<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 June 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 ___              NO  X (1)
                                        -------

There were 126,002,921 shares of the Company's common stock, par value $0.0001,
outstanding on July 31, 2000

(1)  The Registrant has been subject to the filing requirements of the
     Securities and Exchange Act of 1934 since the effective date of its
     Registration Statement on Form S-1 (May 31, 2000) and has filed all
     required reports since such effective date.

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

                               ONI Systems Corp.

                                   FORM 10-Q

                     Quarterly Period Ended June 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 June 30, 2000 and December 31, 1999..................    3

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

           Condensed Consolidated Statements of Cash Flows
             for the six months ended June 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........................   10

Item 3.    Quantitative and Qualitative Disclosures about Market Risk...   24


                          PART II.  Other Information

Item 1.    Legal Proceedings............................................   25

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

Item 3.    Defaults Upon Senior Securities..............................   26

Item 4.    Submission of Matters to Vote of Security Holders............   26

Item 5.    Other Information............................................   28

Item 6.    Exhibits and Reports on Form 8-K.............................   28

Signatures..............................................................   29
</TABLE>

<PAGE>

Part I.  Financial Information
Item 1.  Condensed Consolidated Financial Statements

                               ONI Systems Corp.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (In thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                              June 30, 2000   December 31, 1999
                                              -------------   -----------------
<S>                                           <C>             <C>
Assets
Cash and cash equivalents                         $ 239,530            $ 80,023
Accounts receivable                                   9,175                 163
Inventory, net                                       38,459               9,649
Property and equipment, net                          29,725               5,315
Prepaid expenses and other assets                     8,780               5,792
                                                -----------    ----------------
     Total assets                                 $ 325,669            $100,942
                                                ===========    ================

Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities          $  20,783            $  8,681
Deferred revenue                                        357                   -
Capital lease obligations                               422                 534
                                                -----------    ----------------
     Total liabilities                               21,562               9,215
                                                -----------    ----------------

Capital Stock                                       437,516             147,350
Accumulated deficit                                (133,409)            (55,623)
                                                -----------    ----------------
     Total stockholders' equity                     304,107              91,727
                                                -----------    ----------------

                                                -----------    ----------------
     Total liabilities and stockholders' equity   $ 325,669            $100,942
                                                ===========    ================
</TABLE>

                                       3
<PAGE>

                               ONI Systems Corp.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                      Three months ended              Six months ended
                                                           June 30,                       June 30,
                                                 ---------------------------    ---------------------------
                                                     2000           1999            2000           1999
                                                 ------------   ------------    ------------    -----------
<S>                                              <C>            <C>             <C>             <C>
Revenue                                          $      9,484    $       400    $     13,117    $       965
  Cost of goods sold                                    6,869            299           9,719            758
                                                 ------------   ------------     -----------    -----------
Gross profit                                            2,615            101           3,398            207

Operating expenses:
  Research and development                             13,229          4,446          24,344          7,296
  Sales and marketing                                   5,926          1,013           8,928          1,439
  General and administrative                            5,005            530           7,561          1,041
  Amortization of deferred stock compensation          18,452          1,649          32,065          2,945
  Amortization of goodwill and intangibles                921              -           1,843              -
  Common stock warrant expense                              -              -           4,545              -
                                                 ------------   ------------     -----------    -----------
    Total operating expense                            43,533          7,638          79,286         12,721
                                                 ------------   ------------     -----------    -----------
    Operating loss                                    (40,918)        (7,537)        (75,888)       (12,514)
Other income, net                                       1,541            226           2,346            406
                                                 ------------   ------------     -----------    -----------
       Loss before income taxes                       (39,377)        (7,311)        (73,542)       (12,108)
Income taxes                                                -              -               2              1
                                                 ------------   ------------     -----------    -----------
       Net loss                                       (39,377)        (7,311)        (73,544)       (12,109)
Beneficial conversion of preferred stock                4,242              -           4,242              -
                                                 ------------   ------------     -----------    -----------
       Loss attributable to common stockholders      ($43,619)       ($7,311)       ($77,786)      ($12,109)
                                                 ============    ===========     ===========    ===========

Basic and diluted net loss per share                   ($0.40)        ($0.50)         ($0.73)        ($0.85)
                                                 ============   ============     ===========    ===========

Weighted average shares outstanding used in
computing basic and diluted net loss per share    109,558,435     14,557,100     106,359,436     14,309,564
                                                 ============   ============    ============    ===========
</TABLE>

                                       4
<PAGE>

                               ONI SYSTEMS CORP.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                       Six months ended
                                                                            June 30,
                                                                 ----------------------------
                                                                     2000            1999
                                                                 ------------    ------------
<S>                                                              <C>             <C>
Cash flows from operating activities:
   Net loss                                                        ($73,544)       ($12,109)
   Adjustments to reconcile net loss to net cash used in
   operating activities:
      Depreciation and amortization                                   4,718             292
      Amortization of deferred stock compensation                    32,065           2,945
      In-process research and development                                 -             170
      Loss on disposal of property and equipment                         33               -
      Value of leased facilities received in exchange for
      preferred stock                                                    73              24
      Amortization of debt financing costs                               33              22
      Common stock warrant expense                                    4,545               -
      Stock-based compensation for non-employees                        241               -
      Changes in operating assets and liabilities:
      Accounts receivable                                            (9,012)            721
      Inventory                                                     (28,810)              -
      Prepaid expenses and other assets                              (4,644)           (119)
      Accounts payable and accrued liabilities                       12,101             560
      Deferred revenue                                                  358              50
                                                                -----------      ----------
      Net cash used in operating activities                         (61,843)         (7,444)
                                                                -----------      ----------
Cash flows used in investing activities:
      Purchase of property and equipment                            (27,538)         (1,362)
      Acquisition of Object-Mart, net of cash acquired                    -          (1,744)
                                                                -----------      ----------
      Net cash used in investing activities                         (27,538)         (3,106)
                                                                -----------      ----------
Cash flows from financing activities:
     Payments under capital lease obligations                          (112)            (19)
     Proceeds from issuance of preferred stock, net of
     issuance costs                                                  21,961           7,264
     Proceeds from issuance of common stock, net of
     issuance costs                                                 227,039              64
                                                                -----------      ----------
     Net cash provided by financing activities                      248,888           7,309
                                                                -----------      ----------
     Net increase (decrease) in cash and cash equivalents           159,507          (3,241)
Cash and cash equivalents at beginning of period                     80,023          19,091
                                                                -----------      ----------
Cash and cash equivalents at end of period                         $239,530        $ 15,850
                                                                ===========      ==========
</TABLE>

                                       5

<PAGE>

                               ONI SYSTEMS CORP.
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2000

1.   Description of Business

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


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 June 30, 2000 and the operating results for the three and six months
ended June 30, 2000 and 1999, and cash flows for the six months ended June 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 Statement on Form S-1 filed with the Securities and
Exchange Commission on May 31, 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 June 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
126,143,466 shares of common stock outstanding as of June 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.

  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

                                       6
<PAGE>

Recognition, SOP 98-4, Deferral of Effective Date of SOP 97-2, 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, ONI has not been obligated to provide installation
services to its customers and 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 Finanical 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 share and per
share data):


<TABLE>
<CAPTION>
                                          Three months Ended                      Six months Ended
                                               June 30,                               June 30,
                                  ----------------------------------     -----------------------------------
                                         2000           1999                     2000           1999
                                  ----------------------------------     -----------------------------------
<S>                               <C>                   <C>              <C>                    <C>
Net loss attributable to
Common stockholders                    $     43,619      $     7,311         $     77,786        $    12,109
                                  ----------------------------------     -----------------------------------
Basic and diluted:
Weighted-average shares of stock
outstanding                             118,396,257       18,875,773          115,065,815         18,628,237

Less: weighted-average shares
subject to repurchase                     8,837,822        4,318,673            8,706,379          4,318,673
                                  ----------------------------------     -----------------------------------

Weighted-average shares used in
computing basic and diluted net
loss per common share                   109,558,435       14,557,100          106,359,436         14,309,564
                                  ----------------------------------     -----------------------------------

Basic and diluted net loss per
common share                                 ($0.40)          ($0.50)              ($0.73)            ($0.85)
                                  ----------------------------------     -----------------------------------
</TABLE>

                                       7
<PAGE>

6.   Inventory

  Inventory consists of:


                                               June 30,       December 31,
                                                 2000            1999
                                               --------        --------

Raw materials.......................            $12,031          $8,914
Work in progress....................             15,992               -
Finished goods......................              9,228             735
Consignment inventory...............              1,208               -
                                                -------        --------
                                                $38,459          $9,649
                                                =======        ========

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.
This non-cash charge was recorded as an increase in accumulated deficit with a
corresponding credit to additional paid-in capital.

  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. ONI has
recorded deferred stock compensation of $16.5 million for the three months ended
June 30, 2000, for the excess of the fair value of the common stock underlying
the options at the grant date over the exercise price of the options. 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 June 30, 2000 and 1999 was $18.5 million and $1.6 million,
respectively, and for the six months ended June 30, 2000 and 1999 was $32.1
million and $2.9 million, respectively.

8.   Recent Accounting Pronouncements

  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. Management believes that FIN 44 will not have a material
effect on ONI's financial position or results of operations.

  In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and amendment to FASB Statement No. 133. Statement No. 138 addresses
a limited number of issues causing implementation difficulties for companies
that are required to apply Statement No. 133. Statement 133, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the effective date of FASB Statement No. 133, and Statement 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.

9.   Segment Reporting

  ONI adopted SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, for the year ended December 31, 1999. 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 product. ONI expects to continue selling the ONLINE9000 in the
future, and also to develop other lines of products for sale. ONI's geographic
distribution of revenues for the three and six months ended June 30, 2000, is as
follows:

                                   Three months ended       Six months ended
                                     June 30, 2000           June 30, 2000
                                   ------------------       ----------------
North America...................          48%                     54%
Asia............................          38%                     28%
Europe..........................          14%                     18%

  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. ONI expects to incur substantial legal and other expenses in connection
with the Nortel Networks litigation. In the event of an adverse

                                       8
<PAGE>

ruling, ONI also could be required to pay damages to Nortel Networks. The
accompanying consolidated financial statements do not include any costs, 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



  The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities and Exchange Act of 1934, and is
subject to the safe harbor created by this section. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks" and "estimates", and
variations of these words and similar expressions, are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the forward-
looking statements. These risks and uncertainties include those described in
"Factors that May Affect Future Results" and elsewhere in this report. These
forward-looking statements reflect our view only as of the date of this report.
We cannot guarantee future results, levels of activity, performance or
achievements.

  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 Statement on Form S-1 declared effective by the
Securities and Exchange Commission on May 31, 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
incumbent and competitive local exchange carriers, inter-exchange carriers,
internet service providers, application service providers, cable operators, and
utilities and their affiliates. 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. We expect a significant portion of our
future revenue will come from sales of our products to North American and
international customers.

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 ratably over the
service period. Prior to June 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. 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;
 .    Conserve working capital by limiting the amount of inventory we must stock;
     and
 .    Provide flexibility in meeting market demand.

                                       10
<PAGE>


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


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 will result from being a publicly traded company and the increasing size of
our business. Our operating expenses are largely based on anticipated revenue
trends and a high percentage of our expenses are, and will continue to be, fixed
in the short term. 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
substantial 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 $9.5 million for the quarter ended June 30, 2000, an increase of
$9.1 million from the comparable quarter in 1999, and was $13.1 million for the
six months ended June 30, 2000, an increase of $12.2 million from the comparable
period in 1999.  All of the net revenue for the quarter and six months ended
June 30, 2000 was from sales of our ONLINE9000 product.  Net revenue recorded
for the quarter and six months ended June 30, 1999 was from government research
and development contracts, which were completed in 1999.


Cost of goods sold

Cost of goods sold was $6.9 million for the quarter ended June 30, 2000, an
increase of $6.6 million from the comparable quarter in 1999 and was
$9.7 million for the six months ended June 30, 2000, an increase of $9.0 million
over the comparable period in fiscal 1999. As a percentage of net revenue, cost
of goods sold for the quarter ended June 30, 2000 was 72%, compared to 75% for
the quarter ended June 30, 1999 and was 74% for the six months ended June 30,
2000, compared to 79% for the six months ended June 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.

                                       11
<PAGE>

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


Cost of goods sold as a percentage of revenue for the quarter ended June 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 $13.2 million for the quarter ended June
30, 2000, an increase of $8.8 million from the comparable quarter in 1999, and
was $24.3 million for the six months ended June 30, 2000, an increase of $17.0
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 expense will continue to
increase in absolute dollars in future periods.


Sales and marketing expense

Sales and marketing expense was $5.9 million for the quarter ended June 30,
2000, an increase of $4.9 million from the comparable quarter in 1999 and was
$8.9 million for the six months ended June 30, 2000, an increase of $7.5 million
from the comparable period in 1999. 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 $5.0 million for the quarter ended June
30, 2000, an increase of $4.5 million from the comparable quarter in 1999 and
was $7.6 million for the six months ended June 30, 2000, an increase of $6.5
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 $18.5 million for the quarter
ended June 30, 2000, an increase of $16.8 million from the comparable quarter in
1999 and was $32.1 million for the six months ended June 30, 2000, an increase
of $29.1 million from the comparable period in 1999.  From inception through
June 30, 2000, we have amortized a total of $46.9 million of deferred stock
compensation, leaving an unamortized balance of $89.3 million as of June 30,
2000.


Amortization of goodwill and intangibles

Amortization of goodwill and intangibles was $0.9 million for the quarter ended
June 30, 2000 and $1.8 million for the six months ended June 30, 2000 (nil 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 were expensed in the quarter ended March 31, 2000.

                                      12
<PAGE>

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


Other income, net

Other income, net was $1.5 million for the quarter ended June 30, 2000, an
increase of $1.3 million from the comparable quarter in 1999 and was $2.3
million for the six months ended June 30, 2000, an increase of $1.9 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 June 30, 2000, our principal source of liquidity was our cash and cash
equivalents of $239.5 million.

We used $61.8 million in cash in operating activities in the six months ended
June 30, 2000, an increase of $54.4 million from the $7.4 million used in the
six months ended June 30, 1999. The increase was primarily due to the increase
in our net loss of $61.4 million, an increase in inventory of $28.8 million and
other working capital of $2.3 million, offset by increased amortization of
deferred stock compensation and common stock warrants of $33.7 million, and
depreciation and amortization of $4.4 million.

We used $27.5 million in cash in investing activities in the six months ended
June 30, 2000, an increase of $24.4 million from the $3.1 million used in the
six months ended June 30, 1999. The increase was primarily related to the
increase in purchases of property and equipment.

We generated $248.9 million in cash from financing activities in the six months
ended June 30, 2000, an increase of $241.6 million from the $7.3 million
generated in the six months ended June 30, 1999, primarily from the net proceeds
from our initial public offering and the private sales of convertible preferred
stock.

At June 30, 2000, cash and cash equivalents totaled $239.5 million, an increase
of $159.5 million from the balance of $80.0 million at December 31, 1999. The
increase was due to the receipt of $226.1 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
$61.8 million of cash used in operating activities and $27.5 million of cash
used in investing activities.

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.

                                       13
<PAGE>

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


  Through June 30, 2000, we incurred cumulative losses of $133.4 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
introduced 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.

The ONLINE9000 and the ONLINE7000 are our only 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 ONLINE9000 and ONLINE7000 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.


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. 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

                                       14
<PAGE>

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

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 June 30,
2000, we had seven 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 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

                                       15
<PAGE>

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

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 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 several 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.

                                       16
<PAGE>

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

  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 several key components, including optical filters, optical
amplifiers, optical 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. 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 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.

                                       17
<PAGE>

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

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 June 30, 2000, we had 424 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

                                       18
<PAGE>

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

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. 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 and their 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. The ONLINE9000, ONLINE7000, OPTX, OLMP 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.

                                      19
<PAGE>

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

  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 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.

                                       20
<PAGE>

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

  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.

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;

                                      21
<PAGE>

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

  . 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 June 30, 2000, our executive officers, directors and entities affiliated
with them beneficially owned approximately 35.25% 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 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 may fluctuate significantly 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.

  The stock markets, particularly the Nasdaq National Market on which our common
stock is listed, have experienced substantial price and volume fluctuations.
These 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.  Future sales of a
substantial number of shares of our common stock could cause our stock price to

                                       22
<PAGE>

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

fall. In addition, the future sale of shares by existing stockholders could
impair our ability to raise capital through the sale of additional stock.

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.

                                       23

<PAGE>

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.

                                       24
<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 Canada 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
California 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 Network 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.

     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. We believe these claims will not have a material adverse effect on
our business, financial condition or results of operation.

Item 2.  Changes in Securities and Use of Proceeds.

(a)  Recent Sales of Unregistered Securities.

On May 9, 2000, we sold 1,333,333 shares of Series H preferred stock to Sun
Microsystems, Inc. at a price per share of $15.00 for aggregate proceeds of
$20.0 million.  These shares of Series H preferred stock automatically converted
into 969,697 shares of common stock upon the closing of our initial public
offering on June 6, 2000. These shares were issued by us in reliance upon Rule
506 promulgated under the Securities Act of 1933, as amended.

                                       25
<PAGE>

Concurrent with the closing of our initial public offering, we sold an aggregate
of 560,000  shares of common stock to Internet Initiative Japan Inc. and CCT
Telecom Holdings Limited at a price per share of $25.00 for aggregate proceeds
of $14.0 million.  These shares of common stock were issued by us in reliance
upon Regulation S promulgated under the Securities Act.

From April 1, 2000 to May 31, 2000, we issued 1,529,388 unregistered shares
of common stock pursuant to the exercise of stock options at exercise prices
ranging from $0.0049 to $10.00 per share, a weighted-average exercise price of
$0.1246 per share. All of these stock options were granted under our 1997 Stock
Option Plan, 1998 Equity Incentive Plan or 1999 Equity Incentive Plan prior to
our initial public offering. Our issuance of these shares upon the exercise of
these options was exempt from registration pursuant to Section 4(2) of, or Rule
701 promulgated under, the Securities Act.

(b)  Use of Proceeds from Registered Securities.

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, pursuant to which 9,200,000 shares of our common stock
were offered and sold for our account at a price of $25.00 per share, generating
gross offering proceeds of $230 million. The managing underwriters were Goldman,
Sachs & Co., Banc of America Securities LLC, Chase Securities Inc. and
FleetBoston Robertson Stephens Inc. Our initial public offering closed on June
6, 2000. Concurrently with the completion of the offering, we 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 $25.00 per share.
After deducting approximately $16 million in underwriting discounts and
approximately $2 million in other related expenses, the net proceeds of the IPO
and private placements offering were approximately $226.1 million.

We have not yet used any funds from the initial public offering.  We expect to
use the net proceeds from the initial public offering for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business. We
currently have no commitments or agreements with respect to any acquisitions or
investments. We have not determined the amounts we plan to spend on any of the
uses described above or the timing of these expenditures. Pending our use of the
net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.

Item 3.  Defaults Upon Senior Securities.

None.

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

(a)      On April 25, 2000, we reincorporated in Delaware by merging our
predecessor, Optical Networks, Incorporated, a California Corporation, into its
wholly-owned subsidiary ONI Systems Corp., a Delaware corporation. Pursuant to a
written consent of the shareholders of Optical Networks dated April 13, 2000,
the following matters were approved, all of which were reflected in our
Registration Statement or documents filed as exhibits thereto. In addition, each
of these matters was approved by Optical Networks, Incorporated, as our sole
stockholder prior to the reincorporation, pursuant to a written consent dated
April 24, 2000. The number of shares for which consents were received approving,
the number of shares for which consents were not received or abstaining, and the
number of shares for which consents were received but voting against the
proposal, for each of the approved matters is indicated.

         1.  REINCORPORATION OF THE COMPANY IN DELAWARE. Changing the state of
incorporation of the Company from California to Delaware (the "Reincorporation")
by means of a merger of the Company, which is currently organized under the
laws of California, with and into ONI Systems Corp., a wholly-owned subsidiary
of the company organized under the laws of Delaware ("ONI Delaware"), including
the adoption of the Agreement and Plan of Merger, the First Amended and Restated
Certificate of Incorporation, and the Restated Bylaws of ONI Delaware. For this
proposal we sought approval of a majority of the outstanding shares of common
stock entitled to vote, voting as a separate class, and a majority of the
outstanding shares of preferred stock entitled to vote, voting together as a
separate class.

                                      Common Stock          Preferred Stock
                                      ------------          ---------------
        For.........................   26,213,679             71,365,696
        Against.....................      160,656                     --
        Abstained or Not Voted......      517,129                     --

                                       26

<PAGE>

     2.  INDEMNITY AGREEMENTS. ONI Delaware entering into Indemnity Agreements
with certain of its directors and officers, in substantially the form of
Indemnity Agreement attached as an annex to the Information Statement. For this
proposal we sought the approval of a majority of the outstanding shares of
common stock and preferred stock entitled to vote and not held by members of the
board or their affiliates, voting together as a single class.

                                       Common Stock and Preferred Stock on As-
                                           Converted-To-Common Stock Basis
                                       ---------------------------------------
      For............................               51,087,718
      Against........................                  498,996
      Abstained or Not Voted.........               46,670,946

     3.  ADOPTION OF 2000 EQUITY INCENTIVE PLAN. Adoption by ONI Delaware of the
2000 Equity Incentive Plan and the authorization and reservation for issuance
under the plan of 7,000,000 shares of Common Stock, plus an automatic increase
in the number of shares authorized and reserved for issuance under the plan, on
January 1, 2001 and each anniversary thereafter, of 5% of the shares outstanding
as of the immediately preceding December 31. For this proposal we sought
approval of a majority of the outstanding shares of common stock entitled to
vote, voting as a separate class, and a majority of the outstanding shares of
preferred stock entitled to vote, voting together as a separate class.

                                         Common Stock      Preferred Stock
                                         ------------      ---------------
      For............................     25,801,336         66,367,548
      Against........................         72,982                 --
      Abstained or Not Voted.........      1,017,646          4,998,148

     4.  ADOPTION OF 2000 EMPLOYEE STOCK PURCHASE PLAN. Adoption by ONI Delaware
of the 2000 Employee Stock Purchase Plan and the authorization and reservation
for issuance under the plan of 1,000,000 shares of Common Stock, plus an
automatic increase in the number of shares authorized and reserved for issuance
under the plan, on January 1, 2001 and each anniversary thereafter, of 1% of the
shares outstanding as of the immediately preceding December 31. For this
proposal we sought approval of a majority of the outstanding shares of common
stock entitled to vote, voting as a separate class, and majority of the
outstanding shares of preferred stock entitled to vote, voting together as a
separate class.

                                         Common Stock      Preferred Stock
                                         ------------      ---------------
      For............................     25,989,007         66,367,548
      Against........................         26,252                 --
      Abstained or Not Voted.........        862,621          4,998,148

     5.  ADOPTION OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION.
Adoption of the Second Amended and Restated Certificate of Incorporation of ONI
Delaware, which ONI Delaware will file with the Delaware Secretary of State
following the Reincorporation and the proposed initial public offering of ONI
Delaware common stock. For this proposal we sought approval of a majority of the
outstanding shares of common stock entitled to vote, voting as a separate class,
and a majority of the outstanding shares of preferred stock entitled to vote,
voting together as a separate class.

                                         Common Stock      Preferred Stock
                                         ------------      ---------------
      For............................     25,975,195         71,365,696
      Against........................        377,916                 --
      Abstained or Not Voted.........        537,353                 --

(b)  Pursuant to a written consent of our stockholders dated April 28, 2000, our
stockholders approved an amendment of our Certificate of Incorporation to create
our Series H preferred Stock. This amendment was reflected in the Registration
Statement for our initial public offering or documents filed as exhibits
thereto. Holders of 18,781,350 shares of ONI common stock and 63,042,608 shares
of ONI preferred stock consented to this action.

                                       27

<PAGE>

(c)  Pursuant to a written consent of our stockholders dated May 8, 2000, our
stockholders approved the adoption of Davis 2000 Equity Incentive Plan. This was
reflected in the Registration Statement for our initial public offering or
documents filed as exhibits thereto. Holders of 17,876,198 shares of ONI common
stock and 50,489,794 shares of ONI preferred stock consented to this action.


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:
     10.07  Davis Stock Option Plan and Agreement (incorporated herein by
            reference to Exhibit 10.07 of the Company's Registration Statement
            on Form S-8 filed with the Securities and Exchange Commission on
            June 1, 2000)

      27.1  Financial Data Schedule

(b)   Reports on Form 8-K
      The Company did not file any reports on Form 8-K during the quarter ended
      June 30, 2000.

                                       28

<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: August 11, 2000                   ONI SYSTEMS CORP.


                                        By   /s/ Chris A. Davis
                                           ---------------------------
                                             Chris A. Davis
                                             Executive Vice President, Chief
                                             Financial and Administrative
                                             Officer

                                       29