<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, 2001

                                       OR

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

                        Commission File Number 000-30633

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

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

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

 5965 Silver Creek Valley Road San Jose, California                 95138
      (Address of principal executive offices)                    (zip code)

       Registrant's telephone number, including area code: (408) 965-2600

             166 Baypointe Parkway, San Jose, California 95134-1621
                 (Former Address, if changed since last report)

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

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

There were 137,950,723 shares of the Company's common stock, par value $0.0001,
outstanding on June 30, 2001.

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

<PAGE>

                                ONI SYSTEMS CORP.

                                    FORM 10-Q

                      Quarterly Period Ended June 30, 2001

                                Table of Contents

<TABLE>
<CAPTION>
                                     PART I. Financial Information

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

        Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 ...........    3

        Condensed Consolidated Statements of Operations for the three and six months ended June 30,
        2001 and 2000 .............................................................................    4

        Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and
        2000 ......................................................................................    5

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .....    9

Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................   22


                                       PART II. Other Information

Item 1. Legal Proceedings .........................................................................   22

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

Item 3. Defaults Upon Senior Securities ...........................................................   23

Item 4. Submission of Matters to Vote of Security Holders .........................................   23

Item 5. Other Information .........................................................................   23

Item 6. Exhibits and Reports on Form 8-K ..........................................................   23

Signatures ........................................................................................   24
</TABLE>


                                       2

<PAGE>

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

                                ONI SYSTEMS CORP.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                 June 30, 2001   December 31, 2000
                                                                 -------------   -----------------
<S>                                                              <C>             <C>

                             ASSETS
                             ------

Cash and cash equivalents .....................................   $   491,018        $   852,360
Short term investments ........................................        81,469               --
Accounts receivable ...........................................        65,739             24,309
Inventory, net ................................................        86,483             70,626
Prepaid expenses and other current assets .....................        13,483              7,950
                                                                  -----------        -----------
   Total current assets .......................................       738,192            955,245
Property and equipment, net ...................................        87,210             41,581
Other assets ..................................................        19,080             16,829
Long term investments .........................................       166,895               --
Goodwill and intangibles ......................................        20,751              1,813
                                                                  -----------        -----------
   Total assets ...............................................   $ 1,032,128        $ 1,015,468
                                                                  ===========        ===========

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

Accounts payable ..............................................   $    23,901        $    17,518
Accrued liabilities ...........................................        24,130             18,492
Deferred revenue ..............................................         2,005              1,466
Current portion of capital lease obligations ..................           427                161
                                                                  -----------        -----------
   Total current liabilities ..................................        50,463             37,637
Capital lease obligations, less current portion ...............           119                187
Subordinated convertible notes ................................       300,000            300,000
                                                                  -----------        -----------
   Total liabilities ..........................................       350,582            337,824
                                                                  -----------        -----------
Capital stock .................................................       923,711            870,154
Accumulated deficit ...........................................      (242,165)          (192,510)
                                                                  -----------        -----------
   Total stockholders' equity .................................       681,546            677,644
                                                                  -----------        -----------
   Total liabilities and stockholders' equity .................   $ 1,032,128        $ 1,015,468
                                                                  ===========        ===========
</TABLE>


                                       3

<PAGE>

                                ONI SYSTEMS CORP.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                              Three months ended            Six months ended
                                                                   June 30,                      June 30,
                                                            -----------------------     -----------------------
                                                              2001          2000           2001           2000
                                                            ---------     ---------     ---------     ---------
<S>                                                         <C>           <C>           <C>           <C>

Revenue ................................................    $  68,229     $   9,484     $ 113,331     $  13,117
    Cost of goods sold, excluding deferred stock
     compensation amortization amounts .................       41,709         6,869        69,465         9,719
                                                            ---------     ---------     ---------     ---------
    Gross profit .......................................       26,520         2,615        43,866         3,398

Operating expenses:
    Research and development, excluding deferred stock
     compensation amortization amounts .................       18,801        13,229        36,853        24,344
    Sales and marketing, excluding deferred stock
     compensation amortization amounts .................       13,115         5,926        22,983         8,928
    General and administrative, excluding deferred stock
     compensation amortization amounts .................        6,022         5,005        12,280         7,561
    Amortization of deferred stock compensation* .......        9,222        18,452        21,494        32,065
    Amortization of goodwill and intangibles ...........        2,676           921         4,001         1,843
    Common stock warrant expense .......................         --            --            --           4,545
    In-process research and development ................         --            --           8,240          --
                                                            ---------     ---------     ---------     ---------
Total operating expenses ...............................       49,836        43,533       105,851        79,286
                                                            ---------     ---------     ---------     ---------
        Operating loss .................................      (23,316)      (40,918)      (61,985)      (75,888)
Other income, net ......................................        4,752         1,541        12,331         2,346
                                                            ---------     ---------     ---------     ---------
        Loss before income taxes .......................      (18,564)      (39,377)      (49,654)      (73,542)
Income taxes ...........................................         --            --               1             2
                                                            ---------     ---------     ---------     ---------
        Net loss .......................................      (18,564)      (39,377)      (49,655)      (73,544)
Beneficial conversion of preferred stock ...............         --           4,242          --           4,242
                                                            ---------     ---------     ---------     ---------
        Net loss attributable to common stockholders ...    $ (18,564)    $ (43,619)    $ (49,655)    $ (77,786)
                                                            =========     =========     =========     =========
Basic and diluted net loss per share ...................    $   (0.14)    $   (0.40)    $   (0.38)    $   (0.73)
                                                            =========     =========     =========     =========
Weighted average shares outstanding used in
 computing basic and diluted net loss per share ........      132,612       109,558       131,299       106,359
                                                            =========     =========     =========     =========
  * Amortization of deferred stock compensation:
    Cost of goods sold .................................    $   1,348     $   2,153     $   3,242     $   3,781
    Research and development ...........................        3,881         9,634         9,199        16,713
    Sales and marketing ................................        2,805         3,435         6,080         5,899
    General and administrative .........................        1,188         3,500         2,973         5,672
                                                            ---------     ---------     ---------     ---------
                                                            $   9,222     $  18,452     $  21,494     $  32,065
                                                            =========     =========     =========     =========
</TABLE>

                                       4

<PAGE>

                                ONI SYSTEMS CORP.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                        Six months ended
                                                                                            June 30,
                                                                                    -----------------------
                                                                                       2001        2000
                                                                                    ---------     ---------
<S>                                                                                 <C>           <C>
Cash flows from operating activities:
   Net loss ....................................................................    $ (49,655)    $ (73,544)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization .............................................       15,396         4,718
     Amortization of deferred stock compensation ...............................       21,494        32,065
     In-process research and development .......................................        8,240          --
     Common stock warrant expense ..............................................         --           4,545
     Other non-cash charges ....................................................         --             380
     Changes in operating assets and liabilities:
        Accounts receivable ....................................................      (41,430)       (9,012)
        Inventory ..............................................................      (15,857)      (28,810)
        Prepaid expenses and other assets ......................................       (7,784)       (4,644)
        Accounts payable and accrued liabilities ...............................       12,021        12,101
        Deferred revenue .......................................................          539           358
                                                                                    ---------     ---------
   Net cash used in operating activities .......................................      (57,036)      (61,843)
                                                                                    ---------     ---------
Cash flows used in investing activities:
   Purchase of property and equipment ..........................................      (56,464)      (27,538)
   Purchase of Finisar technology ..............................................      (10,000)         --
   Investment in marketable securities .........................................     (248,364)         --
                                                                                    ---------     ---------
   Net cash used in investing activities .......................................     (314,828)      (27,538)
                                                                                    ---------     ---------
Cash flows from financing activities:
   Payments under capital lease obligations ....................................         (232)         (112)
   Proceeds from issuance of preferred stock, net of issuance costs ............         --          21,961
   Proceeds from repayment of shareholder loans ................................        2,419          --
Proceeds from issuance of common stock, net of issuance costs ..................        8,318       227,039
                                                                                    ---------     ---------
   Net cash provided by financing activities ...................................       10,505       248,888

Effect of exchange rate changes on cash and cash equivalents ...................           17          --
                                                                                    ---------     ---------
   Net decrease in cash and cash equivalents ...................................     (361,342)     (159,507)
Cash and cash equivalents at beginning of period ...............................      852,360        80,023
                                                                                    ---------     ---------
Cash and cash equivalents at end of period .....................................    $ 491,018     $ 239,530
                                                                                    =========     =========
Supplemental disclosures of cash flow information:
   Noncash investing and financing activities
   Interest paid during period .................................................    $   7,013     $      18
                                                                                    =========     =========
   Issuance of common stock upon exercise of options in exchange
    for notes receivable .......................................................    $    --       $   4,652
                                                                                    =========     =========
   Issuance of common stock for future services ................................    $    --       $  83,229
                                                                                    =========     =========
   Issuance of common stock in connection with Finisar technology acquisition...    $  21,340     $    --
                                                                                    =========     =========
</TABLE>


                                       5

<PAGE>
                                ONI SYSTEMS CORP.

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

1. Description of Business

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

2. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and, therefore, do not include all the information and
footnotes necessary for a complete presentation of ONI's results of operations,
financial position, and cash flows in conformity with accounting principles
generally accepted in the United States. The unaudited financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position at June 30, 2001 and the operating results for the three and
six months ended June 30, 2001 and 2000 and cash flows for the six months ended
June 30, 2001 and 2000. These financial statements and notes should be read in
conjunction with ONI's audited financial statements and related notes for the
year ended December 31, 2000, included in ONI's Annual Report on Form 10-K filed
April 2, 2001 with the Securities and Exchange Commission. The condensed
consolidated balance sheet at December 31, 2000 has been derived from audited
financial statements as of that date.

     The results of operations for the three and six months ended June 30, 2001
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2001.

3. Technology Purchase

     In February 2001, ONI acquired technology and other assets associated with
Finisar Corporation's Opticity(TM) product line for up to $51,340, comprised of
$30,000 in cash and $21,340 of ONI's common stock. At closing, ONI paid $5,000
in cash and issued 488,624 shares of common stock to Finisar. In June 2000, we
paid an additional $5,000 upon the completion of a first mutually agreed
deliverable and capitalized this payment as additional goodwill. Subsequent to
June 30, 2001, ONI paid an additional $4,250 upon the completion of a second
mutually agreed deliverable and capitalized this amount as additional goodwill.
The remaining cash payments of up to $15,000 are contingent upon the timely
delivery and acceptance of mutually agreed deliverables and will be capitalized
as goodwill at the time of payment and amortized over the remaining useful life.


                                       6

<PAGE>

                               ONI SYSTEMS CORP.

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

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
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Arrangements". Accordingly, ONI recognizes revenue from licenses of
software products provided that a purchase order has been received, the software
and related documentation have been shipped, collection of the resulting
receivable is deemed probable, and the fee is fixed or determinable.

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

     Deferred revenue represents amounts billed in excess of revenue recognized.

5. Net Loss Per Share

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

<TABLE>
<CAPTION>
                                                         Three months ended           Six months ended
                                                               June 30,                   June 30,
                                                       -----------------------     -----------------------
                                                          2001          2000         2001          2000
                                                       ---------     ---------     ---------     ---------
<S>                                                    <C>           <C>           <C>           <C>
Net loss attributable to common
  stockholders ......................................  $  18,564     $  43,619     $  49,655     $  77,786
                                                       =========     =========     =========     =========
Basic and diluted:
Weighted-average shares of common stock outstanding..    137,355       118,396       136,042       115,066
Less: weighted-average shares subject to repurchase..      4,743         8,838         4,743         8,707
                                                       ---------     ---------     ---------     ---------
Weighted-average shares used in computing basic and
  diluted net loss per common share .................    132,612       109,558       131,299       106,359
                                                       =========     =========     =========     =========
Basic and diluted net loss per common share .........  $   (0.14)    $   (0.40)    $   (0.38)    $   (0.73)
                                                       =========     =========     =========     =========
</TABLE>

6. Inventory

     Inventory consists of:

<TABLE>
<CAPTION>
                                                   June 30, 2001    December 31, 2000
                                                   -------------    -----------------
<S>                                                   <C>                <C>
Raw materials ............................            $22,570            $27,821
Work in progress .........................             26,912             15,414
Finished goods ...........................             27,549             16,763
Consignment inventory ....................              9,452             10,628
                                                      -------            -------
                                                      $86,483            $70,626
                                                      =======            =======
</TABLE>


                                       7

<PAGE>
                               ONI SYSTEMS CORP.

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

7. Recent Accounting Pronouncements

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

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001, and for all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 eliminates the use of the pooling-of-interest method of accounting for
business combinations. SFAS No. 142 is effective for all fiscal years beginning
after December 15, 2001, and changes the accounting for goodwill from an
amortization method approach to an impairment-only approach. The adoption of
SFAS No. 141 is not expected to have a material impact on ONI's financial
position or results of operations. ONI is currently reviewing and assessing the
impact of SFAS No. 142 on its financial position and results of operations.

8. Segment Reporting

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

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

     ONI's revenue is generally derived from sales of its ONLINE(TM) and
ONWAVE(TM) products. ONI expects to continue selling these products in the
future, and also to develop other lines of products for sale. ONI's geographic
distribution of revenues for the three and six months ended June 30, 2001 and
2000, is as follows:

                                      Three months ended       Six months ended
                                           June 30,                June 30,
                                       ----------------        ----------------
                                       2001        2000        2001        2000
                                       ----        ----        ----        ----
North America ..................         80%         82%         83%         70%
Asia ...........................         13%         10%          8%         --
Europe .........................          7%          8%          9%         30%

9. Contingencies

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

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

                                       8

<PAGE>

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

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

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

     In addition, the following information should be read in conjunction with
the financial statements and related notes included in Item 1 of this Quarterly
Report, our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 2, 2001 and "Factors that May Affect Future Results" in this
document.

Overview

     We develop, market and sell optical communications networking equipment
specifically designed to address the bandwidth and service limitations of
metropolitan and regional networks. From our inception in October 1997 through
November 1999, our operating activities consisted primarily of research and
development. We also formed and expanded our administrative, marketing, sales,
manufacturing and customer service and support organizations and commenced sales
and marketing activities. In January 2000, we released our first product, the
ONLINE9000, which is designed for metropolitan 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. In
the fourth quarter of 2000, we announced the ONLINE11000, which is designed for
regional markets, and, we released the ONWAVE(TM) multiplexer product family
that eliminates the need for traditional multiplexing equipment in the network
by combining lower speed signals and multiple data formats into a single
wavelength. In June 2001, we released the ONLINE2500, which is designed to
enable service providers to deliver high bandwidth services to their customers'
sites at the optical edge of the metro network.

Results of Operations

     Beginning in 2000, our revenue generally is derived from the sale of our
ONLINE(TM) and ONWAVE(TM) products. We expect to experience seasonality in the
sales of our products. Historically, the communications equipment market has
experienced increased sales in the first and fourth quarter of a calendar year
due in part to purchasers' budgetary cycles. We further expect that sales may
decline during summer months, particularly in European markets. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results.

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

Revenue

     Revenue was $68.2 million for the quarter ended June 30, 2001, an increase
of $58.7 million from the comparable quarter in 2000 and was $113.3 million for
the six months ended June 30, 2001, an increase of $100.2 million from the same
period in 2000. The increase in revenue was primarily due to the increase in
the number of revenue generating customers from 7 in the quarter ended June 30,
2000 to 22 in the quarter ended June 30, 2001 and the increase in the volume
of purchases from repeat customers.

                                       9

<PAGE>

Cost of goods sold

     Cost of goods sold, excluding stock-based compensation, was $41.7 million
for the quarter ended June 30, 2001, an increase of $34.8 million from the
comparable quarter in 2000 and was $69.5 million for the six months ended June
30, 2001 an increase of $59.7 million from the same period in 2000. The increase
in cost of goods sold is primarily related to the increase in revenue, as well
as the growth in our customer service and support organization. As a percentage
of revenue, cost of goods sold for the three and six months ended June 30, 2001
was 61.1% and 61.3% respectively, compared to 72.4% and 74.1% for the three and
six ended June 30, 2000. The reduction in cost of goods sold as a percentage of
revenue is primarily attributed to production efficiencies associated with
larger sales volumes and reductions in component costs.

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

Research and development expense

     Research and development expense, excluding stock-based compensation, was
$18.8 million for the quarter June 30, 2001, an increase of $5.6 million from
the comparable quarter in 2000, and was $36.9 million for the six months ended
June 30, 2001 an increase of $12.5 million from the same period in 2000. The
increase in research and development expense is primarily due to the significant
expansion of our research and development department, particularly attributable
to the increase of engineering staff supporting new product development. At June
30, 2001, we had approximately 278 research and development employees, an
increase of 95 from 183 at June 30, 2000. Research and development expense as a
percentage of revenue was 28% and 33% for the three and six months ended June
30, 2001, respectively, a decrease from 139% and 186% from the comparable
periods in 2000, respectively. We expect research and development expense as a
percentage of revenue to continue to decline in future periods. Research and
development is essential to our future success and we expect that research and
development expenses will continue to increase in absolute dollars in future
periods.

Sales and marketing expense

     Sales and marketing expense, excluding stock-based compensation, was $13.1
million for the quarter ended June 30, 2001, an increase of $7.2 million from
the comparable quarter in 2000, and was $23.0 million for the six months ended
June 30, 2001 an increase of $14.1 million from the same period in 2000. The
increase in sales and marketing expenses primarily relates to the expansion of
our sales force and customer service and support department, both domestically
and internationally. At June 30, 2001, we had approximately 236 sales, marketing
and service employees, an increase of 158 from 78 at June 30, 2000. Sales and
marketing expense as a percentage of revenue was 19% and 20% for the three and
six months ended June 30, 2001, respectively, a decrease from 62% and 68% from
the comparable periods in 2000, respectively. We expect sales and marketing
expense as a percentage of revenue to continue to decline in future periods. We
expect to continue to expand our domestic and international sales force and
marketing activity, and as a result, expect that the dollar amounts of sales and
marketing expenses will continue to increase in absolute dollars in future
periods.

General and administrative expense

     General and administrative expense, excluding stock-based compensation, was
$6.0 million for the quarter ended June 30, 2001, an increase of $1.0 million
from the comparable quarter in 2000, and was $12.3 for the six months ended June
30, 2001, an increase of $4.7 million from the same period in 2000. The increase
in general and administrative expense primarily reflects the expansion in
infrastructure to support our planned growth. At June 30, 2001, we had
approximately 100 general and administrative employees, an increase of 25 from
75 at June 30, 2000. General and administrative expense as a percentage of
revenue was 9% and 11% for the three and six months ended June 30, 2001,
respectively, a decrease from 53% and 58% from the comparable periods in 2000,
respectively. We expect general and administrative expense as a percentage of
revenue to continue to decline in future periods. We expect that the absolute
dollar amount of general and administrative expenses will continue to increase
in future periods as a result of the expansion of business activity.


                                       10

<PAGE>

Amortization of deferred stock compensation

     Amortization of deferred stock compensation was $9.2 million for the
quarter ended June 30, 2001, a decrease of $9.2 million from the comparable
quarter in 2000, and was $21.5 million for the six months ended June 30, 2001 a
decrease of $10.6 million from the same period in 2000. Deferred stock
compensation is being amortized on an accelerated basis over the vesting period,
generally four years, consistent with the method described in FASB
Interpretation No. 28. Accordingly, we expect the amortization of deferred stock
compensation to continue to decline in future quarters. From inception through
June 30, 2001, we have amortized a total of $102.7 million of deferred stock
compensation, leaving an unamortized balance of $34.5 million as of June 30,
2001.

Amortization of goodwill and intangibles

     Amortization of goodwill and intangibles was $2.7 million for the quarter
ended June 30, 2001, an increase of $1.8 million from the comparable quarter in
2000, and was $4.0 million for the six months ended June 30, 2001 an increase of
$2.2 million from the same period in 2000. We recorded goodwill of $0.8 million
and intangibles of $17.3 million in relation to the acquisition of certain
assets and technology from Finisar Corporation on February 28, 2001. In
accordance with the terms of the acquisition agreement we made an additional
cash payment of $5 million in the quarter ended June 30, 2001 upon the delivery
and acceptance of a first mutually agreed deliverable. This payment was
capitalized as additional goodwill. Subsequent to June 30, 2001, we paid an
additional $4.3 million upon the completion of a second mutually agreed
deliverable. The remaining cash payments of up to $15 million will be contingent
upon the timely delivery and acceptance of certain mutually agreed deliverables.
These payments will be capitalized as additional goodwill at the time of
payment. Goodwill and intangibles were initially being amortized over a period
not exceeding three years. In accordance with FASB Statement No. 142 goodwill
will no longer be amortized subsequent to December 31, 2001. We will evaluate
the carrying value of the goodwill on an annual basis for impairment. To the
extent that the carrying value of goodwill exceeds the fair value we will adjust
the carrying value to fair value and record the impairment in the period.

In-process research and development

     In association with the purchase of certain technology from Finisar, we
recorded $8.2 million of in-process research and development in the quarter
ended March 31, 2001. The amount allocated to purchased in-process research and
development was determined through established valuation techniques in the
high-technology communications industry, and was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed.

Common stock warrant expense

     In the first quarter of 2000, we recorded an aggregate common stock warrant
expense of $4.5 million in connection with two separate transactions in which
warrants were issued to purchase shares of common stock. The value of the
warrants was expensed in the quarter ended June 30, 2000.

Other income, net

     Other income, net was $4.8 million for the quarter ended June 30, 2001, an
increase of $3.2 million from the comparable quarter in 2000, and was $12.3
million for the six months ended June 30, 2001 an increase of $10.0 million from
the same period in 2000. The increase was primarily due to the interest earned
on the net cash proceeds received in connection with the completion of our
initial public equity offering in June 2000 and our follow-on public equity and
debt offerings in October 2000, partially offset by interest expense incurred on
our 5% subordinated convertible notes. As of June 30, 2001, our cash is invested
in money market funds and short to intermediate term marketable securities that
currently earn an average rate of return of approximately 4.3%. Further interest
rate reductions by the Federal Reserve would negatively impact the level of
interest income earned on these investments.

Liquidity and Capital Resources

     At June 30, 2001, our principal source of liquidity was our cash, cash
equivalents and short-term investments of $572.5 million.

     We used $57.0 million in cash in operating activities in the six months
ended June 30, 2001, a decrease of $4.8 million from the $61.8 million used in
the six months ended June 30, 2000. Cash used in operating activities for the
six months ended June 30, 2001 was primarily due to the net loss of $49.7
million and the increase in operating assets and liabilities of $52.5 million
offset by depreciation and amortization of $15.4 million, amortization of
deferred stock compensation of $21.5 million


                                       11

<PAGE>

and in-process research and development of $8.2 million. Cash used in operating
activities for the six months ended June 30, 2000 was primarily due to the net
loss of $73.5 million and the increase in operating assets and liabilities of
$30.0 million offset by depreciation and amortization of $4.7 million,
amortization of deferred stock compensation of $32.1 million and common stock
warrant expense of 4.5 million.

     As part of our cash management strategy we invested some of our cash and
cash equivalents in short to intermediate term marketable securities. As a
result we used $314.8 million of cash in investing activities in the six months
ended June 30, 2001, an increase of $287.3 million from the $27.5 million used
in the six months ended June 30, 2000. The increase was primarily related to the
investment of $248.4 million in marketable securities, an increase in purchases
of property and equipment of $28.9 million and the $10 million of payments to
Finisar Corporation for the purchase of technology.

     We generated $10.5 million in cash from financing activities in the six
months ended June 30, 2001, a decrease of $238.4 million from the $248.9 million
generated in the six months ended June 30, 2000. The decrease was primarily
related to the proceeds of $22.0 million from the issuance of preferred stock in
the six months ended June 30, 2000 and the proceeds of $212.1 million from our
initial public offering in June 2000. The $10.5 million in cash from financing
activities in the six months ended June 30, 2001 was related to proceeds from
the exercise of stock options and repayment of shareholder loans.

     At June 30, 2001, cash and cash equivalents totaled $491.0 million, a
decrease of $361.3 million from the balance of $852.4 million at December 31,
2000. The decrease was primarily due to our cash management strategy, under
which we invested $248.4 million of our cash and cash equivalents in marketable
securities. In addition we used $57.0 million in operating activities, purchased
property and equipment of $56.5 million, paid $10 million to Finisar, offset by
cash provided by financing activities of $10.5 million.

     In February 2001, we acquired technology and other assets associated with
Finisar Corporation's Opticity product line for approximately $51.3 million,
comprised of $30 million in cash and $21.3 million of our common stock. At
closing, we paid $5 million in cash and issued 488,624 shares of common stock to
Finisar. In accordance with the terms of the acquisition agreement we made an
additional cash payment of $5 million in the quarter ended June 30, 2001, upon
the completion of a first mutually agreed deliverable. Subsequent to June 30,
2001, we paid an additional $4.3 million upon the completion of a second
mutually agreed deliverable. The remaining cash payments of up to $15 million
are contingent upon the timely delivery and acceptance of certain mutually
agreed deliverables.

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

Factors that May Affect Future Results

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

     Through June 30, 2001, we incurred cumulative losses of $242.2 million, and
we expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large fixed expenses,
and we plan to incur significant and increasing sales and marketing, research
and development, manufacturing, and general and administrative expenses. In
February 2000, we began to ship our first product, the ONLINE9000, and our
revenue to date has been limited. In order for us to become profitable, we will
need to generate and sustain higher revenue while maintaining reasonable cost
and expense levels.

     We expect our operating expenses to increase significantly as we increase
spending in order to fund more research and development, expand our sales and
marketing operations, broaden our customer support capabilities and develop new
distribution channels. We also plan to expand our general and administrative
functions to support the expected growth of our business. Our operating expenses
are largely based on anticipated revenue trends and a high percentage of our
expenses are, and will continue to be, fixed in the short term. As a result, a
delay in generating or recognizing revenue could cause significant variations in
our operating results from quarter to quarter and annually and could result in
substantial operating losses.

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


                                       12

<PAGE>

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

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

     If our customers and potential customers do not adopt, purchase and
successfully deploy our products in large numbers, our revenue may not grow and
our business, financial condition and results of operations will be seriously
harmed. Since the market for our products is relatively new, future demand for
our products is uncertain and will depend on the speed of adoption of optical
networking, in general, and optical equipment in metro networks, in particular.
Communication service providers may not choose to purchase and deploy our
equipment. Even if service providers do deploy our products in their networks,
they may not operate as expected, which could delay or prevent their adoption.

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

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

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

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

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

     We expect that substantially all of our revenue will depend on sales of our
products to a small number of customers and that our revenue will only grow if
these customers purchase substantial quantities of our products. As of June 30,
2001, we had twenty-four 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:

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

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

     o    failure of our products to perform as expected;

     o    difficulties in meeting customers' delivery requirements;


                                       13

<PAGE>

     o    introductions of new products by our competitors; and

     o    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.

     We expect the pace of change to accelerate in the future. We also expect
many new competitors to emerge as the market for optical networking equipment
expands and evolves in response to technical innovations and increasing demand
for new broadband and wavelength-based services. We currently compete with both
public and private companies providing solutions for network and bandwidth
management in the metropolitan and regional markets. Many of these companies
have existing relationships with communication service providers, making it more
difficult for us to sell our products to these potential customers.

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

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

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

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:

     o    tariffs, export controls and other trade barriers;

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

     o    difficulties and costs of staffing and managing foreign operations;

     o    certification requirements with which we may be unfamiliar; and

     o    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.


                                       14

<PAGE>

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

     We believe we will need to continue to increase our customer service and
support organization to support new and existing customers. Our products are
complex and require highly-trained customer service and support personnel.
Hiring customer service and support personnel is difficult in our industry due
to the limited number of people available with the necessary technical skills.
If we are unable to expand our customer service and support organization, we may
not be able to increase sales.


                                       15

<PAGE>

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

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

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

     We rely on contract manufacturers to complete most of the manufacturing of
optical assemblies for our products. If for any reason these manufacturers were
to stop satisfying our needs without providing us with sufficient warning to
procure an alternate source, our ability to sell our products would be harmed.

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

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

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

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

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

     In addition, we expect to experience seasonality in the sales of our
products. Historically, the communications equipment market has higher sales in
the first and fourth quarters of the year, due in part to purchasers' budgetary
cycles. In addition, we expect that sales may decline during summer months,
particularly in European markets. These seasonal variations in our sales may
lead to fluctuations in our quarterly operating results.


                                       16

<PAGE>

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

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

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

     We are still a relatively small company and our success depends on growth.
At December 31, 1999, we had 202 employees, at December 31, 2000, we had 541
employees and at June 30, 2001, we had 776 employees. We plan to hire a
significant number of additional employees this year. Our growth has placed, and
we expect it to continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial, managerial control and reporting systems and procedures, and will
need to continue to expand, train and manage our work force worldwide.

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

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

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

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

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

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

     If our customers and potential customers are not successful in building
their communications systems, promoting their products, including new
revenue-generating data services, receiving requisite approvals and
accomplishing the many other requirements for the success of their businesses,
our growth will be limited. Many factors in addition to the effectiveness of our
products influence the ultimate success of our customers, and we have no control
over these factors. Many of our customers and potential customers require
substantial capital for the expansion of their networks. The inability of
customers or potential customers to obtain sufficient financing on attractive
terms, or any downturn in their business, could impair our ability to make
future sales. In addition, we have limited ability to foresee the competitive
success of our customers and to plan accordingly.


                                       17

<PAGE>

Current unfavorable economic and market conditions could cause our existing and
potential customers to delay or forgo purchases of our products.

     As a result of current unfavorable economic and market conditions, many
service providers, including our existing and potential customers, have reduced
their capital spending on communications equipment, including optical networking
equipment. If these economic conditions persist for an extended period or
worsen, our customers and potential customers may decide to delay or to forgo
the purchase of our products. These decisions could harm our revenue, results of
operations and financial condition.

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

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

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

     Our products are technically advanced and highly complex, and it is common
for complex hardware and software to have defects which are difficult to detect.
Our current and any future products or releases can only be fully tested when
deployed for an extended period of time as part of networks that include
equipment from other vendors. Consequently, our customers may discover defects
in our hardware or software after deployment, and we could experience:

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

     o    loss of customers;

     o    damage to our reputation;

     o    diversion of development resources;

     o    increased service and warranty costs;

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

     o    increased insurance costs.

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

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

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

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


                                       18

<PAGE>

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

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

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

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

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

     In the future, we may be a party to litigation to protect our intellectual
property or as a result of other alleged infringements of intellectual property.
These claims and any resulting lawsuit, if successful, could subject us to
significant liability for damages and invalidate our proprietary rights. These
lawsuits, regardless of their success, would be time-consuming and expensive to
resolve and would divert management time and attention. Any potential
intellectual property litigation also could force us to do one or more of the
following:

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

     o    obtain from the owner of the infringed intellectual property right a
          license to

     o    sell or use the relevant technology, which license may not be
          available on reasonable terms, or at all; or

     o    redesign those products that use the challenged technology.

     If we are forced to take any of these actions, our business may be harmed.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed.

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

     We intend to continue to expand our sales and marketing activities,
manufacturing activities and inventory to achieve our growth targets. If we do
not achieve these growth targets, we may need to raise additional capital in
order to develop new services or products, or to acquire complementary services,
businesses or technologies. Product development and acquisition activities are
particularly capital-intensive in our industry. Additional financing may not be
available on terms favorable to us, or at all. If we issue additional equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of the
then-existing holders of common stock.


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<PAGE>

Acquisitions could disrupt our business and harm our financial condition.

     We intend to acquire or invest in complementary businesses, products and
technologies. We may not successfully integrate any businesses, products,
technologies or personnel that we might acquire and, as a result, our operating
results could suffer. For example, in February 2001, we acquired certain
technology and other assets from Finisar Corporation which have been
incorporated into our new ONLINE2500 product. This acquisition and any future
acquisitions or investments could lead to:

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

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

     o    responsibility for unanticipated liabilities;

     o    amortization expenses related to goodwill and other intangible assets;

     o    large and immediate write-offs;

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

     o    unanticipated costs;

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

     o    adverse effects on existing relationships with suppliers and
          customers;

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

     o    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, 2001, our executive officers, directors and entities
affiliated with them beneficially owned approximately 17.08 % 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.


                                       20

<PAGE>

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

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

     o    changes in financial estimates by securities analysts;

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

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

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

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

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

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

     We have a substantial amount of outstanding indebtedness. There is the
possibility that we may be unable to generate cash sufficient to pay the
principal of, interest on and other amounts payable in respect of the notes when
due.

     Our substantial leverage could have significant negative consequences,
including:

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

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

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

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

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

     o    authorizing the issuance of preferred stock without stockholder
          approval;

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

     o    prohibiting cumulative voting in the election of directors;

     o    prohibiting stockholders from calling stockholders meetings; and

     o    prohibiting stockholder actions by written consent.


                                       21

<PAGE>

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate sensitivity

     We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition, we maintain our cash equivalents in
money market funds and short to intermediate term marketable securities.
Accordingly, we are not a party to financial instruments or contracts, and do
not have investments, that expose us to material interest rate risk. Our
subordinated convertible notes were issued at a fixed interest rate and
therefore do not expose us to the risk of earnings or cash flow loss due to
changes in market interest rates.

Exchange rate sensitivity

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

Part II. Other Information

Item 1. Legal Proceedings.

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

Item 2. Changes in Securities and Use of Proceeds.

   (a)  Changes in Securities

     On April 25, 2001, Fenwick & West LLP, our outside counsel, net exercised
25% of a warrant issued in March 2000 to purchase 200,000 shares of common stock
at an exercise price of $15 per share, and we issued 30,115 shares of ONI
Systems common stock to Fenwick & West. Our issuance of these shares upon the
exercise of this warrant was exempt from registration pursuant to Rule 506
promulgated under the Securities Act of 1933, as amended, and/or Section 4(2) of
the Securities Act.

   (b)   Use of Proceeds

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


                                       22

<PAGE>

     As of June 30, 2001, we had used $174.7 million of the net proceeds from
the initial public offering for working capital, capital expenditures and other
general corporate purposes, including sales and marketing, customer support,
research and development, expansion of our operation and administrative
infrastructure, and the leasing of additional facilities. The remaining $37.4
million of the net proceeds are expected to be used for working capital, capital
expenditures and other general corporate purposes. We may also use a portion of
the remaining net proceeds from our initial public offering to acquire or invest
in businesses, technologies or products that are complementary to our business.
Except for our commitments in connection with our acquisition of assets from
Finisar, we currently have no commitments or agreements with respect to any
acquisitions or investments. We have not determined the amounts of the remaining
proceeds that we plan to spend on any of the uses described above or the timing
of these expenditures. Pending our use of the remaining net proceeds, we intend
to invest them in short-term, interest-bearing, cash equivalent instruments.

Item 3. Defaults Upon Senior Securities.

     None.

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

     The Annual Meeting of the Stockholders of ONI Systems Corp. was held on May
16, 2001 at the Silicon Valley Conference Center, 2161 North First Street, San
Jose, California 95131. Of the 136,298,595 shares of common stock outstanding as
of the record date of March 19, 2001, 92,747,322 (68%) were present or
represented by proxy at the meeting.

     At the meeting, the stockholders re-elected as ONI Systems directors Kevin
R. Compton (with 92,684,732 affirmative votes and 62,590 votes withheld) and
Jonathan D. Feiber (with 92,684,634 affirmative votes and 62,688 votes
withheld).

     The stockholders also ratified the appointment of KPMG LLP as ONI Systems
independent auditors for the fiscal year ending December 31, 2001 (with
92,621,945 shares voting for, 113,774 shares voting against and 11,603 shares
abstaining).

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:

        10.01 2000 Employee Equity Incentive Plan, as amended
        10.02 Davis Stock Option Plan and Agreement

   (b)  Reports on Form 8-K

     On August 2, 2001, we filed a report on Form 8-K dated August 1, 2001 to
report under Item 5 that ONI Systems Corp. has promoted William R. Cumpston to
the position of chief operating officer, Chris A. Davis, executive vice
president, chief administrative and financial officer, is leaving ONI Systems
and Ken Burckhardt, vice president of finance, will act as ONI Systems interim
chief financial officer.


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<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 13, 2001                  ONI SYSTEMS CORP.

                                       By:  /s/ Hugh C. Martin
                                          --------------------------------------
                                          Hugh C. Martin
                                          President, Chief Executive Officer
                                          and Chairman of the Board of Directors


                                       By:  /s/ Ken Burckhardt
                                          --------------------------------------
                                          Ken Burckhardt
                                          Vice President Finance and Interim
                                          Chief Financial Officer


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