<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 March 31, 2001

                                      OR

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

                        Commission File Number 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 136,479,560 shares of the Company's common stock, par value $0.0001,
outstanding on March 31, 2001.

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

                               ONI SYSTEMS CORP.

                                   FORM 10-Q

                     Quarterly Period Ended March 31, 2001

                               Table of Contents

                         PART I. Financial Information


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

         Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000................     3

         Condensed Consolidated Statements of Operations for the three months ended March 31,
         2001 and 2000...................................................................................     4

         Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and
         2000............................................................................................     5

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

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations...........    10

Item 3.  Quantitative and Qualitative Disclosures about Market Risk......................................    21

                                                  PART II. Other Information

Item 1.  Legal Proceedings...............................................................................    21

Item 2.  Changes in Securities and Use of Proceeds.......................................................    22

Item 3.  Defaults Upon Senior Securities.................................................................    22

Item 4.  Submission of Matters to Vote of Security Holders...............................................    22

Item 5.  Other Information...............................................................................    22

Item 6.  Exhibits and Reports on Form 8-K................................................................    22

Signatures...............................................................................................    23

</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>

                                                                                            March 31, 2001   December 31, 2000
                                                                                            --------------   -----------------
<S>                                                                                         <C>              <C>
                                        ASSETS
                                        ------

Cash and cash equivalents.............................................................             799,128          $  852,360
Accounts receivable...................................................................              48,099              24,309
Inventory, net........................................................................              76,132              70,626

Prepaid expenses and other current assets.............................................              14,958               7,950
                                                                                                ----------          ----------
 Total current assets.................................................................             938,317             955,245
Property and equipment, net...........................................................              63,679              41,581
Other assets..........................................................................              16,051              16,829
Goodwill and intangibles..............................................................              18,556               1,813
                                                                                                ----------          ----------
 Total assets.........................................................................          $1,036,603          $1,015,468
                                                                                                ==========          ==========

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

Accounts payable......................................................................          $   20,299          $   17,518
Accrued liabilities...................................................................              26,803              18,492
Deferred revenue......................................................................               1,455               1,466
Current portion of capital lease obligations..........................................                 151                 161
                                                                                                ----------          ----------
 Total current liabilities............................................................              48,708              37,637
Capital lease obligations, less current portion.......................................                 154                 187
Subordinated convertible notes........................................................             300,000             300,000
                                                                                                ----------          ----------
 Total liabilities....................................................................             348,862             337,824
                                                                                                ----------          ----------

Capital stock.........................................................................             911,342             870,154
Accumulated deficit...................................................................            (223,601)           (192,510)
                                                                                                ----------          ----------

 Total stockholders' equity...........................................................             687,741             677,644
                                                                                                ----------          ----------

 Total liabilities and stockholders' equity...........................................          $1,036,603          $1,015,468
                                                                                                ==========          ==========
</TABLE>

                                       3
<PAGE>

                               ONI SYSTEMS CORP.

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

                                                           Three months ended
                                                                March 31,
                                                                ---------

                                                              2001        2000
                                                              ----        ----

Revenue.................................................  $ 45,102    $  3,633
  Cost of goods sold, excluding deferred stock
     compensation amortization amounts..................    27,756       2,850
                                                          --------    --------
   Gross profit.........................................    17,346         783
                                                          --------    --------
Operating expenses:
  Research and development, excluding deferred stock
    compensation amortization amounts...................    18,052      11,116
  Sales and marketing, excluding deferred stock
    compensation amortization amounts...................     9,868       3,002
  General and administrative, excluding deferred stock
    compensation amortization amounts...................     6,258       2,556
  Amortization of deferred stock compensation*..........    12,272      13,612
  Amortization of goodwill and intangibles..............     1,325         921
  Common stock warrant expense..........................        --       4,545
  In-process research and development...................     8,240          --
                                                          --------    --------
Total operating expenses................................    56,015      35,752
                                                          --------    --------
     Operating loss.....................................   (38,669)    (34,969)
Other income, net.......................................     7,579         804
                                                          --------    --------
     Loss before income taxes...........................   (31,090)    (34,165)
Income taxes............................................         1           2
                                                          --------    --------
     Net loss...........................................   (31,091)    (34,167)
                                                          ========    ========

Basic and diluted net loss per share....................  $  (0.24)   $  (1.41)
                                                          ========    ========
Weighted average shares outstanding used in
 computing basic and diluted net loss per share.........   129,173      24,219
                                                          ========    ========

  * Amortization of deferred stock compensation:

    Cost of goods sold..................................  $  5,779    $  1,628
    Research and development............................     1,433       7,349
    Sales and marketing.................................     3,275       2,464
    General and administrative..........................     1,785       2,171
                                                          --------    --------
                                                          $ 12,272    $ 13,612
                                                          ========    ========

                                       4
<PAGE>

                               ONI SYSTEMS CORP.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                                    Three months ended
                                                                                        March 31,
                                                                                        ---------

                                                                                       2001       2000
                                                                                       ----       ----
<S>                                                                                <C>        <C>
Cash flows from operating activities:
   Net loss......................................................................  $(31,091)  $(34,167)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization..............................................     6,044      1,788
      Amortization of deferred stock compensation................................    12,272     13,612
      In-process research and development........................................     8,240         --
      Loss on disposal of property and equipment.................................        --         34
      Value of leased facilities received in exchange for preferred stock........        --         36
      Amortization of debt financing costs.......................................        --         29
      Common stock warrant expense...............................................        --      4,545
      Stock-based compensation for non-employees.................................        --        201
      Changes in operating assets and liabilities:
         Accounts receivable.....................................................   (23,789)    (3,765)
         Inventory...............................................................    (5,506)   (11,135)
         Prepaid expenses and other assets.......................................    (6,231)      (211)
         Accounts payable and accrued liabilities................................    11,092      7,903
         Deferred revenue........................................................       (11)       119
                                                                                   --------   --------
   Net cash used in operating activities.........................................   (28,980)   (21,011)
                                                                                   --------   --------

Cash flows used in investing activities:

   Purchase of property and equipment............................................   (26,816)   (11,382)
   Purchase of Finisar technology................................................    (5,000)        --
                                                                                   --------   --------
   Net cash used in investing activities.........................................   (31,816)   (11,382)
                                                                                   --------   --------

Cash flows from financing activities:
   Payments under capital lease obligations......................................       (44)       (67)
   Proceeds from issuance of preferred stock, net of issuance costs..............        --      1,961
   Proceeds from repayment of shareholder loans..................................     1,880         --
Proceeds from issuance of common stock, net of issuance costs....................     5,716        783
                                                                                   --------   --------
   Net cash provided by financing activities.....................................     7,552      2,677
Effect of exchange rate changes on cash and cash equivalents.....................        12         --
                                                                                   --------   --------
   Net (decrease) in cash and cash equivalents...................................   (53,232)   (29,716)
Cash and cash equivalents at beginning of period.................................   852,360     80,023
                                                                                   --------   --------

Cash and cash equivalents at end of period.......................................  $799,128   $ 50,307
                                                                                   ========   ========

Supplemental disclosures of cash flow information:
   Noncash investing and financing activities:
     Issuance of common stock upon exercise of options in exchange
      for notes receivable.......................................................  $     --   $  4,605
                                                                                   ========   ========
     Issuance of common stock for future services................................  $     --   $ 66,697
                                                                                   ========   ========
     Issuance of common stock in connection with Finisar technology acquisition..  $ 21,340   $     --
                                                                                   ========   ========
</TABLE>

                                       5
<PAGE>

                               ONI SYSTEMS CORP.

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (In thousands, except share and per share data)


1. Description of Business

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

     ONI was originally incorporated in California, as Optical Networks,
Incorporated and 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 accounting principles
generally accepted in the United States. 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 March 31, 2001 and the operating results and cash flows
for the three months ended March 31, 2001 and 2000. These financial statements
and notes should be read in conjunction with ONI's audited financial statements
and related notes for the year ended December 31, 2000, included in ONI's Annual
Report on Form 10-K filed April 2, 2001 with the Securities and Exchange
Commission. The condensed consolidated balance sheet at December 31, 2000 has
been derived from audited financial statements as of that date.

     The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2001.

3. Technology Purchase

     In February 2001, ONI acquired technology and other assets associated with
Finisar Corporation's Opticity(TM) product line for up to $51,340, comprised of
$30,000 in cash and $21,340 of ONI's common stock. At closing, ONI paid $5,000
in cash and issued 488,624 shares of common stock to Finisar. The remaining cash
payments of up to $25,000 will be contingent upon the timely delivery of certain
mutually agreed deliverables. In accordance with the terms of the acquisition
agreement the number of common shares issued to Finisar was determined by
dividing $20,000 by the average closing price of ONI's common stock for the ten
days prior to closing of the transaction on February 28, 2001. For accounting
purposes the value of the shares issued was determined in accordance with EITF
99-12 and APB No. 16 "Business Combinations". According to EITF 99-12 and APB 16
the 488,624 shares issued to Finisar must be valued based on the market price of
ONI's shares over a reasonable period of time before and after the announcement
date of the transaction, which was February 13, 2001. The difference in share
price between the announcement date and the closing date of the transaction
resulted in a value of $21,340 for the 488,624 common shares issued to Finisar
as opposed to the $20,000 value per the acquisition agreement. ONI allocated the
portion of the purchase price, paid on closing, to the estimated fair market
value of identifiable intangible assets (core and developed technology) of
$17,300 and to purchased in-process research and development of $8,240. The
excess of the aggregate purchase price over the estimated fair value of the
assets acquired of $800 has been recorded as goodwill. The identifiable
intangible assets and goodwill are being amortized over a period of three years.
The $8,240 allocated to purchased in-process research and development was
determined through established valuation techniques in the high-technology
communications industry and was expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.
Management believes that the assumptions used in the in process research and
development analysis were reasonable at the time of the acquisition. No
assurance can be given, however, that the underlying assumptions used to
estimate expected revenues, operating costs or profitability, or the events
associated with the product, will transpire as estimated. The remaining future
cash payments of up to $25,000 that are contingent upon the timely delivery of
certain mutually agreed deliverables and will be recorded as goodwill at the
time of payment and amortization over three years.

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)
                (In thousands, except share and per share data)


     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 or 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.


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:

                                                           Three months ended
                                                                March 31,
                                                                ---------

                                                            2001        2000
                                                            ----        ----

Net loss attributable to common
 stockholders.........................................   $ 31,091     $34,167
                                                         --------     -------

Basic and diluted:
Weighted-average shares of common stock
 outstanding..........................................    134,709      34,315
Less: weighted-average shares subject to repurchase...      5,536      10,096
                                                         --------     -------

Weighted-average shares used in computing basic and
diluted net loss per common share.....................    129,173      24,219
                                                         --------     -------
Basic and diluted net loss per common share...........   $  (0.24)    $ (1.41)
                                                         --------     -------


                                       7
<PAGE>

                               ONI SYSTEMS CORP.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (In thousands, except share and per share data)


6. Inventory

     Inventory consists of:

                                             March 31, 2001  December 31, 2000
                                             --------------  -----------------

     Raw materials........................       $19,926          $27,821
     Work in progress.....................        23,854           15,414
     Finished goods.......................        20,804           16,763
     Consignment inventory................        11,548           10,628
                                                 -------          -------

                                                 $76,132          $70,626
                                                 =======          =======

7. Recent Accounting Pronouncements

     In September 2000, the FASB issued SFAS No. 140, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. ONI does not expect the adoption of
SFAS No. 140 to have a material impact on its financial position or results of
operations.


8. 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
ONLINE(TM) and ONWAVE(TM) products. ONI expects to continue selling these
products in the future, and also to develop other lines of products for sale.
ONI's geographic distribution of revenues for the three months ended March 31,
2001 and 2000, is as follows:

                                                       Three months ended
                                                            March 31,
                                                            ---------

                                                       2001          2000
                                                       ----          ----

     North America...................................  83%           70%
     Asia............................................   8%            -
     Europe..........................................   9%           30%


                                       8
<PAGE>

                               ONI SYSTEMS CORP.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (In thousands, except share and per share data)


9. 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. 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 condensed 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>

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 related notes included in Item 1 of this Quarterly
Report, our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 2, 2001 and "Factors that May Affect Future Results" in this
document.

Overview

     We develop, market and sell optical communications 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/(TM)/, which is designed for metropolitan markets. In June 2000, we
released the ONLINE7000/(TM)/, which is designed to provide metropolitan service
providers with a more cost-effective solution for metro access applications. In
the fourth quarter of 2000, we announced the ONLINE11000/(TM)/, which is
designed for regional markets, and, we released the ONWAVE SONET/SDH Multiplexer
and ONWAVE Data Multiplexer products that eliminate the need for traditional
multiplexing equipment in the network by combining lower speed signals and
multiple data formats into a single wavelength.

Results of Operations

     Beginning in 2000, our revenue generally is derived from the sale of our
ONLINE and ONWAVE products.   We expect to experience seasonality in the sales
of our products. Historically, the communications 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. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results.

     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. 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 increasing size of our business. 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.


Revenue

     Revenue was $45.1 million for the quarter ended March 31, 2001, an increase
of $41.5 million from the comparable quarter in 2000. The increase in revenue
was primarily due to the increase in the number of revenue generating customers
from four in the quarter ended March 31, 2000 to nineteen in the quarter ended
March 31, 2001 and the increase in the volume of purchases from repeat
customers. Revenue was primarily from sales of our ONLINE and ONWAVE products.

                                       10
<PAGE>

Cost of goods sold

   Cost of goods sold was $27.8 million for the quarter ended March 31, 2001, an
increase of $24.9 million from the comparable quarter in 2000. The increase in
cost of goods sold is primarily related to the increase in revenue, as well as
the growth in our customer service and support organization. As a percentage of
revenue, cost of goods sold for the quarter ended March 31, 2001 was 61.5%,
compared to 78.5% for the quarter ended March 31, 2000.

   Gross margin on product sales is dependent upon several factors, including
the stage of our customers' network deployments, sales volume and product mix.
Typically, we realize lower gross margins on initial customer deployments, which
include fewer wavelengths, than on follow-on purchases where the customer is
adding capacity to their network. We expect to continue to add new customers
such that the mix of new versus repeat customer purchases may vary on a
quarterly basis. In addition, we expect to develop new products in the future,
which may generate higher or lower gross margins. While we expect gross margins
to continue to improve over time, the quarterly gross margin percentage may vary
in accordance with the timing and stage of our customers' network deployments
and the quarterly product mix.

Research and development expense

   Research and development expense was $18.1 million for the quarter March 31,
2001, an increase of $6.9 million from the comparable quarter in 2000. 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 supporting new product development. At
March 31, 2001, we had approximately 245 research and development employees, an
increase of 98 from 147 at March 31, 2000. Research and development expense as a
percentage of revenue was 40.0% for the quarter ended March 31, 2001, a decrease
from 306% from the comparable quarter in 2000. We expect research and
development expense as a percentage of revenue to continue to decline in future
periods. 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 $9.9 million for the quarter ended March 31,
2001, an increase of $6.9 million from the comparable quarter in 2000. The
increase in sales and marketing expenses primarily relates to the expansion of
our sales force and customer service and support department, both domestically
and internationally. At March 31, 2001, we had approximately 178 sales and
marketing employees, an increase of 119 from 59 at March 31, 2000. Sales and
marketing expense as a percentage of revenue was 21.9% for the quarter ended
March 31, 2001, a decrease from 82.6% from the comparable quarter in 2000. We
expect sales and marketing expense as a percentage of revenue to continue to
decline in future periods. We expect to continue to expand our domestic and
international sales 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 $6.3 million for the quarter ended
March 31, 2001, an increase of $3.7 million from the comparable quarter in 2000.
The increase in general and administrative expense primarily reflects the
expansion in infrastructure to support our planned growth. At March 31, 2001, we
had approximately 97 general and administrative employees, an increase of 45
from 52 at March 31, 2000. General and administrative expense as a percentage of
revenue was 13.9% for the quarter ended March 31, 2001, a decrease from 70.4%
from the comparable quarter in 2000. We expect general and administrative
expense as a percentage of revenue to continue to decline in future periods. 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 $12.3 million for the quarter
ended March 31, 2001, a decrease of $1.3 million from the comparable quarter in
2000.  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.  Accordingly, we expect the
amortization of deferred stock compensation to continue to decline in future
quarters.  From inception through March 31, 2001, we have amortized a total of
$93.5 million of deferred stock compensation,  leaving an unamortized balance of
$43.7 million as of March 31, 2001.

Amortization of goodwill and intangibles

   Amortization of goodwill and intangibles was $1.3 million for the quarter
ended March 31, 2001, an increase of $0.4 million from the comparable quarter in
2000. We recorded goodwill of $0.8 million and intangibles of $17.3 million in
relation to the acquisition of certain assets and technology from Finisar
Corporation on February 28, 2001. Under the terms of the acquisition agreement,
we will make additional cash payments of up to $25 million contingent upon the
timely completion of certain mutually agreed deliverables. These payments will
be recorded as additional goodwill at the time of payment. Goodwill and
intangibles are being amortized over a period not exceeding three years.

                                       11
<PAGE>

In-process research and development

   In association with the purchase of certain technology from Finisar
Corporation, we recorded $8.2 million of in-process research and development.
The amount allocated to purchased in-process research and development was
determined through established valuation techniques in the high-technology
communications industry, and was expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.

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 $7.6 million for the quarter ended March 31, 2001, an
increase of $6.8 million from the comparable quarter in 2000. The increase was
primarily due to the interest earned on the net cash proceeds received in
connection with the completion of our initial public equity offering in June
2000 and our follow-on public equity and debt offerings in October 2000,
partially offset by interest expense incurred on our subordinated convertible
notes.

Liquidity and Capital Resources

   At March 31, 2001, our principal source of liquidity was our cash and cash
equivalents of $799.1 million.

   We used $29.0 million in cash in operating activities in the three months
ended March 31, 2001, an increase of $8.0 million from the $21.0 million used in
the three months ended March 31, 2000.  Cash used in operating activities for
the quarter ended March 31, 2001 was primarily due to the net loss of $31.1
million and the increase in operating assets and liabilities of $24.4 million
offset by depreciation and amortization of $6.0 million, amortization of
deferred stock compensation of $12.3 million and in-process research and
development of $8.2 million.   Cash used in operating activities for the quarter
ended March 31, 2000 was primarily due to the net loss of $34.2 million and the
increase in operating assets and liabilities of $7.1 million offset by
depreciation and amortization of $1.8 million, amortization of deferred stock
compensation of $13.6 million and common stock warrant expense of 4.5 million.

   We used $31.8 million in cash in investing activities in the three months
ended March 31, 2001, an increase of $20.4 million from the $11.4 million used
in the three months ended March 31, 2000. The increase was primarily related to
the increase in purchases of property and equipment and the $5 million cash
payment to Finisar Corporation for the purchase of technology.

   We generated $7.6 million in cash from financing activities in the three
months ended March 31, 2001, an increase of $4.9 million from the $2.7 million
generated in the three months ended March 31, 2000, primarily from proceeds from
employee share purchase plans, the exercise of employee stock options and the
repayment of shareholder loans.

   At March 31, 2001, cash and cash equivalents totaled $799.1 million, a
decrease of $53.2 million from the balance of $852.4 million at December 31,
2000. The decrease was due to cash used in operating activities of $29.0 and
cash used in investing activities of $31.8 million, offset by cash provided by
financing activities of $7.6 million.

   In February 2001, we acquired technology and other assets associated with
Finisar Corporation's Opticity product line for approximately $51.3 million,
comprised of $30 million in cash and $21.3 million of our common stock. At
closing, we paid $5 million in cash and issued 488,624 shares of common stock to
Finisar. The remaining cash payments of up to $25 million will be contingent
upon the timely delivery of certain mutually agreed deliverables. In accordance
with the terms of the acquisition agreement the number of common shares issued
to Finisar was determined by dividing $20 million by the average closing price
of ONI's common stock for the ten days prior to closing of the transaction on
February 28, 2001. For accounting purposes the value of the shares issued was
determined in accordance with EITF 99-12 and APB No. 16. According to EITF 99-12
and APB 16, the 488,624 shares issued to Finisar must be valued based on the
market price of ONI's shares over a reasonable period of time before and after
the announcement date of the transaction, which was February 13, 2001. The
difference in share price between the announcement date and closing date of the
transaction resulted in a value of $21.3 million for the 488,624 shares issued
to Finisar as opposed to the $20 million value per the acquisition agreement.

   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 build out our new facility in San Jose,
California, 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.

                                       12
<PAGE>

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 March 31, 2001, we incurred cumulative losses of $223.6 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 support 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 and commenced sales of our first products in 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.
Communication service providers may not choose to purchase and deploy our
equipment. Even if service providers do deploy our products in their networks,
they may not operate as expected, which could delay or prevent their adoption.


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.


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 currently developing new
products, including our ONLINE2500/(TM)/. 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

                                       13
<PAGE>

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 March 31,
2001, we had twenty-one 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 and
regional markets. Many of these companies have existing 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.



                                       14
<PAGE>

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 believe we will need to continue to increase our customer service and
support organization to support new and existing customers. Our products are
complex and require highly-trained customer service and support personnel.
Hiring 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. 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.

  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.

                                       15
<PAGE>

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 addition, we expect that sales may decline during summer months,
particularly in European markets. 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 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, 1999, we had 202 employees, at December 31, 2000, we had 541
employees and at March 31, 2001, we had 667 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, managerial control and 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.

                                       16
<PAGE>

     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 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 products are technically advanced and highly complex, and it is common
for complex hardware and software to have defects which are difficult to detect.
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.

                                       17
<PAGE>

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 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 have incurred and 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:

                                       18
<PAGE>

     . 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.


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

     We intend to continue to expand our sales and marketing activities,
manufacturing activities and inventory to achieve our growth targets. If we do
not achieve these growth targets, we may need to raise 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. 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.


Acquisitions 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 and, as a result, our operating
results could suffer. For example, in February 2001, we acquired certain
technology and other assets from Finisar Corporation which we intend to
incorporate into our new ONLINE2500 product. If we cannot successfully
incorporate Finisar's technology into our ONLINE2500, we may not be able to make
this product available for sale in a timely fashion, or at all, and our business
would suffer. This acquisition and any future 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.

     As of March 31, 2001, our executive officers, directors and entities
affiliated with them beneficially owned approximately 26.4 % 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.

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<PAGE>

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 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.


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

     We have a substantial amount of outstanding indebtedness. 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.


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:

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     . 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. Our subordinated convertible notes were issued at a fixed interest rate
and therefore do not expose us to the risk of earnings or cash flow loss due to
changes in market interest rates.


Exchange rate sensitivity

     Currently, all of our sales and the majority of our expenses are
denominated in United States Dollars. Therefore, we have had no material
exposure to foreign currency rate fluctuation and have not engaged in any
foreign exchange hedging activities to date. With the expansion of our
international sales and service organization we do expect to conduct a more
significant number of transactions in foreign currencies in the future, so we
may engage in foreign exchange hedging activities at that time.


Part II. Other Information

Item 1. Legal Proceedings.

     In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. This suit is described
on page 13 of our Annual Report on Form 10-K for the fiscal year ended December
31, 2000.


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Item 2. Changes in Securities and Use of Proceeds.

   (a)  Changes in Securities

     On February 5, 2001, FMR Corp. net exercised five percent of a warrant
issued in February 2000 to purchase 223,000 shares of common stock at an
exercise price of $0.91 per share, and we issued 10,955 shares of ONI Systems
common stock to FMR. Our issuance of these shares upon the exercise of these
warrants was exempt from registration pursuant to Rule 506 promulgated under the
Securities Act of 1933, as amended, and/or Section 4(2) of the Securities Act.

     On February 28, 2001, we issued 488,624 shares of ONI Systems common stock
to Finisar Corporation as partial consideration for certain assets and
technology acquired by us. Our issuance of these shares was exempt from
registration pursuant to Rule 506 promulgated under the Securities Act and/or
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 March 31, 2001, we had used $111.8 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 $100.3
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.
Except for our commitments in connection with our acquisition of assets from
Finisar, 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.

     None

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

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

        None



   (b)  Reports on Form 8-K

     On February 14, 2001, we filed a report on Form 8-K dated February 12, 2001
to report under Item 5 that we had entered into an agreement with Finisar
Corporation to acquire certain technology and other assets associated with
Finisar's Opticity product line.



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                                   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: May 15, 2001                   ONI SYSTEMS CORP.

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

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