentage-of-completion method. Amounts designated as withholdings are not
recognized until completion of the contract.

5. Net Loss Per Share

     Basic and diluted net loss per share have been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". Basic net loss per share has been computed using the weighted-average
number of common shares outstanding during the period. Diluted net loss per
share is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding during the period, using the as-if-
converted method for convertible preferred shares and the treasury stock method
for options and warrants. All potential common shares have been excluded from
the computation of diluted net loss per share for all periods presented because
the effect would be antidilutive. The following table presents the calculation
of basic and diluted net loss per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                      Three months ended                Nine months ended
                                                         September 30,                     September 30,
                                                         -------------                     -------------
                                                       2000             1999            2000           1999
                                                       ----            ----             ----           ----
<S>                                             <C>              <C>              <C>              <C>
Net loss attributable to common
   stockholders............................     $      35,087    $      12,550    $     112,874    $      24,605
                                                -------------    -------------    -------------    -------------
Basic and diluted:
Weighted-average shares of common stock
   outstanding.............................           126,174           23,987          118,671           18,877
Less: weighted-average shares subject to
   repurchase..............................             7,400            3,922            6,932            3,912
                                                -------------    -------------    -------------    -------------
Weighted-average shares used in computing
   basic and diluted net loss per common
   share...................................           118,774           20,065          111,739           14,965
                                                -------------    -------------    -------------    -------------
Basic and diluted net loss per common
   share...................................     $       (0.30)   $       (0.63)   $       (1.01)   $       (1.64)
                                                -------------    -------------    -------------    -------------
</TABLE>

                                       7
<PAGE>

                               ONI SYSTEMS CORP.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                              September 30, 2000

6. Inventory

     Inventory consists of:

<TABLE>
<CAPTION>
                                                                                         September    December 31,
                                                                                          30, 2000        1999
                                                                                         ---------    -----------
     <S>                                                                                 <C>          <C>
     Raw materials....................................................................    $19,799        $ 8,914
     Work in progress.................................................................     14,399             --
     Finished goods...................................................................     11,918            735
     Consignment inventory............................................................      5,246             --
                                                                                        ---------      ---------
                                                                                          $51,362        $ 9,649
                                                                                        =========      =========
</TABLE>

7. Stockholders' Equity

     On May 9, 2000, ONI sold 1,333,333 shares of Series H preferred stock to
Sun Microsystems, Inc., at a price per share of $15.00. In June 2000, concurrent
with the completion of the IPO, these shares of preferred stock automatically
converted into 969,697 shares of common stock and ONI recorded a non-cash charge
of $4.2 million to accrete the value of the preferred stock to its fair value.

     ONI uses the intrinsic value method prescribed by APB No. 25 in accounting
for its stock-based compensation arrangements for employees whereby compensation
cost is recognized to the extent the fair value of the underlying common stock
exceeds the exercise price of the stock options at the date of grant. Deferred
stock compensation is being amortized on an accelerated basis over the vesting
period, generally four years, consistent with the method described in FASB
Interpretation No. 28. Amortization of deferred stock compensation for the three
months ended September 30, 2000 and 1999 was $18.0 million and $3.4 million,
respectively, and for the nine months ended September 30, 2000 and 1999 was
$50.1 million and $6.3 million, respectively.

     During the three months ended September 30, 2000, ONI repurchased 639,333
unvested restricted shares in consideration of the cancellation of notes
receivable in the amount of $58,000 against these shares.

     In connection with ONI's spin-out from Optivision in December 1997, ONI was
obligated to issue 233,468 shares of common stock to an equipment finance
company upon the exercise by the finance company of its warrants to purchase
capital stock of Optivision. The finance company exercised these warrants, and
ONI issued 233,468 shares of ONI's common stock to the finance company on August
14, 2000. We did not receive any proceeds from the exercise of these warrants.

8. Recent Accounting Pronouncements

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, which summarizes views of the Commission
staff in applying generally accepted accounting principles to revenue
recognition in financial statements. ONI believes that its current revenue
recognition principles comply with this bulletin.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions involving
Stock Compensation--an Interpretation of Accounting Principles Board (APB)
Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and is
effective July 1, 2000.  To date, FIN 44 has not had a material effect on ONI's
financial position or results of operations.

     In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No.
133". Statement No. 138 addresses a limited number of issues causing
implementation difficulties for companies that are required to apply SFAS No
133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the effective date of SFAS No.
133", and SFAS No. 138 are effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. ONI has not determined the impact that SFAS 133
and SFAS 138 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.

                                       8
<PAGE>

                                ONI SYSTEMS CORP.

   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                               September 30, 2000

9. Segment Reporting

     ONI has adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information. SFAS No. 131 establishes standards for the manner in
which public companies report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The method for determining what information to report is based on the way
management organizes the operating segments within a company for making
operating decisions and assessing financial performances.

     ONI's chief executive officer is its chief operating decision-maker. The
financial information that the chief executive officer reviews is identical to
the information presented in the accompanying consolidated statements of
operations. ONI has determined that it operates in a single operating segment:
development and sale of optical networking equipment to communications service
providers in the regional and metropolitan area markets.

     Beginning January 1, 2000, ONI's revenue has been derived from sales of its
ONLINE9000 and ONLINE7000 products. ONI expects to continue selling the
ONLINE9000 and ONLINE7000 in the future, and also to develop other lines of
products for sale. ONI's geographic distribution of revenues for the three and
nine months ended September 30, 2000, is as follows:

<TABLE>
<CAPTION>
                                                     Three months ended         Nine months ended
                                                     September 30, 2000         September 30, 2000
                                                     ------------------         ------------------
       <S>                                           <C>                        <C>
       North America.............................          76%                           66%
       Asia......................................          23%                           25%
       Europe....................................           1%                            8%
</TABLE>

     Through December 31, 1999, ONI's revenue was primarily from government
research and development contracts. These contracts were completed in 1999, and
they will not contribute to ONI's revenue in the future as ONI will not continue
these activities.

10. Contingencies

     In March 2000, Nortel Networks filed suit against ONI in the United States
District Court for the Northern District of California. The suit alleges that
ONI's products infringe five patents held by Nortel Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. Nortel Networks is seeking preliminary and
permanent injunctions and damages against ONI in connection with these claims.
In April 2000, ONI filed a motion to dismiss Nortel Networks' claims for
misappropriation of trade secrets, unlawful business practices and common law
unfair competition. ONI also filed an answer and counterclaims asserting unfair
business practices, tortious interference, breach of contract and seeking
declarations of invalidity, unenforceability and non-infringement of the patents
against Nortel Networks. On June 23, 2000, the court dismissed one of Nortel
Networks' unfair competition claims and stayed its remaining claims for trade
secret misappropriation and unlawful business practices in California. On July
14, 2000, Nortel Networks filed a Notice of Motion to lift the stay of the trade
secret misappropriation and unlawful business practices claims in the California
suit, which was granted in September 2000. ONI expects to incur substantial
legal and other expenses in connection with the Nortel Networks litigation. In
the event of an adverse ruling, ONI also could be required to pay damages to
Nortel Networks. The accompanying consolidated financial statements do not
include any costs for damages, if any, that might result from this uncertainty.

     From time-to-time ONI may be subject to other legal proceedings and claims
in the ordinary course of business. ONI is not aware of any legal proceedings or
claims, including the above matter that ONI believes will have, individually or
in the aggregate, a material adverse effect on ONI's business, financial
condition or results of operations.

                                       9
<PAGE>

11.  Reclassification

     Certain prior period financial information has been reclassified to conform
to the current period presentation.

12. Subsequent Events

     In October 2000, ONI completed a follow-on public offering of 8,000,000
shares of common stock at $74.50 per share. Of the 8,000,000 shares offered,
5,646,643 shares were sold by ONI and 2,353,357 shares were sold by existing
stockholders of ONI. The net proceeds of this offering to ONI, after deducting
underwriting discounts and estimated expenses, were approximately $401.5
million. ONI has granted the underwriters a 30-day option to purchase an
additional 1,200,000 shares of common stock to cover over-allotments, if any.

     Concurrently with the completion of the follow-on offering of common stock,
ONI sold $300 million of 5% Convertible Subordinated Notes due October 15, 2005.
The net proceeds to ONI, after deducting underwriting discounts and other
expenses, were approximately $290.3 million. The conversion rate is 10.9129
shares per each $1,000 principal amount of notes, subject to adjustment in
certain circumstances. This is equivalent to a conversion price of approximately
$91.64 per share. ONI will pay interest on the notes on April 15 and October 15
of each year. The first interest payment will be made on April 15, 2001. ONI has
granted the underwriters a 30-day option to purchase an additional $45 million
of its 5% Convertible Subordinated Notes due October 15, 2005 to cover
over-allotments, if any.

                                       10
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

     Some of the statements contained in this discussion constitute
forward-looking statements that involve substantial risks and uncertainties. In
some cases, you can identify these statements by forward-looking words such as
"may", "will", "should", "expect", "intend", "plan", "anticipate", "believe",
"estimate" or "continue" and variations of these words or comparable words. In
addition, any statements which refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and situations that may cause our or our industry's actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. The risk factors
contained in this document, as well as any other cautionary language in this
document, provide examples of risks, uncertainties and events that may cause our
actual results to differ from the expectations described or implied in our
forward-looking statements.

     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which reflect our view only as of the date of
this report. Except as required by law, we do not undertake to update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.

     In addition, the following information should be read in conjunction with
the financial statements and notes thereto included in Item 1 of this Quarterly
Report, our Registration Statements on Form S-1 declared effective by the
Securities and Exchange Commission on October 23, 2000 and "Factors that May
Affect Future Results" in this document.

Overview

     We develop, market and sell optical networking equipment specifically
designed to address the bandwidth and service limitations of metropolitan and
regional networks. From our inception in October 1997 through November 1999, our
operating activities consisted primarily of research and development. We also
formed and expanded our administrative, marketing, sales, manufacturing and
customer service and support organizations and commenced sales and marketing
activities. In January 2000, we released our first product, the ONLINE9000,
which is designed for metropolitan and regional markets. In June 2000, we
released the ONLINE7000, which is designed to provide metropolitan service
providers with a more cost-effective solution for metro access applications.

     We primarily market and sell our products through our direct sales force to
competitive local exchange carriers, inter-exchange carriers, internet service
and application service providers, cable operators, utilities and their
affiliates and incumbent local exchange carriers. In some international regions
where it is difficult to maintain a direct sales force, we may rely on resellers
for distribution of our products, such as our OEM agreement with Lucent
Technologies for the sale of our products in China.

     Our policy is to recognize revenue at the time of shipment unless we have
future obligations or customer acceptance is required, in which case revenue is
deferred until these obligations are met or the customer accepts the product.
Revenue from service obligations are deferred and recognized as the services are
performed. Prior to September 30, 1999, our revenue resulted from government
research and development contracts and the sale of a non-product related
software license.

     We conduct supply chain management, production engineering, documentation
and quality assurance at our manufacturing facility in San Jose, California. We
outsource most of the manufacturing of optical modules used in our products, and
we complete the final assembly of these optical modules at our facilities. The
majority of our electronic manufacturing and assembly is outsourced. Currently,
we use a number of manufacturing vendors for electronic assemblies while E-TEK
Dynamics, Inc., which has been acquired by JDS Uniphase Corporation, performs
the majority of our outsourced optical assembly. This approach to manufacturing
allows us to:

     .    reduce capital equipment expenditures required for a turnkey
          manufacturing operation;

     .    reduce our facilities square footage requirements by limiting the
          amount of space dedicated to manufacturing and operations;

                                       11
<PAGE>

     .    conserve working capital by limiting the amount of inventory we must
          stock; and

     .    provide flexibility in meeting market demand.

RESULTS OF OPERATIONS

     We plan to increase our operating expenses significantly in order to fund
greater levels of research and development, expand our sales and marketing
operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that result from being a publicly traded company and the increasing size of
our business. Our operating expenses are largely based on anticipated revenue
trends and a high percentage of our expenses are, and will continue to be, fixed
in the short term. As a result, a delay in generating or recognizing revenue
could cause significant variations in our operating results from quarter to
quarter and could result in substantial operating losses.

     In addition, we expect to experience seasonality in the sales of our
products. Historically, the telecommunications equipment market has experienced
increased sales in the first and fourth quarter of a calendar year due in part
to purchasers' budgetary cycles. We further expect that sales may decline during
summer months, particularly in European markets, which we believe to represent a
significant portion of the market for our products for the foreseeable future.
These seasonal variations in our sales may lead to fluctuations in our quarterly
operating results.

Net revenue

     Net revenue was $16.4 million for the quarter ended September 30, 2000, an
increase of $15.6 million from the comparable quarter in 1999, and was $29.5
million for the nine months ended September 30, 2000, an increase of $27.8
million from the comparable period in 1999. All of the net revenue for the
quarter and nine months ended September 30, 2000 was from sales of our
ONLINE9000 and ONLINE7000 products. Net revenue recorded for the quarter and
nine months ended September 30, 1999 was from government research and
development contracts, which were completed in 1999.

Cost of goods sold

     Cost of goods sold was $11.1 million for the quarter ended September 30,
2000, an increase of $10.9 million from the comparable quarter in 1999 and was
$20.8 million for the nine months ended September 30, 2000, an increase of $19.9
million from the comparable period in fiscal 1999. As a percentage of net
revenue, cost of goods sold for the quarter ended September 30, 2000 was 68%,
compared to 28% for the quarter ended September 30, 1999 and was 71% for the
nine months ended September 30, 2000, compared to 56% for the nine months ended
September 30, 1999. We believe the comparison of these two periods is not
meaningful, because our revenue in 1999, and the related cost of goods sold,
were from governmental research and development contracts.

     Cost of goods sold as a percentage of revenue for the quarter ended
September 30, 2000 is higher than it is anticipated to be in the future due to
the high cost of initial start-up of production and the low volume of sales. We
expect to develop additional products in the future such that the product mix of
our sales may vary. Accordingly, we expect the quarterly gross profit
percentages to fluctuate in accordance with the quarterly product mix of related
sales.

Research and development expense

     Research and development expense was $13.5 million for the quarter ended
September 30, 2000, an increase of $6.3 million from the comparable quarter in
1999, and was $37.8 million for the nine months ended September 30, 2000, an
increase of $23.4 million from the comparable period in 1999. The increase in
research and development expense is primarily due to the significant expansion
of our research and development department, particularly attributable to the
increase of engineering staff. Research and development is essential to our
future success and we expect that research and development expenses will
continue to increase in absolute dollars in future periods.

Sales and marketing expense

     Sales and marketing expense was $7.2 million for the quarter ended
September 30, 2000, an increase of $6.1 million from the comparable quarter in
1999 and was $16.1 million for the nine months ended September 30, 2000, an
increase of $13.7 million from the comparable period in 1999. We expect to
continue to expand our domestic and international sales

                                       12
<PAGE>

force and marketing activity, and as a result, expect that the dollar amounts of
sales and marketing expenses will continue to increase in absolute dollars in
future periods.

General and administrative expense

     General and administrative expense was $4.4 million for the quarter ended
September 30, 2000, an increase of $3.6 million from the comparable quarter in
1999 and was $11.9 million for the nine months ended September 30, 2000, an
increase of $10.1 million from the comparable period in 1999. The increase in
general and administrative expense primarily reflects the expansion in
infrastructure to support our planned growth. We expect that the absolute dollar
amount of general and administrative expenses will continue to increase in
future periods as a result of the expansion of business activity.

Amortization of deferred stock compensation

     Amortization of deferred stock compensation was $18.0 million for the
quarter ended September 30, 2000, an increase of $14.6 million from the
comparable quarter in 1999 and was $50.1 million for the nine months ended
September 30, 2000, an increase of $43.7 million from the comparable period in
1999. From inception through September 30, 2000, we have amortized a total of
$64.9 million of deferred stock compensation, leaving an unamortized balance of
$72.3 million as of September 30, 2000.

Amortization of goodwill and intangibles

     Amortization of goodwill and intangibles was $0.9 million for the quarter
ended September 30, 2000 and $2.7 million for the nine months ended September
30, 2000 ($0.8 million for the comparable periods in 1999). We recorded goodwill
of $5.7 million and intangibles of $1.2 million in relation to the acquisition
of Object-Mart, Inc. on June 29, 1999. Goodwill and intangibles are being
amortized over a period not exceeding two years.

Common stock warrant expense

     In the first quarter of 2000, we recorded an aggregate common stock warrant
expense of $4.5 million in connection with two separate transactions in which
warrants were issued to purchase shares of common stock. The value of the
warrants was expensed in the quarter ended March 31, 2000.

Other income, net

     Other income, net was $3.5 million for the quarter ended September 30,
2000, an increase of $3.4 million from the comparable quarter in 1999 and was
$5.9 million for the nine months ended September 30, 2000, an increase of $5.4
million from the comparable period in 1999. The increase was primarily due to
the interest earned on the net cash proceeds received in connection with the
completion of our initial public offering in June 2000.

Liquidity and Capital Resources

     At September 30, 2000, our principal source of liquidity was our cash and
cash equivalents of $197.0 million.

     We used $93.1 million in cash in operating activities in the nine months
ended September 30, 2000, an increase of $78.9 million from the $14.2 million
used in the nine months ended September 30, 1999. The increase was primarily due
to the increase in our net loss of $84.0 million, an increase in inventory of
$39.7 million and other working capital of $2.3 million, offset by increased
amortization of deferred stock compensation and common stock warrants of $48.3
million, and depreciation and amortization of $7.8 million.

     We used $39.0 million in cash in investing activities in the nine months
ended September 30, 2000, an increase of $34.9 million from the $4.2 million
used in the nine months ended September 30, 1999. The increase was primarily
related to the increase in purchases of property and equipment.

     We generated $249.1 million in cash from financing activities in the nine
months ended September 30, 2000, an increase of $226.8 million from the $22.3
million generated in the nine months ended September 30, 1999, primarily from
the net proceeds from our initial public offering and the private sales of
convertible preferred stock.

                                       13
<PAGE>

     At September 30, 2000, cash and cash equivalents totaled $197.0 million, an
increase of $117.0 million from the balance of $80.0 million at December 31,
1999. The increase was due to the receipt of $227.1 million, primarily from the
net proceeds of our initial public offering and concurrent private placements,
and $22.0 million from the private sales of convertible preferred stock, offset
by $93.1 million of cash used in operating activities and $39.0 million of cash
used in investing activities.

     In October 2000, ONI completed a follow-on public offering of 8 million
shares of common stock and received net proceeds of approximately $401.5
million, after deducting underwriting discounts and estimated expenses. ONI has
granted the underwriters a 30-day option to purchase an additional 1.2 million
shares of common stock to cover over-allotment, if any.

     Concurrently with the completion of the follow-on public offering of common
stock, ONI sold $300 million of 5% Convertible Subordinated Notes due October
15, 2005. The net proceeds to ONI, after deducting underwriting discounts and
other expenses, were approximately $290.3 million. ONI has granted the
underwriters a 30-day option to purchase an additional $45 million of its 5%
Convertible Subordinated Notes due October 15, 2005 to cover over-allotments, if
any.

     We expect to devote substantial capital resources to continue our research
and development activities, to expand our sales, marketing and customer service
and support organizations, to support our information systems requirements and
for other general corporate activities. We believe that our current cash
balances will be sufficient to fund our operations for at least the next 12
months. However, we may require additional financing within that time frame
which, if needed, may not be available on terms acceptable to us or at all.

Factors that May Affect Future Results

We have a history of losses, expect to continue to incur additional losses, and
may never achieve profitability.

     Through September 30, 2000, we incurred cumulative losses of $164.3
million, and we expect to continue to incur losses in the future. If we do not
become profitable, the value of our stock will decrease. We have large fixed
expenses, and we plan to incur significant and increasing sales and marketing,
research and development, manufacturing, and general and administrative
expenses. In February 2000, we began to ship our first product, the ONLINE9000,
and our revenue to date has been limited. In order for us to become profitable,
we will need to generate and sustain higher revenue while maintaining reasonable
cost and expense levels.

     We expect our operating expenses to increase significantly as we increase
spending in order to fund more research and development, expand our sales and
marketing operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands
that result from being a public company and the expected growth 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, a delay in generating or recognizing revenue could cause
significant variations in our operating results from quarter to quarter and
annually and could result in substantial operating losses.

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

     We commenced business as an independent company in December 1997. We
announced general availability of our first product, the ONLINE9000, in January
2000 and our second product, the ONLINE7000, in June 2000. Consequently, we have
a limited history upon which we can rely in planning and making the critical
decisions that will affect our future operating results. Similarly, because of
the relatively immature state of our business, it will be difficult for
investors to evaluate our prospects. We will need to make decisions in the
immediate future regarding resource allocations for research and development and
marketing and sales. If our predictions about the best use of our resources turn
out to be inaccurate, we may not make the best use of our resources and we may
forego better opportunities. Our limited history makes it difficult for
investors to gauge our capability in making these decisions.

We have a limited number of currently available products and, if they are not
commercially successful, our revenue will not grow and we may not achieve
profitability.

     If our customers and potential customers do not adopt, purchase and
successfully deploy our products in large numbers, our revenue may not grow and
our business, financial condition and results of operations will be seriously
harmed. Since the market for our products is relatively new, future demand for
our products is uncertain and will depend on the speed of adoption of optical
networking, in general, and optical equipment in metro networks, in particular.
No communications service provider has fully deployed our products in large
network environments, and they may choose not to do so. Even if service
providers do deploy our product fully, it may not operate as expected, which
could delay or prevent its adoption.

                                       14
<PAGE>

If we fail to enhance existing products or to develop and achieve market
acceptance for new products that meet customer requirements, our sales will
suffer.

     The market in which we compete is characterized by more rapid technological
change than most, because it is newly emerging. As a result, we expect there
will be frequent new product introductions, changes in customer requirements and
evolving industry standards. We have no significant track record of our ability
to respond to these developments, and we may not be able to develop new products
or product enhancements in a timely manner, or at all. Because we are new to
this business, an investment in our stock is riskier than most.

Our new products and product enhancements may not achieve widespread market
acceptance.

     Any failure of our future products to achieve market acceptance could harm
our business and financial results. For example, we are developing new products,
including our ONLINE11000. We have devoted and expect to continue to devote
significant engineering and financial resources to the development and marketing
of new products and features. Unexpected technical challenges could prevent us
from successfully developing new products and features in a timely manner or at
all. In addition, new products and features could be more costly to develop and
test than we anticipate. Even if we are able to develop and introduce new
products and features, they may not achieve market acceptance if they do not
offer performance desired by customers or if competitors develop products that
customers prefer.

We expect that substantially all of our revenue will be generated from a small
number of customers, and our revenue will not grow if we do not sell products to
them in large numbers and if we do not add customers.

     We expect that substantially all of our revenue will depend on sales of our
products to a small number of customers and that our revenue will only grow if
these customers purchase substantial quantities of our products. As of September
30, 2000, we had thirteen customers. Most of these customers are not
contractually committed to purchase any minimum quantities of our products. If
these customers or future customers do not purchase large quantities of our
products for any reason, our ability to succeed would be harmed. The decision to
purchase substantial quantities of our products will depend, in part, on our
customers' and potential customers' desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will introduce or
expand commercial services utilizing our products on a timely basis, if at all.
Any delay in introducing, or failure to introduce, these services would
seriously harm our revenue, results of operations and financial condition.

     In addition, if we fail to attract new customers, our growth will be
limited. The growth of our customer base could be limited by:

     .  unwillingness of potential customers to adopt our optical networking
        architecture;

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

     .  failure of our products to perform as expected;

     .  difficulties in meeting customers' delivery requirements;

     .  introductions of new products by our competitors; and

     .  other competitive factors such as aggressive pricing or financing by
        our competitors.

We face intense competition that could prevent us from growing and could prevent
us from becoming profitable.

     The market for communications equipment is rapidly evolving and is marked
by intense competition and technical innovations. We expect the pace of change
to accelerate in the future. We also expect many new competitors to emerge as
the market for optical networking equipment expands and evolves in response to
technical innovations and increasing demand for new broadband and
wavelength-based services. We currently compete with both public and private
companies providing solutions for network and bandwidth management in the
metropolitan market. Many of these companies have existing

                                       15
<PAGE>

relationships with communication service providers, making it more difficult for
us to sell our products to these potential customers.

     Some of our current and potential competitors are large public companies
that have longer operating histories, significantly greater financial, technical
and marketing resources, wider customer relationships and a broader product line
than we do. Consequently, these competitors are able to devote greater resources
to the development, promotion, sale and support of their products. These large
public companies are better positioned than we are to acquire companies and new
technologies that may displace our products or make them obsolete. Any of these
acquisitions could give the acquiring competitor a strategic advantage. Unlike
these large public companies, we have limited ability to provide
vendor-sponsored financing, which may influence the purchasing decisions of
customers and prospective customers. In addition, a number of start-up companies
are attracting large amounts of capital and rapidly developing competing
technologies in an attempt to market products to communication service
providers. These private companies can offer certain investment opportunities
that we may be unable to offer to induce potential customers to purchase their
products.

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

     Our industry has experienced rapid erosion of average product selling
prices. We anticipate that the average selling prices of our products will
decline in response to competitive pressures, increased sales discounts, new
product introductions by our competitors or other factors. If we are unable to
achieve sufficient cost reductions and increases in sales volumes, this decline
in average selling prices will reduce our gross margins and revenue.

We face risks associated with our international operations that could limit our
sales and add to our cost of operations.

     We market and sell our products in the United States and internationally.
We intend to expand our international operations substantially and to enter new
international markets. This expansion will require significant management
attention and financial resources. We may not be able to maintain or increase
international market demand for our products.

     We have limited experience in marketing and distributing our products
internationally. International operations are subject to inherent risks,
including:

     .  tariffs, export controls and other trade barriers;

     .  longer accounts receivable payment cycles and difficulties in collecting
        accounts receivable;

     .  difficulties and costs of staffing and managing foreign operations;

     .  certification requirements with which we may be unfamiliar; and

     .  reduced protection for intellectual property rights in some countries.

If we do not expand our direct sales operations, we may be unable to increase
market awareness and sales of our products.

     If we are unable to expand our direct sales force, we may not be able to
increase market awareness and sales of our products, which may prevent us from
achieving and maintaining profitability. Our products and services require a
technical sales effort targeted at several key people within each of our
prospective customers' organizations. Our sales efforts require the attention of
sales personnel and specialized system engineers with extensive experience in
networking technologies. Competition for these individuals is intense, and we
may not be able to hire sufficient numbers of qualified sales personnel and
specialized system engineers.

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

     We currently have a small customer service and support organization and
will need to increase our staff to support new and existing customers. Our
products are complex and require highly-trained customer service and support
personnel. Hiring

                                       16
<PAGE>

customer service and support personnel is difficult in our industry due to the
limited number of people available with the necessary technical skills. If we
are unable to expand our customer service and support organization, we may not
be able to increase sales.

We depend on sole or limited source suppliers for key components of our
products, and if we are unable to buy these components on a timely basis, we
will not be able to deliver products to our customers.

     If we are unable to buy components on a timely basis, we will not be able
to deliver our products to customers, which would harm our sales and revenue. We
currently purchase key components, including optical filters, amplifiers,
transmitters, receivers and switches and electronic microprocessors, from
limited sources. In addition, we rely on a sole supplier for some optical
components, and we are required to purchase at least half of some optical
components from E-TEK Dynamics under our supply agreement with E-TEK, which has
been acquired by JDS Uniphase. Optical components are complex, and we may not be
able to develop multiple or alternate sources of supply in a timely manner,
which could hurt our ability to deliver our products to customers. Sole or
limited source suppliers may be vulnerable to pressure from large purchasers of
their products, who may be competitors of ours, not to sell their products to
us.

We rely on contract manufacturers to produce our products, and our business
would be harmed if they were to stop meeting our manufacturing requirements.

     We rely on contract manufacturers to complete most of the manufacturing of
optical assemblies for our products. If for any reason these manufacturers were
to stop satisfying our needs without providing us with sufficient warning to
procure an alternate source, our ability to sell our products would be harmed.
Except for our agreement with E-TEK, we have no material long term contracts
with our manufacturers. As a result, our contract manufacturers are not
obligated to supply products to us for any specific period, in any specific
quantity or at any certain price, except as may be provided in a particular
purchase order.

     The process of qualifying a new contract manufacturer for complex products
such as our optical assemblies is lengthy and would consume a substantial amount
of the time of our technical personnel and management. If we sought to change
manufacturers in a short period of time, our business would be disrupted. In
addition, we may be unsuccessful in identifying a new manufacturer capable of
and willing to meet our needs on terms that we would find acceptable.

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

     We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our requirements, we may have excess
inventory, which could increase our costs and harm our relationships with our
contract manufacturers and component vendors due to reduced future orders. If we
underestimate our requirements, we may have an inadequate inventory of
components and optical assemblies. Inadequate inventory could interrupt
manufacturing of our products and result in delays in shipments. In addition,
lead times for materials and components that we order are long and depend on
factors such as the procedures of, or contract terms with, a specific supplier
and demand for each component at a given time. In the case of some optical
components in short supply, component suppliers have imposed strict allocations
that limit the number of these components they will supply to a given customer
in a specified time period. These suppliers may choose to increase allocations
to larger, more established companies, which could reduce our allocations and
harm our ability to manufacture our products.

We expect that our revenue and operating results will vary significantly from
quarter to quarter, which may cause our stock price to decline.

     Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. It is likely that in some
future quarters, our operating results may be below the expectations of market
analysts and investors, which could cause the trading price of our common stock
to fall.

     In addition, we expect to experience seasonality in the sales of our
products. Historically, the communications equipment market has higher sales in
the first and fourth quarters of the year, due in part to purchasers' budgetary
cycles. In

                                       17
<PAGE>

addition, we expect that sales may decline during summer months, particularly in
European markets, which we expect to represent a significant portion of the
market for our products for the foreseeable future. These seasonal variations in
our sales may lead to fluctuations in our quarterly operating results.

Due to the long sales cycle for our products, the timing of revenue is difficult
to predict and may cause our operating results to fluctuate unexpectedly.

     The sales and deployment cycle for our products is lengthy; it may extend
for six months or more. The length of our sales cycle may cause our revenue and
operating results to vary unexpectedly from quarter to quarter. A customer's
decision to purchase our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process.
Consequently, we may incur substantial expenses and devote senior management
attention to potential relationships that never materialize, in which event our
investments will largely be lost and we may miss other opportunities. In
addition, our lengthy sales cycle makes it difficult to predict the quarter in
which we may recognize revenue from any sale.

If we do not manage growth, improve existing processes and implement new
systems, procedures and controls, we may use resources, including your
investment, inefficiently and we may not achieve profitability.

     We are still a relatively small company and our success depends on growth.
At December 31, 1998, we had 63 employees, at December 31, 1999, we had 202
employees and at September 30, 2000, we had 447 employees. We plan to hire a
significant number of additional employees this year. Our growth has placed, and
we expect it to 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 work force worldwide.

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

     If we are unable to identify, attract or retain qualified personnel or to
retain the services of key personnel, especially engineers and sales personnel,
it would be difficult for us to manage our business, make timely product
introductions and increase sales. We intend to continue to hire many
engineering, sales, marketing and support personnel. Competition for these
employees, particularly optical engineers, is intense, especially in the San
Francisco Bay area. We may not be successful in attracting and retaining
qualified personnel.

     Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel,
including Hugh C. Martin, our President, Chief Executive Officer and Chairman of
our board of directors. None of our officers or key employees is bound by an
employment agreement for any specific term, and we do not have "key person" life
insurance policies covering any of our employees.

If we or our employees become subject to unfair hiring claims, we could be
precluded from hiring needed personnel, incur substantial costs in defending
ourselves and incur damages.

     Companies in our industry frequently claim that their competitors have
engaged in unfair hiring practices. As a result of these types of claims, we may
incur damages, lose potential employees or encounter disruptions in the
operation of our business. We have received claims of this kind in the past and
we may receive claims of this kind in the future. We could incur substantial
costs, including management time and attention, in defending ourselves and our
employees against these types of claims, regardless of their merits.

Our success depends on our customers and potential customers building new
communications systems and offering new communications services to their
end-user customers, which we have no ability to foresee or control.

     If our customers and potential customers are not successful in building
their communications systems, promoting their products, including new
revenue-generating data services, receiving requisite approvals and
accomplishing the many other requirements for the success of their businesses,
our growth will be limited. Many factors in addition to the effectiveness of our
products influence the ultimate success of our customers, and we have no control
over these factors. Many of our

                                       18
<PAGE>

customers and potential customers require substantial capital for the expansion
of their networks. The inability of customers or potential customers to obtain
sufficient financing on attractive terms, or any downturn in their business,
could impair our ability to make future sales. In addition, we have limited
ability to foresee the competitive success of our customers and to plan
accordingly.

If our products do not operate properly with other equipment in our customers'
networks, we may suffer product installations delays, order cancellations or
product returns, and our reputation could be harmed.

     Our products are designed to interface with our customers' existing
networks, each of which has its own specifications and is based on various
industry standards. Many of our customers' networks contain multiple generations
of products that were added as their networks grew and evolved. Our products
must interoperate with other existing and future products within these networks.
When interoperability problems occur, it may be difficult to identify their
source. Whether or not these problems are due to our products, they may cause us
to incur warranty, support and repair costs, divert the attention of our
engineering personnel from our product development efforts and suffer customer
relations problems.

Our products may have defects that we find only after full deployment in complex
networks, which could seriously harm our business.

     Our currently available products and our OPTX operating system and OLMP
inter-network communication protocol are technically advanced and highly complex
and have been tested or deployed on only a limited basis. It is common for
complex hardware and software to have defects, some of which are significant,
that are not discovered in limited trials. Our current and any future products
or releases can only be fully tested when deployed for an extended period of
time as part of networks that include equipment from other vendors.
Consequently, our customers may discover defects in our hardware or software
after deployment, and we could experience:

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

     .  loss of customers;

     .  damage to our reputation;

     .  diversion of development resources;

     .  increased service and warranty costs;

     .  legal actions by customers exposing us to product liability claims and
        significant legal expenses; and

     .  increased insurance costs.

Our products may become obsolete if we do not quickly meet industry standards
that may emerge.

     Our success depends in part on both the adoption of industry standards for
new technologies in our market and our products' compliance with industry
standards. To date, no industry standard for our products has been adopted. The
absence of an industry standard may prevent market acceptance of our products if
potential customers delay purchases of new equipment until standards are
adopted. In addition, if our products cannot support an industry standard,
potential customers may not choose our products. As a result, we may incur
significant losses due to lack of customer demand, excess inventory and
diversion of our engineers from product development efforts.

If we are unable to protect and enforce our intellectual property rights, we may
be unable to compete effectively.

     We regard substantial elements of our products and services as proprietary
and attempt to protect them by relying on patent, trademark, service mark,
copyright and trade secret laws. We also rely on confidentiality procedures and
contractual provisions with our employees, consultants and corporate partners.
Any steps we take to protect our intellectual property may

                                       19
<PAGE>

be inadequate, time consuming and expensive. Furthermore, despite our efforts,
we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property, which could harm our business.

     It is possible that no patents will be issued from our currently pending or
future patent applications. Moreover, any issued patents may not provide us with
any competitive advantages over, or may be challenged by, third parties.

     Because legal standards relating to the validity, enforceability and scope
of protection of intellectual property rights of software are uncertain and
still evolving, the future viability or value of our intellectual property
rights is uncertain. Effective patent, trademark, copyright and trade secret
protection may not be available in some countries in which our products are
distributed. Furthermore, our competitors may independently develop similar
technologies that limit the value of our intellectual property or design around
patents issued to us.

Necessary licenses for third-party software may not be available to us or may be
very expensive.

     In the future, we may be required to license from third parties software
that is used in our products or is required to develop new products or product
enhancements. While we have been able to license third-party software to date,
in the future third-party licenses may not be available to us on commercially
reasonable terms or at all. Third parties who hold exclusive rights to software
technology that we seek to license may include our competitors. If we are unable
to obtain any necessary third-party licenses, we would be required to redesign
our product or obtain substitute technology, which may perform less well, be of
lower quality or be more costly.

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

     In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. The suit alleges that
our products infringe five patents held by Nortel Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. We are in the process of investigating these
allegations. Nortel Networks is seeking preliminary and permanent injunctions
and damages against us in connection with these claims. If Nortel Networks is
able to obtain an injunction preventing us from selling our products, we would
suffer a substantial reduction in our revenues and incur losses over an extended
period of time. We expect to incur substantial legal and other expenses as well
as diversion of management and technical time and attention in connection with
this litigation. The expenses and diversion of resources associated with this
litigation could seriously harm our business and financial condition and could
affect our ability to raise capital in the future. In the event of an adverse
ruling, we may be unable to sell our products or be required to pay substantial
damages to Nortel Networks, and if this litigation is resolved by settlement, we
might need to make substantial payments to Nortel Networks.

     In the future, we may be a party to litigation to protect our intellectual
property or as a result of other alleged infringements of intellectual property.
These claims and any resulting lawsuit, if successful, could subject us to
significant liability for damages and invalidate our proprietary rights. These
lawsuits, regardless of their success, would 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 the challenged technology.

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

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<PAGE>

We may not be able to obtain additional financing to satisfy our future capital
needs.

     Unlike many companies, we intend to expand our sales and marketing
activities, manufacturing activities and inventory faster than increases in
actual or forecasted revenue. If we achieve our growth targets, our working
capital needs will increase, so we may need to raise additional capital in order
to fund expansion. We may also need additional capital in order to develop new
services or products, or to acquire complementary services, businesses or
technologies. Product development and acquisition activities are particularly
capital-intensive in our industry. Additional financing may not be available on
terms favorable to us, or at all. Future debt financing may limit our financial
and operating flexibility. If we issue additional equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of the then-existing
holders of common stock.

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

     We intend to acquire or invest in complementary businesses, products and
technologies. We may not successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and, as a result,
our operating results could suffer. These acquisitions or investments could lead
to:

     .   stock issuances that would reduce our current stockholders' percentage
         ownership;

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

     .   responsibility for unanticipated liabilities;

     .   amortization expenses related to goodwill and other intangible assets;

     .   large and immediate write-offs;

     .   problems combining the purchased operations, technologies or products
         with ours;

     .   unanticipated costs;

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

     .   adverse effects on existing relationships with suppliers and customers;

     .   risks associated with entering markets in which we have limited prior
         experience; and

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

The continuing control of ONI Systems by insiders could delay or prevent a
change in corporate control, which could prevent you from realizing a premium
over the market price of our common stock.

     After the completion of our recent public offerings, our executive
officers, directors and entities affiliated with them beneficially own
approximately 33.0% of our outstanding common stock. These stockholders, if
acting together, would be able to influence all matters requiring approval by
our stockholders, including the election of directors and the approval of
mergers or other business combination transactions. This ability to exercise
influence over all matters requiring stockholder approval could prevent or
significantly delay another company or person from acquiring or merging with us.
As a result, offers to acquire ONI Systems which represent a premium over the
available market price of our common stock may be withdrawn or otherwise fail to
be realized.

The continuing control of ONI Systems by insiders could permit insiders to
engage in transactions to the detriment of stockholder value.

     We have engaged in transactions with related parties, including loans to
executive officers. The ability of executive officers, directors and their
affiliated entities to exercise influence over all matters requiring stockholder
approval could

                                       21
<PAGE>

enable insiders to approve transactions involving each other that might
otherwise not be approved and which could reduce the market price of our common
stock.

We have experienced and expect to continue to experience volatility in our share
price which could negatively affect our stock price.

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

     .   changes in financial estimates by securities analysts;

     .   changes in market valuations of communications and Internet
         infrastructure-related companies;

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

     .   volume fluctuations, which are particularly common among highly
         volatile securities of Internet-related companies.

Stock market volatility has increased, making your investment more risky and
litigation more likely.

     The stock markets, particularly the Nasdaq National Market on which our
common stock is listed, have experienced substantial price and volume
fluctuations. These market fluctuations have particularly affected the market
prices of equity securities of many technology, networking and Internet-related
companies and have often been unrelated or disproportionate to the operating
performance of those companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against that company. Litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources.

Future sales of a substantial amount of our common stock could cause our stock
price to fall.

     Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. For example, on
November 28, 2000, approximately 4,128,828 shares will first be eligible for
resale. Future sales of a substantial number of shares of our common stock could
cause our stock price to fall. In addition, the future sale of shares by
existing stockholders could impair our ability to raise capital through the sale
of additional stock.

Leverage and debt service obligations may adversely affect our cash flow.

     We have a substantial amount of outstanding indebtedness following our
recent public offering of $300,000,000 of 5% Convertible Subordinated Notes due
October 15, 2005. There is the possibility that we may be unable to generate
cash sufficient to pay the principal of, interest on and other amounts payable
in respect of the notes when due.

     Our substantial leverage could have significant negative consequences,
including:

     .  increasing our vulnerability to general adverse economic and industry
        conditions;

     .  requiring the dedication of a substantial portion of our expected cash
        flow from operations to service our indebtedness, thereby reducing the
        amount of our expected cash flow available for other purposes, including
        capital expenditures; and

     .  limiting our flexibility in planning for, or reacting to, changes in our
        business and the industry in which we compete.

                                       22
<PAGE>

Provisions of Delaware law, our certificate of incorporation and our bylaws
could delay or prevent a takeover of us, which could prevent you from realizing
a premium over the market price of our common stock.

     Provisions of Delaware law, our certificate of incorporation and bylaws
could have the effect of delaying or preventing a third party from acquiring us,
even if a change in control would be beneficial to our stockholders. These
provisions include:

     .   authorizing the issuance of preferred stock without stockholder
         approval;

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

     .   prohibiting cumulative voting in the election of directors;

     .   prohibiting stockholders from calling stockholders meetings; and

     .   prohibiting stockholder actions by written consent.

     These provisions and other provisions of Delaware law could make it more
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. As a result, offers to acquire ONI Systems which represent a
premium over the available market price of our common stock may be withdrawn or
otherwise fail to be realized.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

     We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition, we maintain our cash equivalents in
money market funds. Accordingly, we are not a party to financial instruments or
contracts, and do not have investments, that expose us to material interest rate
risk.

Exchange Rate Sensitivity

     Currently, all of our sales and expenses are denominated in United States
Dollars. Therefore, we have not engaged in any foreign exchange hedging
activities to date. We do expect to conduct transactions in foreign currencies
in the future, so we may engage in foreign exchange hedging activities at that
time.

                                       23
<PAGE>

Part II. Other Information

Item 1. Legal Proceedings.

     In October 1999, Nortel Networks filed suit in the Superior Court for the
Province of Quebec, District of Montreal, Canada against us and several of our
employees who were former employees of Nortel Networks. This suit sought an
injunction to prevent us from hiring additional Nortel Networks' employees and
to prohibit the use of Nortel Networks' trade secrets by us. In October 1999 and
November 1999, temporary orders were issued prohibiting the former Nortel
Networks' employees from soliciting current Nortel Networks' employees and from
using specified Nortel Networks' trade secrets.

     In March 2000, Nortel Networks filed an additional suit against us in the
United States District Court for the Northern District of California. This suit
involves allegations that our products infringe five patents held by Nortel
Networks, and sets forth allegations of misappropriation of trade secrets,
unlawful business practices and common law unfair competition. Nortel Networks
seeks preliminary and permanent injunctions and damages against us in connection
with these claims.

     In April 2000, we filed a motion to dismiss Nortel Networks' claims for
misappropriation of trade secrets, unlawful business practices and common law
unfair competition from the California suit. We also filed an answer and
counterclaims asserting unfair business practices, tortious interference, breach
of contract and seeking declarations of invalidity, unenforceability and
non-infringement of the patents against Nortel Networks. On June 23, 2000, the
court dismissed one of Nortel Networks' unfair competition claims and stayed its
remaining claims for trade secret misappropriation and unlawful business
practices in the California suit because of the pendency of the suit in Canada.
On July 14, 2000, Nortel Networks filed a Discontinuance of Suit dismissing the
suit in Canada against our employees and us and terminating the temporary orders
previously issued in this suit. Simultaneous with this, Nortel Networks filed a
Notice of Motion to lift the stay of the trade secret misappropriation and
unlawful business practices claims in the California suit, which was granted in
September 2000.

     We are in the process of investigating the claims asserted by Nortel
Networks. We believe that we have meritorious defenses against Nortel Networks'
allegations, and we intend to defend the Nortel Networks litigation vigorously.
Based on our investigation to date, we believe that our products do not infringe
the Nortel Networks patents and that we have not engaged in misappropriation of
trade secrets, unlawful business practices or common law unfair competition.

     In the event that an injunction is granted that prevents us from selling
our products, we would have to either negotiate a license with Nortel Networks
or engage in a redesign of our products. We may not be able to obtain a license
from Nortel Networks on commercially reasonable terms, or at all. Accordingly, a
permanent injunction would result in a substantial reduction in our revenue and
result in losses over an extended period of time.

     We expect to incur substantial legal and other expenses in connection with
the Nortel Networks litigation. In addition, we expect the Nortel Networks
litigation to continue to divert the efforts and attention of our management and
technical personnel. Patent litigation is highly complex and can extend for a
protracted period of time, which can substantially increase the cost of
litigation. Accordingly, the expenses and diversion of resources associated with
this litigation could seriously harm our business and financial condition and
could affect our ability to raise capital in the future. In the event of an
adverse ruling, we also could be required to pay damages to Nortel Networks, and
if this litigation is resolved by settlement, we might need to make substantial
payments to Nortel Networks, which could harm our business and financial
condition.

                                       24
<PAGE>

Item 2. Changes in Securities and Use of Proceeds.


  (a)  Changes in Securities

     In connection with our spin-out from Optivision in December 1997, we were
obligated to issue 233,468 shares of common stock to an equipment finance
company upon the exercise by the finance company of its warrants to purchase
capital stock of Optivision. The finance company exercised these warrants, and
we issued 233,468 shares of ONI Systems common stock to the finance company on
August 14, 2000. We did not receive any proceeds from the exercise of these
warrants. Our issuance of these shares upon the exercise of these warrants was
exempt from registration pursuant to Section 4(2) of the Securities Act.

  (b)   Use of Proceeds

     On May 31, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (No. 333-32104) was declared effective by the
Securities and Exchange Commission. The net proceeds of our initial public
offering were approximately $212.1 million.

     As of September 30, 2000, we had used $15.1 million of the net proceeds
from the initial public offering for working capital, capital expenditures and
other general corporate purposes, including sales and marketing, customer
support, research and development, expansion of our operation and administrative
infrastructure, and the leasing of additional facilities. The remaining $197.0
million of the net proceeds are expected to be used for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the remaining net proceeds from our initial public offering to
acquire or invest in businesses, technologies or products that are
complementary to our business. We currently have no commitments or agreements
with respect to any acquisitions or investments. We have not determined the
amounts of the remaining proceeds that we plan to spend on any of the uses
described above or the timing of these expenditures. Pending our use of the
remaining net proceeds, we intend to invest them in short-term, interest-
bearing, cash equivalent instruments.

Item 3. Defaults Upon Senior Securities.

     None.


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

     None.


Item 5. Other Information.

     On October 23, 2000, a Registration Statement on Form S-1 (No. 333-46782)
was declared effective by the Securities and Exchange Commission, pursuant to
which 8,000,000 shares of our common stock were offered and sold in a public
offering at a price of $74.50 per share. Of the 8,000,000 shares of common
stock, 5,646,643 shares were sold for ONI's account and 2,353,357 shares were
sold by certain stockholders of ONI. The net proceeds to ONI, after deducting
underwriting discounts and estimated expenses, were approximately $401.5
million. ONI has granted the underwriters a 30-day option to purchase up to an
additional 1,200,000 shares of common stock to cover over-allotments, if any.

     In addition, concurrently with the public offering of common stock, a
Registration Statement on Form S-1 (No. 333-46784) was declared effective by the
Securities and Exchange Commission, pursuant to which we offered and sold $300
million of 5% Convertible Subordinated Notes due October 15, 2000 in a public
offering. The net proceeds to ONI, after deducting underwriting discounts and
estimated expenses, were approximately $290.3 million. ONI has granted the
underwriters a 30-day option to purchase up to an additional $45 million of the
notes to cover over-allotments, if any.

                                       25
<PAGE>

Item 6. Exhibits and Reports on Form 8-K.

     (a) Exhibits. The following exhibits are filed as part of this Form 10-Q:


          4.1   Indenture, dated October 27, 2000, between ONI Systems Corp. and
                State Street Bank and Trust Company of California, N.A. as
                Trustee.
          4.2   Note (included in Exhibit 4.1).
         27.1   Financial Data Schedule.

     (b) Reports on Form 8-K

         On October 2, 2000, we filed a report on Form 8-K dated September 29,
     2000 pertaining to our filing of two registration statements with the
     Securities and Exchange Commission and the early release of shares of our
     common stock from lock-up agreements.

                                       26
<PAGE>

                                      SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Date: November 13, 2000                 ONI SYSTEMS CORP.


                                         By: /S/ CHRIS A. DAVIS
                                             ----------------------------
                                                     Chris A. Davis
                                             Executive Vice President,
                                             Chief Financial and Administrative
                                                        Officer

                                       27
<PAGE>

                                   EXHIBIT
                                   -------
                                    INDEX
                                    -----

          4.1   Indenture, dated October 27, 2000, between ONI Systems Corp. and
                State Street Bank and Trust Company of California, N.A. as
                Trustee.
          4.2   Note (included in Exhibit 4.1).
         27.1   Financial Data Schedule.

                                      28