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UNITED STATES  SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



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FORM 10-K/A



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(Mark One)

| | x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 29, 2002



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: 0-29811



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NEW FOCUS, INC.

(Exact name of registrant as specified in its charter)



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|Delaware                                                       |  | 33-0404910                             
|-------------------------------------------------------------- |  | ---------------------------------------
|                                                               | 
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|2584 Junction Avenue, San Jose, CA                             |  | 95134-1902                             
|(Address of principal executive offices)                       |  | (Zip Code)                             



Registrants
telephone number, including area code: (408) 919-1500



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Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $.001 par value

Preferred Share Purchase Rights, $.001 par value



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 ̈



Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be contained to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  x    No ̈



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive Proxy Statement for its 2003
Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.



On March 10, 2003, 63,613,393 shares of the Registrants common stock, $0.001 par value, were issued and outstanding.



The aggregate market value of the voting stock held by non-affiliates based
on the closing price ($2.97), as reported on the Nasdaq National Market as of June 28, 2002, the last business day of registrants most recently completed second quarter, and assuming that the holdings of non-affiliates were the same on June
28, 2002 as they were on April 1, 2002, was approximately $127,016,000.



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NEW FOCUS, INC.



INDEX



|               |  |                                                                                                |  | Page
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|PART I        
|               |  |                                                                                               
|Item 1.        |  | Business                                                                                       |  | 3   
|Item 2.        |  | Properties                                                                                     |  | 22  
|Item 3.        |  | Legal Proceedings                                                                              |  | 22  
|Item 4.        |  | Submission of Matters to a Vote of Securities Holders                                          |  | 23  
|              
|PART II       
|               |  |                                                                                               
|Item 5.        |  | Market for the Registrants Common Stock and Related Stockholder Matters                       |  | 24  
|Item 6.        |  | Selected Consolidated Financial Data                                                           |  | 25  
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 27  
|Item 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 39  
|Item 8.        |  | Financial Statements and Supplementary Data                                                    |  | 39  
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 39  
|              
|PART III      
|               |  |                                                                                               
|Item 10.       |  | Directors and Executive Officers of the Registrant                                             |  | 40  
|Item 11.       |  | Executive Compensation                                                                         |  | 40  
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 40  
|Item 13.       |  | Certain Relationships and Related Transactions                                                 |  | 40  
|Item 14.       |  | Controls and Procedures                                                                        |  | 40  
|              
|PART IV       
|               |  |                                                                                               
|Item 15.       |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 42  
|               | 
|SIGNATURES     |  | 74                                                                                            
|               | 
|CERTIFICATIONS |  |                                                                                               



EXPLANATORY NOTE



This Form 10-K/A amends the annual report of New Focus,
Inc. on Form 10-K for the year ended December 29, 2002, referred to as the 2002 Form 10-K, filed with the SEC on March 20, 2003. The purposes of this amendment are to:



| | (1) |  | Include additional disclosure in the Notes to Consolidated Financial Statements regarding the methods and assumptions that management of New Focus used in determining the fair value
allocation in connection with its acquisitions of JCA Technology, Inc. in January 2001 and of Globe Y. Technology, Inc. in February 2001.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Include the consent of Financial Strategies Consulting Group, LLC as experts in connection with its calculations of impairment charges against goodwill and other intangible assets
associated with the acquisitions of JCA Technology and Globe Y.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This amendment is limited in scope to the portions of the 2002 Form 10-K set forth above and does not amend, update or change any other items or disclosures contained in the original 2002 Form 10-K.



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PART I



Item 1.Business



New Focus was incorporated in California in April 1990. We reincorporated in Delaware in May 2000. In addition to historical information, this Annual Report on Form 10-K (Annual Report) contains predictions, estimates
and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 that relate to future events or our future financial performance. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by the forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in this Annual Report, and some of which we may not know. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, estimates, predicts,
potential, continue or the negative of these terms or other comparable terminology. In addition, these forward-looking statements include, but are not limited to, statements regarding the following:



| |  |  | the anticipated market trends and uncertainties;
| | - |  | ------------------------------------------------



| |  |  | the effectiveness of our business strategy;
| | - |  | -------------------------------------------



| |  |  | our ability to grow revenues from sales of our existing product lines;
| | - |  | ----------------------------------------------------------------------



| |  |  | the revenue outlooks for future periods, and general trends in our fiscal year 2003 quarterly revenues;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the potential for growth in certain of our target markets;
| | - |  | ----------------------------------------------------------



| |  |  | our plans to improve market share and increase our revenues through strategic combinations;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | anticipated development and release of new products;
| | - |  | ----------------------------------------------------



| |  |  | the adequacy of our restructuring activities;
| | - |  | ---------------------------------------------



| |  |  | anticipated expenditures for research and development, sales and marketing, and general and administrative expenses;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | the expected improvement in manufacturing efficiencies and gross margins;
| | - |  | -------------------------------------------------------------------------



| |  |  | expected capital expenditures;
| | - |  | ------------------------------



| |  |  | the adequacy of our capital resources to fund our operations;
| | - |  | -------------------------------------------------------------



| |  |  | the maintenance of our competitive advantage;
| | - |  | ---------------------------------------------



| |  |  | the outcome of pending litigation; and
| | - |  | --------------------------------------



| |  |  | the effect of accounting pronouncements on our results of operations.
| | - |  | ---------------------------------------------------------------------



These statements are only predictions and are subject to risks and uncertainties, including the following:



| |  |  | the difficulty of forecasting revenues due to weakness and uncertainties related to general economic conditions and overall demand within our markets and among its current and
prospective customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to improve margin performance through more efficient use of direct labor and direct material as well as better absorption of manufacturing overhead;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to introduce and gain customer acceptance of new products on a timely basis;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the failure to execute on our acquisition and partnering strategies and our expansion into potential new markets, which may prevent achievement of profitability in a timely manner;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential integration of additional operations, the extent of management time and attention required, and related costs and expenses associated with the execution of our
acquisition strategy;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the difficulty of achieving further cost reductions without jeopardizing product development schedules, delivery schedules, product quality, and regulatory compliance;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen development delays for new products that limit our ability to generate volume revenues;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the difficulty in anticipating the outcome of current litigation;
| | - |  | -----------------------------------------------------------------



| |  |  | our ability to generate future revenues from new products commensurate with prior investments in research and development activities; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the protection of our proprietary technology.
| | - |  | ---------------------------------------------



In evaluating these statements, you should specifically consider various factors, including the risks outlined under Risk Factors. 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.



Overview



We develop and manufacture photonics and microwave solutions for both commercial and research applications. Our products include tunable lasers for test
and measurement applications, high-speed radio-frequency (RF) amplifiers, and advanced photonics tools. Our photonics tools products include instruments and tools used for sourcing, measuring, moving, manipulating, modulating and detecting optical
signals in commercial and research applications across a wide variety of industries. Our tunable lasers are based on an external-cavity diode laser design and are used in telecom test and measurement instrumentation, biomedical applications,
spectroscopic applications, and research laboratories worldwide. Our RF amplifier products, which use state-of-the-art thin-film hybrid microwave technology, cover a wide range of frequencies and are available with either standard or customized
performance characteristics. Our products serve a broad range of diversified markets within the semiconductor, industrial, biomedical, defense and telecommunications industries. In an effort to expand our OEM sales content, we intend to pursue new
and emerging applications for modules and subsystems within these markets, in particular modules and subsystems that would use our photonics tools and tunable lasers. Given the difficulty in accurately assessing the size and growth rates of these
market opportunities, we will need to constantly balance new product development expenses against future revenue expectations in order to show continuing improvement in our financial results. For a breakdown of our revenues, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.



In fiscal years 2000 and 2001, our product focus was primarily on the telecommunications industry as we developed and manufactured optical and RF components for next-generation communication networks. Historically, we
reported revenues in two segments: telecom and photonics tools, with sales of telecom products accounting for approximately 67% and 71% of our revenues during fiscal year 2000 and fiscal year 2001, respectively. Our telecom products included passive
optical components, such as circulators and polarization beam combiners, for wavelength management as well as active components, such as tunable laser modules for network as well as test and measurement applications and high-speed RF amplifiers for
telecom networks and defense applications.



In the second
quarter of 2001 we experienced a sharp sequential decline in our quarterly net revenues relative to the first quarter of 2001 due to an unexpected deterioration of the telecommunications industry. In response to this change in industry conditions,
we began restructuring our operations in the second quarter of 2001 with the impairment of acquisition-related goodwill and a restructuring charge related to planned work force reductions and two facility closuresa small facility in China and
another in the U.S. Our net revenues declined sharply again between the second and third quarters of 2001. After the end of the third quarter of 2001 we significantly expanded our expense reduction target through a planned 35% reduction of our
worldwide work force, which was to be completed by the end of 2002, and announced our intention to consolidate our U.S. manufacturing operations. In response to a further decline in our net revenues between the third and fourth quarter of 2001 and a
continuing weak outlook for our acquired businesses, we impaired the remaining



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acquisition-related goodwill on our balance sheet and announced the planned closure of a second U.S. manufacturing facility by the third quarter of 2002.



During the first quarter of 2002 we concluded that difficult
conditions within the telecommunications industry would persist into 2003, and possibly into 2004, and therefore decided to take additional steps to reduce our dependence on this industry. In March 2002 we announced our intention to divest our
passive optical product line and cease operations at our large China manufacturing facility. To reflect these decisions we recorded a $24.0 million restructuring charge in our first quarter 2002 financial results. We also indicated that these
actions would further reduce our expense structure and lower the quarterly net revenue required to reach profitability.



During the second quarter of 2002 we sold our passive component product line to Finisar Corporation and, in addition, completed the sale of our network
tunable laser technology to Intel Corporation. These sales generated a net gain of $41.3 million. During the second quarter of 2002 we also decided to cease development of next-generation high-speed RF products for telecom applications. This action,
combined with the prior divestitures of our passive product line and network tunable laser technology, represented the final step in our plan to eliminate our telecom-related component product lines. The $11.6 million restructuring charge recorded
in the second quarter reflected the decision to cease development of our telecom RF products as well as final work force reductions at our large China facility. Additionally, we wrote off $7.7 million of intangible assets related to our RF telecom
product line. In conjunction with our second quarter results we also announced the planned closure of two additional U.S. facilities in 2002.



In the third quarter of 2002 we completed, as scheduled, our facility consolidation program with the closure of three U.S. facilities, which generated a
restructuring charge of $36.6 million. In total, the facility consolidation program resulted in the closure of four U.S. and two China facilities. By the end of the third quarter of 2002 we had completed our planned restructuring activities.



As a result of our restructuring efforts over the six-quarter
period between the second quarter of 2001 and the end of the third quarter of 2002, we had:



| |  |  | Reduced our quarterly expense structure, defined as operating expenses plus manufacturing overhead, to $9.6 million in the fourth quarter of 2002 from $32.5 million in the second
quarter of 2001;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidated our operations into approximately 60,000 square feet of space (one primary facility plus some ancillary space), down from seven facilities encompassing approximately
573,000 square feet;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduced our worldwide work force to approximately 250 people in the fourth quarter of 2002 from a peak employment level of 2,100 people in the first quarter of 2001;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduced our cash outflow in the fourth quarter of 2002, excluding outflows related to restructuring activities and our share repurchase program as well as inflows from certain
non-recurring transactions, to $2.2 million, which is down from over approximately $30 million per quarter in mid-2001 and approximately $10 million per quarter in the first three quarters of 2002;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Exited the fourth quarter with a lower net loss, due primarily to improved operating performance, minimal restructuring and impairment charges, and reduced amortization of
intangibles and deferred compensation; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Refocused our business on product areas that were less dependent on the telecommunications industry.
| | - |  | ----------------------------------------------------------------------------------------------------



In the process of restructuring our operations we recorded restructuring charges of $72.2 million and $17.8 million in
fiscal years 2002 and 2001, respectively. These totals included charges for the impairment of tangible assets, facility closure costs and severance-related payments. We also recorded impairment charges against goodwill and other intangible assets of
$7.7 million and $289.3 million in fiscal years 2002 and 2001, respectively. Accordingly, our quarterly depreciation expense has declined to $0.7 million in the fourth quarter of 2002 from $3.1 million in the second quarter of 2001. In the same
timeframe, the amortization for intangibles has



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declined to $0.2 million from $22.5 million per quarter, while deferred compensation expense has declined to $1.2 million from $16.1 million per quarter.



The composition of our quarterly net revenues also changed as
a result of the sharp decline in the telecommunications market, our decision to eliminate component product lines related to telecom networks, and general economic conditions. The following table shows the composition of our net revenues (i) for the
three months ended April 1, 2001, near the height of the telecommunications market; (ii) for the three months ended March 31, 2002, at the time we decided to eliminate our telecom-related component product lines, and (iii) for the three months ended
December 29, 2002, our most recent quarter:



Net Revenues

(in millions)



|Three Months Ended                                                                                                                                                                                                                                                                                                                                                           |  | PassiveComponents |      | RFComponents |   | TunableLasers |  | PhotonicsTools |     | Total
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---- | ------------ | - | ------------- |  | -------------- | --- | -----
|April 1, 2001                                                                                                                                                                                                                                                                                                                                                                |  | $                 | 15.5 |              | $ | 9.4           |  | $              | 7.4 |      
|March 31, 2002                                                                                                                                                                                                                                                                                                                                                               |  |                   | 0.7  |              |   | 3.0           |  |                | 1.2 |      
|December 29, 2002                                                                                                                                                                                                                                                                                                                                                            |  |                   |     |              |   | 1.8           |  |                | 2.1 |      
|Notes: (1)    RF components include data drivers and clock amplifiers for telecom networks and amplifiers for
defense and avionics applications. (2)    Tunable lasers include laser modules and benchtop
systems for test and measurement applications. Net revenues for tunable lasers for the quarter ended December 29, 2002 included $1.2 million in cancellation fees.



Under our new
strategic direction, we plan to focus our business on providing photonics and microwave solutions to the semiconductor, industrial, biomedical, defense and telecommunications industries. A main area of focus will remain test and measurement
applications, including telecom test and measurement, which accounted for the majority of tunable laser net revenues in 2001. With the elimination of our telecom-related component product lines we will operate in one segment and report our financial
results accordingly.



Company Strategy



In 2002, we reduced our exposure to the telecommunications market through
the sale of our passive component product line, the sale of our network tunable laser technology and the cessation of development of next-generation high-speed RF products for telecom applications. We also took strategic restructuring actions that
reduced expenses and improved our financial performance. Our business strategy now focuses on providing photonics and microwave solutions to diversified markets within the semiconductor, industrial, biomedical, defense and telecommunications
industries. Currently, the majority of our net revenues come through the sale of photonics and microwave components, either through our catalog channel or on an OEM basis through our direct sales force and network of resellers.



Our plan to increase stockholder value focuses on three major elements:
organic growth of our current business, supplemental growth through acquisitions and partnerships, and the repurchase of shares of our common stock. We believe that a balanced mixture of these elements, combined with proper execution of each
element, will improve the market value of our stock over the long term.



In regard to our current business, our objective is to increase our OEM focus and offer a higher level of design and integration services to customers, particularly in the photonics area, based on our core competencies in electronics,
firmware, software, and optics. Additionally, we plan to expand product offerings, make investments in new product platforms, improve operating efficiencies, and explore new market areas in an effort to grow our current product linesphotonics
tools, tunable lasers and high-speed RF amplifiers.



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More specifically, in order to grow our existing photonics and microwave solutions business in 2003, we
plan to:



| |  |  | Strengthen the performance of our photonics tools catalog by broadening the number of product offerings, increasing the rate of new product introductions, improving our channel
marketing methods, and enhancing customer responsiveness and satisfaction;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Integrate our photonics tools products into differentiated OEM modules and subsystems for selected markets, including a focused emphasis on the semiconductor equipment market;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pursue new market opportunities for our tunable laser products centered on test and measurement applications and complete the development of next-generation tunable laser platforms
to fortify our technology leadership in this product area;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focus the sales and marketing efforts for our high-speed RF products on expanding our customer base in the defense aerospace market; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pursue strategic acquisitions and partnering opportunities to gain access to enabling technologies in our three product areas.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



While we believe we can grow revenues from existing product lines through
internal actions, the rate of internal growth will not allow us to achieve our breakeven quarterly revenues level in a timely manner, thus delaying our return to profitability. Therefore, we continue to evaluate business combinations and partnering
arrangements in our core business areas that would improve our market share position, increase our revenues and improve on our net loss position. In evaluating potential strategic combinations, we focus on companies beyond the development stage with
established photonics and microwave products that serve customers in multiple end-markets outside of telecommunications.



The utilization of a portion of our cash balance to repurchase shares of our common stock is another key element of our plan. Since shares of our common
stock have traded, and continue to trade, at a discount to the actual cash value per share, we believe that the use of some of our cash resources to repurchase shares of our common stock will enhance long-term stockholder value. In February 2003 we
announced the completion of a $45 million share repurchase program, which resulted in the repurchase of approximately 13.1 million common shares between late October 2002 and early February 2003. During the fourth quarter of 2002 we repurchased
approximately 8.25 million common shares for $28.5 million (before commissions) at a discount to the then-existing cash value per share. As a result of these purchases, the companys cash value per share was $4.09 at the end of fiscal year
2002, up from $3.88 per share at the end of fiscal year 2001. The companys net losses per share for the fourth quarter and fiscal year of 2002, however, were negatively affected by the lower average shares outstanding for these periods
resulting from the share repurchases. Conversely, if we return to profitability in the future, we will report a higher net profit per share due to the lower average outstanding share count. We may repurchase additional shares in the future.



Products and Technology



We develop innovative photonics and microwave solutions for both commercial
and research applications. We sell three primary families of products: advanced photonics tools, tunable lasers for test and measurement applications, and high-speed RF products.



Photonics Tools



New Focus was founded in 1990 with the goal of making Simply Better Photonics Tools for research and academic laboratories. Photonics tools
are instruments and tools principally used for sourcing, measuring, moving, manipulating, modulating and detecting optical signals. In addition to research and academic laboratories, our photonics tools are now used in commercial and OEM
applications, thus increasing the available market for our products. We currently offer a wide range of photonics tools for advanced research,



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development and manufacturing. These products leverage our core competencies in photonics and are used in applications for the semiconductor, industrial,
biomedical and telecommunications industries.



Our photonics
tools line includes lasers and instruments, electro-optical components, precision opto-mechanical components and motion control devices. Our electro-optical components include laser sources, modulators, photodetectors and photoreceivers
(photodetectors with built-in amplifiers) used for general-purpose light and fluorescence detection, light modulation, and component test and characterization. Our precision opto-mechanical componentssuch as optical mounts, fiber aligners,
translation stages and Picomotor actuators, among
othersprovide superior stability, high resolution and precision adjustment capability for use in both manufacturing and laboratory environments. Supplementing the precision opto-mechanical component family is a motion control product line that
includes motorized optical mounts, stages and Picomotor drivers. When used with our precision opto-mechanical products, these tools provide high-resolution positioning and precise alignment.



For example, our precision opto-mechanical components and Picomotor products are used for semiconductor manufacturing, advanced manufacturing of fiber
optic components and for research and development of high-speed network products. Our photodetectors, which are devices that convert optical signals to electrical signals faster than the products being measured, are needed to accurately characterize
the optical performance of the tested device.



Tunable Laser
Products



Our tunable laser product family includes
swept-wavelength and step-and-measure lasers available in either benchtop system or OEM module configurations. First introduced in 1992, our tunable lasers are based on an external-cavity diode laser design and are used in telecom test and
measurement instrumentation, biomedical applications, spectroscopic applications, and research laboratories worldwide. Our tunable laser product line has grown to include wavelengths from 400 nanometers (nm) to 1630 nm and offers performance
characteristics such as rapid, precise, and wide tuning or wavelength scanning for efficient testing. We have received numerous industry awards for the development and commercialization of external cavity tunable diode lasers.



Some applications in which our high performance test and measurement tunable
lasers are used include: (1) testing and measuring fiber optic components and systems in manufacturing, development and research environments, (2) improving the accuracy of complex surface profiling instruments for the semiconductor industry,
(3) testing and stabilizing particular transitions of atomic cesium, enabling the production of a new generation of highly accurate atomic clocks, and (4) testing and monitoring pressure, temperature and strain in various industrial environments.



Our tunable laser capabilities include advanced laser design,
development and manufacturing, advanced laser packaging for high reliability, dynamic filter technology for wide tuning, advanced thin films for extremely low optical reflections, and integrated wavelength locking technology that results in minimal
error in the laser wavelength from the desired channel. These capabilities have resulted in tunable laser products with high output power and wide wavelength coverage.



High-Speed RadioFrequency (RF) Microwave Products



Our high-speed RF microwave product family is designed for use in military, air traffic management, avionics, navigation
systems, satellite communications and commercial wireless telephony applications. Our RF amplifiers operate at frequencies from 10 kiloHertz up to 40 gigaHertz and provide power up to 5 Watts, while keeping noise figure below 1 dB. Our designs
use state-of-the-art thin-film hybrid microwave technology to achieve maximum RF performance. We have a comprehensive product line of standard microwave amplifiers as well as built-to-order custom amplifiers and subsystems. Our flexible design
methodology allows our products to be readily customized to meet the specialized requirements of a given customer application.



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Our high-speed RF microwave product offerings include, but are not limited to, radar and communications
band amplifiers, power amplifiers and tri-band amplifiers. Radar and communications band amplifiers, in particular, account for a high percentage of revenues derived from this product family. These amplifiers use high electron mobility transistors
(HEMT) and gallium arsenide field effect transistors (GaAs FETs) to satisfy the low noise requirements in the common radar and communications bands and operate over the full military temperature ranges.



Customers



We sell our products to customers in the semiconductor, industrial, biomedical, defense and telecommunications industries.
Our customers also include commercial, academic and governmental research institutions that engage in advanced research and development activities.



During the past few years, when a significant portion of our net revenues was derived from the telecommunications industry, our major customers tended to
be large, public companies in the telecommunications industry. As a result of the downturn in the telecommunications industry and, more specifically, our restructuring actions in 2002, we have reduced our dependence on the telecommunications
industry and diversified the composition of our customer base. During fiscal year 2000 and the first half of 2001 our top five customers typically accounted for 50-60% of our quarterly net revenues. Typically, two customers would account for 25-30%
of our quarterly net revenues. Representative top customers during this time period included Agilent, Alcatel, Ciena, Corning, Corvis, and Nortel. During the second half of 2001 and fiscal year 2002 our top five customers typically accounted for
20-35% of our quarterly net revenues. Top customers during this time period included resellers of our photonics tools products, defense contractors, and semiconductor companies. For the year ended December 30, 2001, Agilent Technologies and Alcatel
S.A. accounted for 13.4% and 11.3% of our net revenues, respectively. For the year ended December 29, 2002, no customer accounted for more than 10% of our net revenues.



Sales, Marketing and Customer Support



We sell and market our tunable lasers, high-speed RF products, and photonics tools primarily through a combination of direct sales, catalog sales and
international sales representatives and resellers. We currently focus our direct sales and marketing efforts on OEM customers with photonics subsystem integration requirements and on defense contractors that use our high-speed RF amplifiers. Our
direct sales account managers for our photonics tools and tunable laser product lines generally cover specific geographic regions and call on current and potential customers within their assigned regions. Our direct sales account managers for our
high-speed RF products cover the market on an assigned account basis. We take a collaborative approach with our customers and establish relationships at all levelsengineering, procurement, and senior management. This approach allows us to
rapidly respond to customer needs and helps us to stay at the forefront of the technology required for photonics and microwave applications.



We believe that support services are essential to the successful installation and ongoing support of our products. Our support services include customer
service and technical support. Our customer service representatives assist customers with orders, warranty returns and other administrative functions. Our technical support engineers provide customers with answers to technical and product-related
questions as well as application support relating to the use of our products in the customers applications. These engineers also help to define the features that are required for our products to be successful in specific applications.



Manufacturing



We manufacture the majority of our products. We do, however, outsource on a
limited basis manufacturing of selected subcomponents, primarily for a subset of our photonics tools products. Our manufacturing operations are in San Jose, California. As part of our restructuring actions in 2002, we ceased operations at our large



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Shenzhen, China manufacturing facility, decreased the square footage occupied under our Wisconsin facility, and closed and consolidated our Camarillo,
California production facility and our larger San Jose facility into our smaller San Jose facility.



We are committed to designing and manufacturing high quality products that have been thoroughly tested for reliability and performance. Our manufacturing
processes utilize stringent quality controls, including incoming material inspection, in-process testing and final test. We perform in-house thermal, shock and environmental testing, including testing to industry accepted practices. Our products are
designed to be fully compliant with standards for quality and interoperability with existing installation and maintenance systems. As a result of our continuing commitment to manufacturing high quality products, our operation in San Jose, California
is ISO 9001 certified.



Research and Development



We have assembled a team of engineers, technicians and operators with
significant experience in highly specialized manufacturing industries such as semiconductor capital equipment, optical storage and networking, and communications. Our product development efforts have historically focused on our telecom products. In
particular, development of our network tunable laser technology and high-speed RF telecom products, prior to the sale of the network tunable laser technology to Intel and the cessation of product development for next-generation RF telecom
products in the second quarter of 2002, accounted for a significant portion of our research and development expenses.



Our total research and development expenses, excluding reimbursement for engineering development work, totaled $22.2 million for the fiscal year ended
December 29, 2002, $50.8 million for the fiscal year ended December 30, 2001, and $27.2 million for the fiscal year ended December 31, 2000.



During 2002, research and development expenses declined from $7.4 million in the first quarter to $2.4 million, or approximately 32% of net revenues,
in the fourth quarter. Due to the separate and distinct product development efforts for our three product lines, we anticipate that research and development will remain flat, or increase slightly, over the course of 2003 as we execute our business
strategy, particularly with respect to our OEM product direction for photonics tools and tunable lasers, where development costs are higher due to the required integration of electronics, optics and software.



Competition



In the photonics tools market we face competition from a number of companies, including Linos AG, Melles Griot, Inc. (a
Barloworld Scientific company), Newport Corporation, Thermo Oriel (a unit of the Thermo Photonics Division of Thermo Electron Corporation), and Thorlabs, Inc. Our competitors in the tunable laser market include Agilent Technologies and NetTest
(formerly Photonetics). In the high-speed RF products market, we face competition from M/A-Com (a subsidiary of Tyco International), Miteq Inc., REMEC Microwave, Inc. (a subsidiary of REMEC, Inc.) and several smaller private companies.



Our competitors consist of both public and private companies. Some of our
competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we have. As a result, these competitors are able to devote greater resources than we can to the development, promotion,
sale and support of their products. In addition, some of our competitors have larger market capitalizations or cash reserves and are better positioned than we are to acquire other companies in order to gain new technologies or products that may
displace our product lines. Some of our potential competitors have significantly more established sales and customer support organizations, more extensive customer bases, better developed distribution channels, more sophisticated e-commerce sites,
broader product offerings and greater manufacturing capacity than we have. These companies can leverage their customer bases and their broader product offerings and adopt aggressive pricing policies to gain market share. Additional competitors may
enter the market and we



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may compete with new companies in the future. Our industry is also consolidating, and we believe it will continue to consolidate in the future as companies
attempt to strengthen or hold market positions. We expect to encounter potential customers that, due to existing relationships with our competitors, are committed to the products offered by these competitors.



The principal factors upon which we compete are: product features and
performance, product reliability, responsive customer service and support, and price. We believe we compete favorably on each of these factors.



Intellectual Property



Our success and ability to compete depend substantially upon our technology. We pursue patent protection in the United States and abroad, and as of
December 29, 2002 we have been granted 47 U.S. patents and 4 European patents. The expiration dates of our patents range from May 28, 2008 to December 13, 2020.



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



We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to and distribution of our proprietary information. Our confidentiality agreements generally prohibit the disclosure or use of the technology being evaluated or licensed.
From time to time we license our technology to various third parties pursuant to non-exclusive license agreements that prohibit the disclosure or use of the technology except as set forth in the agreements. Despite these efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and there can be no assurance that the steps taken by us will prevent
misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. We cannot assure you that others will not develop technologies that are similar
or superior to our technologies.



Substantial litigation
regarding intellectual property rights exists in the markets in which we compete. We expect that the telecommunications and photonics industries may be increasingly subject to third-party infringement claims as the number of competitors grows and
the functionality of products in different industry segments overlaps. In addition, we believe that many of our competitors have filed or intend to file patent applications covering aspects of their technology on which they may claim our technology
infringes.



In January 2003 we announced the settlement of a
pending patent infringement lawsuit related to the design of tunable lasers filed against us by Photonetics, Inc. and Photonetics, S.A. in July 2001. In response to this lawsuit, we filed counterclaims against Photonetics, Inc. and Photonetics, S.A.
in September 2001 that charged Photonetics with the infringement of two U.S. patents related to New Focus proprietary external cavity laser technology. Under the terms of the settlement we obtained a license to two patents held by Photonetics
and Photonetics obtained a license to two patents held by us. We cannot make any assurances that other third parties in the future will not claim infringement by us with respect to our products and our associated technology.



Other claims of this kind in the future, with or without merit, could be
time-consuming to defend, result in costly litigation, divert managements attention and resources, result in injunctions against us, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements of this kind, if required, may not be available on terms acceptable to us, if at all. A successful claim of product infringement against us and failure or inability by us to license the infringed or similar technology could harm
our business.



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Employees



At December 29, 2002, we had a total of 253 employees located primarily in the United States, down from the peak employment level of approximately 2,100
people in February 2001. Of the 253 total employees, 128 were in manufacturing, 61 were in research and development, 33 were in sales and marketing, and 31 were in administration. None of our employees are subject to a collective bargaining
agreement.



As of March 10, 2003, we had approximately 250
employees.



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RISK FACTORS



You should carefully consider the risks described below and all of the information contained in this annual report on Form
10-K. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our
business, financial condition and results of operations could be harmed, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock. This section should be read in conjunction with the
Audited Consolidated Financial Statements and Notes thereto, and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this annual report on Form 10-K.



Risks Related to Our Financial Results



We have a history of losses and such net losses will likely continue if we are unable to
increase our revenues and contain our costs or complete an accretive acquisition.



We incurred net losses of approximately $104.8 million (excluding a one-time gain of $41.3 million related to the sale of our network tunable laser technology and the divestiture of our passive component product line)
for the fiscal year ended December 29, 2002, $495.4 million for the fiscal year ended December 30, 2001, and $36.0 million for the fiscal year ended December 31, 2000. As of December 29, 2002, we had an accumulated deficit of approximately
$651.7 million. We have estimated that in order to achieve profitability on a pro forma basis (excluding amortization of deferred compensation and acquired intangibles), we need to increase our revenues on a quarterly basis to approximately $13
million and reduce our quarterly cost structure, defined as operating expenses plus manufacturing overhead, to approximately $9 million. To increase our quarterly revenues, we must increase sales of our existing products and introduce new products
that we have either developed internally or acquired through other arrangements. While we believe we can grow our revenues from existing product lines through internal actions, the rate of growth will most likely not allow us to achieve our
breakeven quarterly revenue level in a timely manner. Therefore, we continue to evaluate business combinations and partnering arrangements in our core business areas that would improve our market share position, increase our revenue, improve on our
net loss position and accelerate our ability to reach profitability. While we are seeking acquisitions that we believe would improve our financial results, a completed acquisition may not provide the anticipated financial results, thus leading to
continuing net losses. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.



Our future revenues are inherently unpredictable, and as a result, we may fail to meet the expectations of securities analysts or investors, which could cause our
stock price to decline.



We have experienced reduced order
volumes of current products and slow market adoption of new products and these factors have, and will continue to have, an adverse effect on our revenues and operating results. We have only recently begun targeting some of the diversified markets
that we serve, and certain of the markets we serve are new and emerging and require us to continually assess new product development. As a result, we are unable to predict future revenues accurately or provide meaningful long-term guidance for our
future financial performance. Many of our expenses are fixed in the short term, and the steps we have taken to reduce spending may not be adequate if our revenues are lower than we project. If we are unable to accurately forecast our revenues, we
will incur charges that will harm our operating results. Any new product introductions will also result in increased operating expenses in advance of generating revenues, if any. Therefore, our quarterly net losses could be greater than expected.
Additional factors contributing to the difficulty in predicting future operating results include:



| |  |  | uncertainty regarding the capital equipment requirements in various industries, such as semiconductor and telecommunications, upon which we depend for sales of our test and
measurement lasers and certain other products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | increased availability of used equipment due to current market conditions;
| | - |  | --------------------------------------------------------------------------



| |  |  | general market and economic uncertainty;
| | - |  | ----------------------------------------



| |  |  | limited backlog and lower near-term sales visibility; and
| | - |  | ---------------------------------------------------------



| |  |  | variable and gross margin trends for our three product families.
| | - |  | ----------------------------------------------------------------



Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our
results from one quarter as any indication of our future performance. It is possible that in future quarters, our operating results may be below the expectations of public market analysts or investors, which may result in volatility or a decline in
our stock price.



The long sales cycles for sales of our products to OEM
customers may cause operating results to vary from quarter to quarter, which could continue to cause volatility in our stock price and may delay our return to profitability.



The period of time between our initial contact with certain of our customers, particularly our OEM customers, and the
receipt of an actual purchase order may span a time period of 6-18 months. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products and our manufacturing processes before
purchasing our products and using them in their equipment. The length of these qualification processes also may vary substantially by product and customer, and, thus, inhibit our ability to predict our results of operations. In addition, during the
qualification process, we may incur substantial sales and marketing expenses and expend significant management effort. Even after incurring such costs we ultimately may not sell any products to such potential customers. These qualification processes
often make it difficult to obtain new customers, as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. Further, even after we have received purchase orders or
entered into contracts to supply such customers, changes in the markets for their products may result in negotiations to cancel or alter such purchase orders or contracts. For example, in the fourth quarter of 2002, we recorded approximately $1.2
million in revenues from cancellation fees from two OEM customers due to contract cancellations. The long sales cycles may restrict our ability to increase our revenues in a timely manner, thus delaying a return to profitability on a pro forma
basis. The long sales cycles have caused and may continue to cause, our revenues and operating results to vary significantly and unexpectedly from quarter to quarter, which could continue to cause volatility in our stock price.



We are increasing our efforts to sell modules and subsystems to OEM customers and must
face the challenge of supporting the distinct needs of each of the markets we intend to serve.



We are expanding our efforts in the development and sale of photonics components and modules to diversified markets within the semiconductor, industrial,
biomedical and defense industries, in addition to the telecommunications industry. While we sell standard and customized components to these markets, we have not focused on the development and sale of modules and subsystems for these markets, except
for the test and measurement market within the telecommunications industry. As a result, we do not have established sales channels, brand recognition or an installed customer base in these markets and we have only limited information regarding
customer requirements. Some of these markets are only beginning to adopt photonics technologies and it is therefore difficult to assess the potential of these markets based on historical market information. Due to these factors, among others, we
cannot assure you that our entry into these markets will be successful or result in increased revenues. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth
rate and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive or our analyses of targeted markets are incorrect, our business and results of operations
would be harmed. In addition, the restructuring actions we have implemented to date could adversely affect our ability to market our products, introduce new and improved products and increase our revenues, which could adversely affect our business
and cause the price of our stock to decline.



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Accounting treatment of our acquisitions has harmed our operating results.



Our operating results have in the past been and may in the future be
adversely affected by purchase accounting treatment, primarily due to the effect of in-process research and development charges and the amortization of and impairment charges relating to goodwill and other intangibles originating from acquisitions.
For fiscal year 2001, we recorded acquisition-related amortization expenses of approximately $54.5 million. During 2001, under applicable accounting rules, we periodically evaluated the carrying value of our goodwill and other intangible assets. As
a result of these evaluations, we recorded charges totaling approximately $289.3 million for impairment of goodwill and other intangible assets in 2001. At December 30, 2001, all of the remaining goodwill associated with our acquisitions had
been written off through impairment charges. At June 30, 2002, we recorded an impairment charge of $7.7 million against remaining intangibles associated with our acquisitions of JCA Technology, Inc. (JCA) and Globe Y. Technology, Inc. (Globe
Y). As of December 29, 2002, the net book value of other intangible assets arising from our acquisitions of JCA and Globe Y was approximately $1.4 million. Purchase accounting treatment of future mergers and acquisitions or the write-down of
goodwill and other long-lived assets could result in a reduction in net income or an increase in expenses, which could have a material and adverse effect on our results of operations.



Risks Related to Our Business



Our acquisition and partnering strategy may be unsuccessful, which may harm our ability to grow revenues.



We believe that our future success depends on our ability to introduce and
market new products that we have either developed internally or acquired through strategic combinations or partnering relationships. We regularly review acquisition and partnering prospects that would complement our existing product offerings,
augment our market coverage, secure supplies of critical materials or enhance our technological capabilities. Our acquisition and partnering strategy is subject to inherent risks associated with the potential integration of additional operations,
the extent of management time and attention required, and related costs and expenses associated with the execution of this strategy.



We will face technical, operational and strategic challenges that may prevent us from successfully integrating businesses we may acquire in the future.



Execution of our acquisition and partnering strategy could result in a
number of financial consequences, including without limitation:



| |  |  | use of cash resources that would reduce our financial reserves;
| | - |  | ---------------------------------------------------------------



| |  |  | issuance of stock that would dilute our current stockholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | incurrence of debt;
| | - |  | -------------------



| |  |  | assumption of liabilities;
| | - |  | --------------------------



| |  |  | increased operational and administrative complexity of our business;
| | - |  | --------------------------------------------------------------------



| |  |  | higher fixed expenses which require a higher level of revenues to maintain gross margins; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | incurrence of expenses related to in-process research and development and the possible impairment of goodwill and other intangible assets which could result in large one-time
write-offs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Furthermore, acquisitions involve
numerous operational risks, including:



| |  |  | problems related to the integration and management of acquired technology, products, operations, information systems and personnel of the acquired company;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | problems completing product development programs of the acquired company and consolidating research and development efforts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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| |  |  | unanticipated costs or liabilities;
| | - |  | -----------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | diversion of resources from our existing business, products or technologies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



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



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



The integration of businesses that we have acquired into our business has been and will continue to be a complex, time
consuming and expensive process. We must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices to be successful. We have recorded significant
impairment charges with respect to our acquisitions of JCA and Globe Y. In the second quarter of 2002, we discontinued development of JCAs next-generation high-speed RF telecom products and consolidated its remaining business into our San
Jose facility. We also ceased our Globe Y operations in the third quarter of 2002. We cannot guarantee that any future acquisitions will result in sufficient revenues or earnings to recover our investment in, or expenses related to, these
acquisitions or that any synergies will develop. If we are not successful in integrating acquired businesses or if expected earnings or synergies do not materialize, we could be forced to attempt to resell or cease operations of acquired businesses.
In either event, we would likely incur significant expenses as well as non-cash charges to write-off acquired assets, which could seriously harm our financial condition and operating results.



Our future success depends on our ability to develop and successfully introduce new and
enhanced products that meet the needs of our customers in a timely manner.



The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on
the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. We may not be able to develop the underlying core technologies necessary
to create new or enhanced products, or to license or otherwise acquire these technologies from third parties. Product development delays may result from numerous factors, including:



| |  |  | changing product specifications and customer requirements;
| | - |  | ----------------------------------------------------------



| |  |  | difficulties in hiring and retaining necessary technical personnel;
| | - |  | -------------------------------------------------------------------



| |  |  | difficulties in reallocating engineering resources and overcoming resource limitations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | difficulties with contract manufacturers;
| | - |  | -----------------------------------------



| |  |  | changing market or competitive product requirements; and
| | - |  | --------------------------------------------------------



| |  |  | unanticipated engineering complexities.
| | - |  | ---------------------------------------



The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if
at all, or on a timely basis. In addition, the introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. A slowdown in demand for existing products ahead of a new product introduction could
result in a write-down in the value of inventory on hand related to existing products. We have experienced in the past and are continuing to experience a slowdown in demand for certain existing products. To the extent customers defer or cancel
orders for existing products due to a slowdown in demand or in the expectation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our operating results would suffer.
Further, we cannot assure you that our new products will gain



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market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry
standards. Any failure to respond to technological change would significantly harm our business.



The complexity of our business necessitates an infrastructure that our current revenues do not support. If we are unable to grow revenues to support the complexity of our business structure, our results of
operations will continue to be adversely affected.



We
have three distinct product lines that require separate development, manufacturing and sales and marketing resources. Through recent product line divestitures and plant closures, we have taken steps to reduce the complexity of our business but
multiple acquisition and business-related legal structures still remain in place. Such legal entities require separate accounting and tax records and until such legal entities can be dissolved in accordance with the applicable laws our
administrative costs will be adversely affected. In addition, as a public company we are subject to the reporting and other requirements under the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange
Commission. Compliance with these rules and regulations has become more complex, time-consuming and costly. Our business infrastructure is more complex than our revenues can currently support. If we are unable to grow our revenues sufficiently to
support our business infrastructure, our results of operations will continue to be adversely affected.



We expect competition to increase, which could reduce our sales and gross margins, or cause us to lose market share.



The markets for our products are intensely competitive, and we believe that competition from both new and existing competitors will increase in the
future. We compete in several specialized markets against a limited number of companies. Many of our existing and potential competitors are more established, have greater name recognition and possess greater financial, technological and marketing
resources than we do. Other competitors are small and highly specialized firms that are able to focus on only one aspect of a market.



Consolidation among suppliers of photonics and microwave products could intensify the competitive pressures that we face. A consolidated company could
offer more integrated products, making our products less competitive. Our customers may prefer to purchase products from our competitors who offer broader product lines, which would negatively affect our sales and operating results.



Some existing customers and potential future customers are also our
competitors. These customers may develop or acquire additional competitive products or technologies in the future, which may cause them to reduce or cease their purchases from us. Further, these customers may reduce or discontinue purchasing our
products if they perceive us as a serious competitive threat with regard to sales of products to their customers. As a result of these factors, we expect that competitive pressures will intensify and may result in price reductions, loss of market
share and reduced margins.



We compete on the basis of product
features, quality, reliability and price and on our ability to manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures
may force us to reduce our prices, which could negatively affect our operating results. If we do not respond adequately to competitive challenges, our business and results of operations will be harmed.



We may in the future, and we have in the past, become involved in costly and
time-consuming litigation that may substantially increase our costs and harm our business.



We may from time to time become involved in various lawsuits and legal proceedings. Litigation is subject to inherent uncertainties, and an adverse result
in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations or financial condition. Any litigation to



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which we are subject may be costly and further, could require significant involvement of our senior management and may divert managements attention
from our business and operations. For more information about current legal proceedings, see Part I, Item 3Legal Proceedings.



We depend on key personnel to manage our business effectively. If we are unable to retain key personnel, or if our senior management and key personnel are unable to
work together effectively, our business and operations may be harmed.



Our future success depends in part upon the continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel. Our officers and key employees are not bound
by employment agreements that require them to work for us for any specific term. In addition, our current management team has not worked together for a significant length of time and may not be able to work together effectively to successfully
implement our business strategies. If the management team is unable to accomplish our business objectives, our ability to stabilize and then grow our business could be severely impaired.



We have reduced our work force from a peak of approximately 2,100 employees in the first quarter of 2001 to approximately
250 employees at the end of December 2002. Our ability to continue to retain highly skilled personnel in light of these reductions in force and other factors will be a critical factor in determining whether we will be successful. Despite the
economic downturn, competition for highly skilled personnel continues to be intense. We may not be successful in retaining qualified personnel to fulfill our current or future needs, which could adversely affect our ability to develop and sell our
products. Furthermore, government regulations and immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such
facilities.



We face risks associated with our international sales that
could harm our financial condition and results of operations.



For the fiscal year ended December 29, 2002, approximately 33% of our net revenues were from international sales. For the fiscal year ended December 30, 2001, approximately 36% of our net revenues were from international sales. Sales to
customers outside North America have decreased as a percentage of our net revenues due to the divestiture of our passive component product line and cessation of development of certain high-speed RF telecommunication products, but international sales
continue to be significant.



Since a significant portion of our
foreign sales are denominated in U.S. dollars, our products may become less price competitive in countries in which local currencies decline in value relative to the U.S. dollar. Lower sales levels that typically occur during the summer months in
Europe and some other overseas markets may also materially and adversely affect our business.



Our international sales are subject to risks including the following:



| |  |  | greater difficulty in accounts receivable collection and longer collection periods;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to comply with the customs, import/export and other trade compliance regulations of the countries in which we do business, together with any unexpected changes in such
regulations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sudden and unexpected reductions in demand in particular countries in response to exchange rate fluctuations;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries; and
| | - |  | --------------------------------------------------------------------------



| |  |  | political, legal and economic instability in foreign markets.
| | - |  | -------------------------------------------------------------



While we expect our international revenues to be denominated predominantly in U.S. dollars, a portion of our international revenues may be denominated in
foreign currencies in the future. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks.



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Our business and future operating results may be adversely affected by events outside of our control.



Our business and operating results are vulnerable to interruption by
events outside of our control, such as earthquakes, fire, power loss, telecommunications failures and uncertainties arising out of the terrorist attacks on the United States, including the continuation or potential worsening of the current global
economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.



Risks Related to Manufacturing Our Products



Delays, disruptions or quality control problems in manufacturing could result in delays
in shipments of products to customers and adversely affect our business.



We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our subcontractors, and, as a result, product shipments to our customers could be
delayed beyond the shipment schedules requested by our customers, which would negatively affect our revenues, competitive position and reputation. Furthermore, even if we are able to timely deliver product to our customers, we may be unable to
recognize revenue based on our revenue recognition policies. We recently restructured our operations, consolidating manufacturing from our Camarillo, California and our larger San Jose, California facilities into our remaining facility in San Jose.
In addition, the sale and manufacture of certain products require continued compliance with governmental security and import/export regulations. In the past, we have experienced disruptions in the manufacture of some of our products due to changes
in our manufacturing processes, which resulted in reduced manufacturing yields, delays in the shipment of our products and deferral of revenue recognition. Any disruptions in the future, including disruptions as a result of the consolidation of
facilities or failure to maintain compliance with governmental regulations, could adversely affect our revenues, gross margins and results of operations. In addition, we may experience manufacturing delays and reduced manufacturing yields upon
introducing new products to our manufacturing lines or when integrating acquired products. We have in the past experienced lower-than-targeted product yields, which have resulted in delays of customer shipments, lost revenues and impaired gross
margins.



If we are unable to accurately forecast component and material
requirements, our results of operations will be adversely affected.



We use rolling forecasts based on anticipated product orders to determine our component and material requirements. It is very important that we predict both the demand for our products and the lead times required to
obtain the necessary components and materials. It is very difficult to develop accurate forecasts of product demand, especially in the current uncertain conditions in our served markets and the economy in general. Order cancellations and lower order
volumes by our customers have in the past created excess inventories. Further, in order to avoid additional excess material inventories we have incurred cancellation charges associated with modifying existing purchase orders with our vendors. In
fiscal year 2001, we recorded approximately $36.6 million in excess inventory and related order cancellation fees, primarily related to telecom products, which negatively affected our operating results. If we fail to accurately predict both the
demand for our products and the lead times required to obtain the necessary components and materials in the future, we could incur additional inventory write-downs or cancellation charges. If we underestimate our component and material requirements,
we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively affect our results of operations.



We depend on single or limited source suppliers for some of the key components in our
products, which may make us susceptible to supply shortages or price fluctuations if demand for our products increases.



We currently purchase several key components used in the manufacture of our products from single or limited source suppliers. We do not have long-term or
volume purchase agreements with any of these suppliers



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and these components may not in the future be available in the quantities or at the prices required by us. We may fail to obtain required components in a
timely manner in the future, or could experience further delays from evaluating and testing the products of these potential alternative suppliers. Current difficult economic conditions could adversely affect the financial condition of our suppliers,
many of whom have limited financial resources. We have in the past, and may in the future, be required to provide advance payments in order to secure key components from financially limited suppliers. Financial or other difficulties faced by these
suppliers could limit the availability of key components or impair our ability to recover advances made to these suppliers. Any interruption or delay in the supply of any of these components, or the inability to obtain these components from
alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.



If our customers do not qualify our manufacturing lines or the manufacturing lines of our
subcontractors for volume shipments, our operating results could suffer.



Certain of our OEM customers do not purchase our products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as
well as each new manufacturing line, must pass through varying levels of qualification with our customers. These OEM customers may also require that we, and any subcontractors that we may use, be registered under international quality standards,
such as ISO 9001. We have recently consolidated our worldwide manufacturing operations. Manufacturing lines relocated to our remaining San Jose facility from our other manufacturing facilities must undergo qualification by our customers before
commercial production on these lines can recommence. The qualification process, whether for new products or in connection with the relocation of manufacturing lines for current products, determines whether the manufacturing line meets the quality,
performance and reliability standards of our customers. We may experience delays in obtaining customer qualification of our manufacturing lines and, as a consequence, our operating results and customer relationships would be harmed.



Risks Related to Our Intellectual Property



We may not be able to protect our proprietary technology, which would seriously harm our
ability to compete effectively, and harm our ability to generate revenues.



We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also rely on confidentiality procedures and contractual
provisions with our employees, consultants and corporate partners. We cannot assure you that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. Other parties may independently develop similar or competing technology or design around any patents that may be issued to us. It may be necessary to litigate to enforce our patents, copyrights,
and other intellectual property rights, to protect our trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation can be time consuming,
distracting to management, expensive and difficult to predict. Our failure to protect or enforce our intellectual property could have an adverse effect on our business, financial condition, prospects and results of operations.



If we are unsuccessful in defending intellectual property claims, we may have to expend a
substantial amount of resources to make our products non-infringing and may have to pay a substantial amount in damages.



On January 7, 2003, we settled intellectual property litigation with Photonetics, Inc. and Photonetics, S.A. Under the terms of the settlement, we
obtained a license to two patents held by Photonetics and Photonetics has obtained a license to two of our patents. The settlement did not have a material effect on our results of operations. However, any future claims by others and resulting
lawsuits, if successful, could subject us to significant liability



20



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for damages and invalidate our proprietary rights. We anticipate, based on the size and sophistication of our competitors and the history of rapid
technological advances in our targeted industries, that several competitors may have existing patents or patent applications in progress in the United States or in foreign countries that, if issued, could relate to our product and result in
litigation. The holders of such existing or pending patents or licensees may assert infringement claims against us or claim that we have violated other intellectual property rights. The lawsuits, regardless of their merits, could be time-consuming
and expensive to defend or resolve and would divert management time and attention. As a result of any future intellectual property litigation, we may be forced to do one or more of the following, any of which could harm our business:



| |  |  | stop selling, incorporating or using our products that use the disputed intellectual property;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | obtain from third parties a license to sell or use the disputed technology, which license may not be available on reasonable terms, or at all; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign our products that use the disputed intellectual property.
| | - |  | ------------------------------------------------------------------



For more information about current legal proceedings, see Part I, Item 3Legal Proceedings.



Risks Related to Our Corporate Governance



Our ability to issue preferred stock could harm the rights of our common stockholders.



In July 2001, we adopted a stockholder rights agreement
and declared a dividend distribution of one right per share of common stock for stockholders of record as of August 31, 2001. Each right entitles stockholders to purchase 1/1000 share of our Series A Participating Preferred Stock at an exercise
price of $40. The rights only become exercisable in certain limited circumstances following the tenth day after a person or group announces acquisitions of or tender offers for 15 percent or more of our common stock. For a limited period of time
following the announcement of any such acquisition or offer, the rights are redeemable by us at a price of $0.001 per right. For a limited period of time after the exercisability of the rights, each right, at the discretion of our board of
directors, may be exchanged for either 1/1000th share of Series A Participating Preferred Stock or one share of common stock per right. The rights expire on August 31, 2011, if not earlier redeemed or exchanged.



Some provisions contained in the rights plan may have the effect of
discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change in control. For example, such provisions may deter tender offers for shares of common stock or exchangeable shares which offers may be attractive
to the stockholders, or deter purchases of large blocks of common stock or exchangeable shares, thereby limiting the opportunity for stockholders to receive a premium for their shares of common stock or exchangeable shares over the then-prevailing
market prices. The issuance of Series A Participating Preferred Stock or any preferred stock subsequently issued by our board of directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.



Provisions of our charter documents and Delaware law may have anti-takeover
effects that could prevent a change in our control.



Provisions of our amended and restated certificate of incorporation, bylaws, stockholder rights agreement, Delaware law and other corporate governance documents could make it more difficult for a third party to acquire us, which could
hinder stockholders ability to receive a premium for our stock over the then-prevailing market prices. These provisions include:



| |  |  | a stockholder rights agreement that grants existing stockholders additional rights in the event a single holder acquired greater than 15% of our shares;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a classified board of directors, in which our board is divided into three classes with three-year terms with only one class elected at each annual meeting of stockholders, which
means that a holder of a majority of our common stock will need two annual meetings of stockholders to gain control of the board;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a provision which prohibits our stockholders from acting by written consent without a meeting;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a provision which permits only the board of directors, the president or the chairman to call special meetings of stockholders; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | a provision which requires advance notice of items of business to be brought before stockholder meetings.
| | - |  | ---------------------------------------------------------------------------------------------------------



In addition, amending any of the above provisions will require the vote of the holders of 66 2/3% of our outstanding common
stock.



Item 2.Properties



We currently operate the following facilities:



|Location     |  | Sq. Ft. |  | Type                           |  | Lease Termination
|------------ |  | ------- |  | ------------------------------ |  | -----------------
|San Jose, CA |  | 52,000  |  | Headquarters/R&D/Manufacturing |  | March 2007       
|San Jose, CA |  | 6,000   |  | Administration                 |  | September 2004   
|Madison, WI  |  | 3,000   |  | R&D                            |  | December 2007    



We consolidated our
manufacturing facilities into one facility in San Jose, California. We also lease an unoccupied facility of 145,000 square feet in Camarillo, CA that we have subleased, and certain unoccupied facilities that we are seeking to sublease. The
facilities which we are seeking to sublease include a 55,000 square foot manufacturing facility in Santa Clara, CA and a 130,000 square foot manufacturing, R&D and administrative facility in San Jose, CA. Further, we own a 243,000 square
foot unoccupied facility in Shenzhen, China that we are seeking to sell. We believe that the facilities we currently occupy are adequate for our current and planned manufacturing needs.



Item 3.Legal Proceedings



On February 13, 2002, a lawsuit was filed purportedly on behalf of both Howard Yue and Globe Y Technology, a company acquired by New Focus, in Alameda
County Superior Court. The action was subsequently transferred to Santa Clara County Superior Court. The action was captioned Globe Y Technology, Inc. v. New Focus, Inc. et al., and asserted claims against the company and several of its
officers and directors. The original complaint alleged eight causes of action, including fraud and deceit by active concealment, fraud and deceit based upon omissions of material facts, negligent misrepresentation, and breach of contract. The claims
stemmed from the acquisition of Globe Y Technology, Inc. by the company completed February 15, 2001. The complaint sought unspecified economic, punitive, and exemplary damages, prejudgment interest, costs, and equitable and general relief. On
September 10, 2002, the Santa Clara County Superior Court entered an order dismissing without prejudice the claims against the company and its officers and directors with leave to amend. On November 15, 2002 Howard Yue filed an amended
complaint on behalf of himself. Globe Y Technology, Inc. is not named as a plaintiff in the amended complaint. The amended complaint is captioned Howard Yue v. New Focus, Inc., et al. and asserts claims against the company and several of its
officers and directors. The amended complaint alleges eight causes of action similar to those alleged in the original complaint. As with the original complaint, the claims asserted in the amended complaint stem from the acquisition of Globe Y
Technology, Inc. by the company completed February 15, 2001. The amended complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs, and equitable and general relief. On March 11, 2003, the court granted the
companys motion to dismiss several causes of action in the amended complaint for failure to state a claim. The court, however, gave the plaintiff thirty days to amend his causes of action. We believe that the claims in the amended complaint
are without merit and intend to defend against them vigorously. Discovery in this matter is ongoing. An unfavorable resolution of any of this lawsuit could have a material adverse effect on our business, results of operations or financial condition.



On July 20, 2001, Photonetics, Inc. and Photonetics, S.A.
filed a complaint against the company for patent infringement in the United States District Court for the District of Delaware. Photonetics, Inc. and Photonetics, S.A. claimed that the company infringed U.S. Patent No. 5,594,744 and sought
preliminary and injunctive relief



22



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and damages. Photonetics, Inc. and Photonetics, S.A. alleged that the companys infringement was willful and sought enhanced damages and attorneys
fees. The company filed its answer and counterclaims on September 10, 2001. In the answer, the company denied infringement of U.S. Patent No. 5,594,744 and asserted that the patent was invalid and unenforceable. In a declaratory judgment
counterclaim, the company claimed that U.S. Patent No. 5,594,744 is invalid, unenforceable and not infringed. The company also counterclaimed for patent infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and sought preliminary and injunctive
relief and damages. Additionally, the company claimed that Photonetics, Inc. and Photonetics, S.A.s infringement of the patents was willful and sought enhanced damages and attorneys fees. On October 9, 2001, Photonetics, Inc. and
Photonetics, S.A. filed its reply to the companys counterclaims. Photonetics, Inc. and Photonetics, S.A. denied infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and alleged that the patents were invalid. On January 7, 2003, the
parties settled their claims and counterclaims. Under the terms of the settlement, the company has obtained a license to two patents held by Photonetics and Photonetics has obtained a license to two patents held by the company. The settlement did
not have a material effect on our results of operations or financial condition.



On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against the company and several of its officers and directors (the
Individual Defendants) in the United States District Court for the Southern District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC
World Markets Corp. (collectively the Underwriter Defendants), the underwriters in the companys initial public offering. Three subsequent lawsuits were filed containing substantially similar allegations. These complaints have been
consolidated. On April 19, 2002, plaintiffs filed a consolidated amended complaint. The amended complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants related to the Initial Public Offering and the Secondary
Offering, violations of Section 15 of the Securities Act of 1933 and Section 20(a) of the Securities Act of 1934 against the Individual Defendants, violations of Section 10(b) and Rule 10b-5 against the company and violations of Section 12(a)(2) of
the Securities Act of 1933 and Section 10(b), and Rule 10b-5 promulgated thereunder, of the Securities Act of 1934 against the Underwriter Defendants. The amended complaint seeks unspecified damages on behalf of a purported class of purchasers
of the companys common stock between May 18, 2000 and December 6, 2000.



Various plaintiffs have filed similar actions in the United States District Court for the Southern District of New York asserting virtually identical allegations concerning the offerings of more than 300 other
issuers. These cases have all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on pretrial motions, discovery, and related matters other than trial. On or about July 15, 2002, defendants filed an omnibus motion to dismiss
in the coordinated proceedings on common pleadings issues. On or about October 9, 2002, the court entered as an order a stipulation dismissing the Individual Defendants from the litigation without prejudice. On February 19, 2003, the omnibus motion
to dismiss was denied by the court as to the claims against New Focus.



On or about February 28, 2003, a similar purported class action complaint entitled Liu v. Credit Suisse First Boston Corporation et al. was filed in the United States District Court for the Southern District of Florida against Credit Suisse
First Boston Corporation, approximately 50 issuers, including New Focus, and various individuals of the issuer defendants, including William L. Potts, Jr., our Chief Financial Officer. As against New Focus, the complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as claims for common law fraud, negligent misrepresentation, and violations of the Florida Blue Sky Law arising out of the initial public offering of our common
stock. As against Mr. Potts, the complaint alleges violations of Sections 10(b) and 15 of the Securities Exchange Act of 1934 and Rule 10b-5 as well as claims for common law fraud, negligent misrepresentation, and violations of the Florida Blue Sky
Law, also arising out of the initial public offering of our common stock.



In addition, the Company is subject to various claims that arise in the normal course of business.



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



None.



23



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PART II



Item 5.Market for the Registrants Common Stock and Related Stockholder Matters



Market Information, Holders and Dividends



Our common stock is quoted on the Nasdaq National Market under the symbol NUFO. The following table sets forth, for the period indicated, the
high and low closing prices per share of the common stock as reported on the Nasdaq National Market.



|                                       |  | High |       | Low
|-------------------------------------- |  | ---- | ----- | ---
|2001                                   |  |      |       |    
|First Quarter                          |  | $    | 60.19 |    
|Second Quarter                         |  | $    | 21.69 |    
|Third Quarter                          |  | $    | 7.67  |    
|Fourth Quarter                         |  | $    | 5.16  |    
|2002                                   |  |      |       |    
|First Quarter                          |  | $    | 4.76  |    
|Second Quarter                         |  | $    | 3.25  |    
|Third Quarter                          |  | $    | 3.10  |    
|Fourth Quarter                         |  | $    | 3.70  |    
|2003                                   |  |      |       |    
|First Quarter (through March 10, 2003) |  | $    | 3.84  |    



On March 10, 2003 the
reported last sale price of the common stock on the Nasdaq National Market was $3.24. As of March 10, 2003 there were in excess of 375 stockholders of record.



We have never declared or paid any dividends on our capital stock. Currently, we expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends for the foreseeable future.



Securities Authorized for Issuance Under Equity Compensation Plans



|                                                           |  | (a)                                                                                     |  | (b)                                                                      |      | (c)                                                                                                                                  
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | -------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding
securitiesreflected in column (a))
|Equity compensation plans approved by security holders     |  | 8,106,843                                                                               |  | $                                                                        | 4.25 |                                                                                                                                      
|Equity compensation plans not approved by security holders |  | 7,420                                                                                   |  | $                                                                        | 4.04 |                                                                                                                                      
|                                                           |  |                                                                                         |  |                                                                          |      |                                                                                                                                      
|Total                                                      |  | 8,114,263                                                                               |  | $                                                                        | 4.25 |                                                                                                                                      
|                                                           |  |                                                                                         |  |                                                                          |      |                                                                                                                                      



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Item 6.Selected Consolidated Financial Data



The following table sets forth our selected consolidated financial data and other operating information. The financial data and operating information is
derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.



|                                                            |                  | Fiscal Year Ended                     |          |                      | Nine MonthsEndedDecember 31,1999 (2) |   |                  | Fiscal YearEndedMarch 31,1999 | 
|----------------------------------------------------------- | ---------------- | ------------------------------------- | -------- | -------------------- | ------------------------------------ | - | ---------------- | ----------------------------- | 
|                                                            | December 29,2002 |                                       |          | December 30,2001 (1) |                                      |   | December 31,2000 |                               | 
|                                                            |                  | (in thousands, except per share data) |         
|Consolidated Statement of Operations Data:                  |                  |                                       |          |                      |                                      |   |                  |                               | 
|Net revenues                                                |                  | $                                     | 33,388   |                      |                                      | $ | 92,639           |                               | 
|Cost of net revenues                                        |                  |                                       | 43,627   |                      |                                      |   | 112,004          |                               | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Gross profit (loss)                                         |                  |                                       | (10,239  | )                    |                                      |   | (19,365          | )                             | 
|Operating Expenses:                                         |                  |                                       |          |                      |                                      |   |                  |                               | 
|Research and development, net                               |                  |                                       | 20,478   |                      |                                      |   | 48,824           |                               | 
|Sales and marketing                                         |                  |                                       | 8,227    |                      |                                      |   | 10,191           |                               | 
|General and administrative                                  |                  |                                       | 14,561   |                      |                                      |   | 20,855           |                               | 
|Amortization of goodwill and other intangibles              |                  |                                       | 3,014    |                      |                                      |   | 54,459           |                               | 
|Impairment of goodwill and other intangibles                |                  |                                       | 7,692    |                      |                                      |   | 289,308          |                               | 
|In-process research and development                         |                  |                                       |         |                      |                                      |   | 13,400           |                               | 
|Restructuring charges                                       |                  |                                       | 72,233   |                      |                                      |   | 17,770           |                               | 
|Amortization of deferred compensation                       |                  |                                       | 8,012    |                      |                                      |   | 58,132           |                               | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Total operating expenses                                    |                  |                                       | 134,217  |                      |                                      |   | 512,939          |                               | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Operating loss                                              |                  |                                       | (144,456 | )                    |                                      |   | (532,304         | )                             | 
|Interest and other income (expense), net                    |                  |                                       | 40,345   |                      |                                      |   | 16,880           |                               | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Loss before provision (benefit) for income taxes            |                  |                                       | (104,111 | )                    |                                      |   | (515,424         | )                             | 
|Provision (benefit) for income taxes                        |                  |                                       | 700      |                      |                                      |   | (20,000          | )                             | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Net loss                                                    |                  | $                                     | (104,811 | )                    |                                      | $ | (495,424         | )                             | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Basic and diluted net loss per share                        |                  | $                                     | (1.40    | )                    |                                      | $ | (6.78            | )                             | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 
|Shares used to compute basic and diluted net loss per share |                  |                                       | 75,105   |                      |                                      |   | 73,045           |                               | 
|                                                            |                  |                                       |          |                      |                                      |   |                  |                               | 



|                                                    |  | December 29,2002 |         | December 30,2001 (1) |   | December 31,2000 |  | December 31,1999 |         | March 31,1999 |  
|--------------------------------------------------- |  | ---------------- | ------- | -------------------- | - | ---------------- |  | ---------------- | ------- | ------------- | -
|                                                    |  | (in thousands)   |        
|Consolidated Balance Sheet Data:                    |  |                  |         |                      |   |                  |  |                  |         |               |  
|Cash, cash equivalents and short-term investments   |  | $                | 279,358 |                      | $ | 294,655          |  | $                | 485,493 |               | $
|Working capital                                     |  |                  | 273,499 |                      |   | 297,898          |  |                  | 501,983 |               |  
|Total assets                                        |  |                  | 317,364 |                      |   | 429,724          |  |                  | 600,944 |               |  
|Long-term debt, less current portion                |  |                  |        |                      |   | 7                |  |                  | 111     |               |  
|Total stockholders equity (net capital deficiency) |  |                  | 286,554 |                      |   | 408,110          |  |                  | 567,110 |               |  

---

|(1) |  | Data for 2001 includes the results of operations for JCA and Globe Y subsequent to their acquisition dates of January 16, 2001 and February 15, 2001, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | In 1999, the Company changed its year-end from March to December, resulting in a nine-month fiscal year for 1999.
|--- |  | -----------------------------------------------------------------------------------------------------------------



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The following is a summary of our unaudited quarterly results for the fiscal years ended December 29,
2002 and December 30, 2001:



|                                                                  |  | Three Months Ended                    |       
|----------------------------------------------------------------- |  | ------------------------------------- | ------
|                                                                  |  | Dec. 29,2002                          |       
|                                                                  |  | (in thousands, except per share data) |       
|Quarterly Statement of Operations Data:                           |  |                                       |       
|Net revenues                                                      |  | $                                     | 7,435 
|Cost of net revenues                                              |  |                                       | 6,996 
|                                                                  |  |                                       |       
|Gross profit (loss)                                               |  |                                       | 439   
|Operating Expenses:                                               |  |                                       |       
|Research and development, net                                     |  |                                       | 2,350 
|Sales and marketing                                               |  |                                       | 1,500 
|General and administrative                                        |  |                                       | 2,682 
|Amortization of goodwill and other intangibles                    |  |                                       | 162   
|Impairment of goodwill and other intangibles                      |  |                                       |      
|In-process research and development                               |  |                                       |      
|Restructuring and asset impairmentcharges                         |  |                                       | 18    
|Amortization of deferred compensation                             |  |                                       | 1,207 
|                                                                  |  |                                       |       
|Total operating expenses                                          |  |                                       | 7,919 
|                                                                  |  |                                       |       
|Operating loss                                                    |  |                                       | (7,480
|Interest and other income (expense), net                          |  |                                       | (1,536
|                                                                  |  |                                       |       
|Income (loss) before provision (benefit) for income taxes         |  |                                       | (9,016
|Provision (benefit) for income taxes                              |  |                                       | 700   
|                                                                  |  |                                       |       
|Net income (loss)                                                 |  | $                                     | (9,716
|                                                                  |  |                                       |       
|Basic and diluted net income (loss) per share                     |  | $                                     | (0.13 
|                                                                  |  |                                       |       
|Shares used to compute basic net income (loss) per share          |  |                                       | 73,502
|                                                                  |  |                                       |       
|Shares used to compute diluted net income (loss) per share        |  |                                       | 73,502
|                                                                  |  |                                       |       
|                                                                  |  |                                       |       
|Net income (loss) previously reported (1)                         |  |                                       |       
|                                                                  |  |                                       |       
|Basic and diluted net income (loss) per share previously reported |  |                                       |       
|                                                                  |  |                                       |       

---

|(1) |  | Previously reported results for the quarters ended March 31, 2002, June 30, 2002 and September 29, 2002 have been adjusted for an overstatement of non-cash deferred compensation
expenses associated with terminated employees. Compared to the previously reported deferred stock compensation expenses, the adjusted deferred stock compensation expenses were lower by approximately $2.5 million in the first quarter of 2002, $3.1
million in the second quarter of 2002, and $1.0 million in the third quarter of 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



Recent Developments and Outlook



We develop and manufacture photonics and microwave solutions for both commercial and research applications. Our products include tunable lasers for test
and measurement applications, high-speed radio-frequency (RF) amplifiers, and advanced photonics tools. Our photonics tools products include instruments and tools used for sourcing, measuring, moving, manipulating, modulating and detecting optical
signals in commercial and research applications across a wide variety of industries. Our tunable lasers are based on an external-cavity diode laser design and are used in telecom test and measurement instrumentation, biomedical applications,
spectroscopic applications, and research laboratories worldwide. Our RF amplifier products, which use state-of-the-art thin-film hybrid microwave technology, cover a wide range of frequencies and are available with either standard or customized
performance characteristics. Our products serve a broad range of diversified markets within the semiconductor, industrial, biomedical, defense and telecommunications industries. In an effort to expand our OEM sales content, we intend to pursue new
and emerging applications for modules and subsystems within these markets, in particular modules and subsystems that would use our photonics tools and tunable lasers. Given the difficulty in accurately assessing the size and growth rates of these
market opportunities, we will need to constantly balance new product development expenses against future revenue expectations in order to show continuing improvement in our financial results.



In fiscal years 2000 and 2001, our product focus was primarily on the
telecommunications industry as we developed and manufactured optical and RF components for next-generation communication networks. Historically, we reported revenues in two segments: telecom and photonics tools, with sales of telecom products
accounting for approximately 67% and 71% of our revenues during fiscal year 2000 and fiscal year 2001, respectively. Our telecom products included passive optical components, such as circulators and polarization beam combiners, for wavelength
management as well as active components, such as tunable laser modules for network as well as test and measurement applications and high-speed RF amplifiers for telecom networks and defense applications.



In the second quarter of 2001 we experienced a sharp sequential decline in
our quarterly net revenues relative to the first quarter of 2001 due to an unexpected deterioration of the telecommunications industry. In response to this change in industry conditions, we began restructuring our operations in the second quarter of
2001 with the impairment of acquisition-related goodwill and a restructuring charge related to planned work force reductions and two facility closuresa small facility in China and another in the U.S. Our net revenues declined sharply again
between the second and third quarters of 2001. After the end of the third quarter of 2001 we significantly expanded our expense reduction target through a planned 35% reduction of our worldwide work force, which was to be completed by the end of
2002, and announced our intention to consolidate our U.S. manufacturing operations. In response to a further decline in our net revenues between the third and fourth quarter of 2001 and a continuing weak outlook for our acquired businesses, we
impaired the remaining acquisition-related goodwill on our balance sheet and announced the planned closure of a second U.S. manufacturing facility by the third quarter of 2002.



During the first quarter of 2002 we concluded that difficult conditions within the telecommunications industry would persist
into 2003, and possibly into 2004, and therefore decided to take additional steps to reduce our dependence on this industry. In March 2002 we announced our intention to divest our passive optical product line and cease operations at our large China
manufacturing facility. To reflect these decisions we recorded a $24.0 million restructuring charge in our first quarter 2002 financial results. We also indicated that these actions would further reduce our expense structure and lower the quarterly
net revenue required to reach profitability.



During the second
quarter of 2002 we sold our passive component product line to Finisar Corporation and, in addition, completed the sale of our network tunable laser technology to Intel Corporation. These sales



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generated a $41.3 million net gain in our second quarter results. During the second quarter of 2002 we also decided to cease development of
next-generation high-speed RF products for telecom applications. This action, combined with the prior divestitures of our passive product line and network tunable laser technology, represented the final step in our plan to eliminate our
telecom-related component product lines. The $11.6 million restructuring charge recorded in the second quarter reflected the decision to cease development of our telecom RF products as well as final work force reductions at our large China
facility. Additionally, we wrote off $7.7 million of intangible assets related to our RF telecom product line. In conjunction with our second quarter results we also announced the planned closure of two additional U.S. facilities in 2002.



In the third quarter of 2002 we completed, as scheduled, our
facility consolidation program with the closure of three U.S. facilities, which generated a restructuring charge of $36.6 million. In total, the facility consolidation program resulted in the closure of four U.S. and two China facilities. By
the end of the third quarter of 2002 we had completed our planned restructuring activities.



As a result of our restructuring efforts over the six-quarter period between the second quarter of 2001 and the end of the third quarter of 2002, we had:



| |  |  | Reduced our quarterly expense structure, defined as operating expenses plus manufacturing overhead, to $9.6 million in the fourth quarter of 2002 from $32.5 million in the second
quarter of 2001;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidated our operations into approximately 60,000 square feet of space (one primary facility plus some ancillary space), down from seven facilities encompassing approximately
573,000 square feet;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduced our worldwide work force to approximately 250 people in the fourth quarter of 2002 from a peak employment level of 2,100 people in the first quarter of 2001;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduced our cash outflow in the fourth quarter of 2002, excluding outflows related to restructuring activities and our share repurchase program as well as inflows from certain
non-recurring transactions, to $2.2 million, which is down from over $30 million per quarter in mid-2001 and approximately $10 million per quarter in the first three quarters of 2002;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Exited the fourth quarter with a lower net loss, due primarily to improved operating performance, minimal restructuring and impairment charges, and reduced amortization of
intangibles and deferred compensation; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Refocused our business on product areas that were less dependent on the telecommunications industry.
| | - |  | ----------------------------------------------------------------------------------------------------



In the process of restructuring our operations we recorded restructuring charges of $72.2 million and
$17.8 million in fiscal years 2002 and 2001, respectively. These totals included charges for the impairment of tangible assets, facility closure costs and severance-related payments. We also recorded impairment charges against goodwill and
other intangible assets of $7.7 million and $289.3 million in fiscal years 2002 and 2001, respectively. Accordingly, our quarterly depreciation expense has declined to $0.7 million in the fourth quarter of 2002 from $3.1 million in the second
quarter of 2001. In the same timeframe, the amortization for intangibles has declined to $0.2 million from $22.5 million per quarter, while deferred compensation expense has declined to $1.2 million from $16.1 million per quarter.



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The composition of our quarterly net revenues also changed as a result of the sharp decline in the
telecommunications industry, our decision to eliminate component product lines related to telecom networks, and general economic conditions. The following table shows the composition of our net revenues (i) for the three months ended April 1,
2001, near the height of the telecommunications industry; (ii) for the three months ended March 31, 2002, at the time we decided to eliminate our telecom-related component product lines, and (iii) for the three months ended December 29, 2002,
our most recent quarter:



Net Revenues

(in millions)



|Three Months Ended                                                                                                                                                                                                                                                                                                                                                           |  | PassiveComponents |      | RFComponents |   | TunableLasers |  | PhotonicsTools |     | Total
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---- | ------------ | - | ------------- |  | -------------- | --- | -----
|April 1, 2001                                                                                                                                                                                                                                                                                                                                                                |  | $                 | 15.5 |              | $ | 9.4           |  | $              | 7.4 |      
|March 31, 2002                                                                                                                                                                                                                                                                                                                                                               |  |                   | 0.7  |              |   | 3.0           |  |                | 1.2 |      
|December 29, 2002                                                                                                                                                                                                                                                                                                                                                            |  |                   |     |              |   | 1.8           |  |                | 2.1 |      
|Notes: (1)    RF components include data drivers and clock amplifiers for telecom networks and amplifiers for
defense and avionics applications. (2)    Tunable lasers include laser modules and benchtop
systems for test and measurement applications. Net revenues for tunable lasers for the quarter ended December 29, 2002 included $1.2 million in cancellation fees.



Under our new
strategic direction, we plan to focus our business on providing photonics and microwave solutions to the semiconductor, industrial, biomedical, defense and telecommunications industries. A main area of focus will remain test and measurement
applications, including telecom test and measurement, which accounted for the majority of tunable laser net revenues in 2001. With the elimination of our telecom-related component product lines we will operate in one segment and report our financial
results accordingly.



Near-term improvement in our financial
results remains dependent on general economic conditions and, in particular, a recovery in the semiconductor industry and research markets across multiple industries. We do not expect a significant recovery in these industries in the near term, and
thus, we expect only limited improvements in our quarterly revenues, if any, during the first half of 2003. We continue to pursue OEM opportunities using our photonics technology and are actively sampling prototype products for different market
applications. We expect higher quarterly net revenues during the second half of 2003, in part, based upon winning production contracts for some of these new OEM products. Supported by an increasing volume of orders, we expect increased revenues from
sales of our high-speed RF products for defense applications during 2003. Additionally, any recovery in the semiconductor industry or research markets in the second half of 2003 would likely increase revenues from our photonics tools products.



We also recently completed our $45 million share repurchase
program, which resulted in the repurchase of 13.1 million shares of our common stock between late October 2002 and early February 2003. Through December 31 2002, we had repurchased 8.25 million common shares at a total cost of approximately
$28.7 million, including commissions. We may repurchase additional shares of our common stock in the future, which will decrease our cash balance.



Throughout 2003 we will be striving to improve our operating performance by continuously evaluating our expense structure and our manufacturing
efficiencies while we aggressively pursue revenue opportunities. Additionally, we continue to look for strategic combinations that will strengthen our position in the application of photonics and microwave technologies.



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Statement of Operations



We sell and market our products through a combination of direct sales, catalog sales and international sales representatives
and resellers, primarily in the United States, Europe and Asia. For the year ended December 29, 2002, approximately 33% of our net revenues were from international sales.



Our cost of net revenues consists of raw materials, direct labor and manufacturing overhead, which includes, among other
costs, production start-up, prototype costs and inventory write-down costs. In addition, we rely on contract manufacturers for some of our key components, which are included in our cost of net revenues. We anticipate that our gross margin percentage
for the first half of 2003 will improve relative to the positive 6% reported for the fourth quarter of 2002 due to improved manufacturing efficiencies. Based on our expectations for higher quarterly revenues in the second half of the year, our gross
margins should further improve in the last half of 2003.



Research and development expenses consist primarily of salaries and related personnel expenses, fees paid to consultants and outside service providers, materials costs and other expenses related to the design, development, testing and
enhancements of our products. We expense our research and development costs as they are incurred. In addition, from time to time, we receive funding for research and development projects. Our product development efforts have historically focused on
our telecom products. In particular, development of our network tunable laser technology and high-speed RF telecom products, prior to the sale of the network tunable laser technology to Intel and the cessation of product development for
next-generation RF telecom products in the second quarter of 2002, accounted for a significant portion of our research and development expenses. For fiscal years 2002, 2001 and 2000, we received $1.7 million, $1.9 million and $774,000, respectively,
for research and development activities, which were used to offset research and development costs.



During 2002, research and development expenses declined from $7.4 million in the first quarter to $2.4 million, or approximately 32% of net revenues,
in the fourth quarter due primarily to the divestiture of our passive optical product line and our decision to cease development of our next-generation high-speed RF telecommunications products. Due to the separate and distinct product development
efforts for our three product lines, we anticipate that research and development will remain flat, or increase slightly, over the course of 2003 as we execute our business strategy, particularly with respect to targeting OEM customers for our
photonics tools and tunable lasers. Development costs for these applications are higher due to the required integration of electronics, optics and software.



Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows, promotional activities and travel expenses. We believe our future success depends upon establishing and maintaining successful relationships with a variety of key
customers, and that continued investment in sales and marketing is critical to establishing these relationships. In 2002, we reduced our aggregate sales and marketing expense to $1.5 million, or approximately 20.2% of net revenues, in the fourth
quarter of 2002 from a peak of $2.6 million, or approximately 25.5% of net revenues, in the first quarter of 2002. This reduction was primarily attributable to the divestiture of our passive component product line, cessation of our development of
next-generation high-speed RF telecommunication products and consolidation of our facilities. We expect that our quarterly sales and marketing expenses will remain at approximately this quarterly level throughout 2003.



General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, accounting, information technology, business development and human resources personnel, corporate-related expenses associated with operating as a public company, professional fees and costs associated with
maintaining our information systems. In 2002, we reduced our aggregate general and administrative expenses from a peak of $4.3 million in the second quarter to $2.7 million in the fourth quarter. Decreases resulting from the divestiture of our
passive component product line, including the closure of our manufacturing facility in Shenzhen, China, and the consolidation of our California facilities contributed to the decrease. We expect that



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our general and administrative expenses will remain flat, and possibly decline, relative to this quarterly level throughout 2003.



Acquisitions



On January 16, 2001, we acquired JCA Technology, Inc., a designer, manufacturer and marketer of a full line of fiber optic
products for OC-48 and OC-192 modulators, including high-speed clock amplifiers and broadband data driver amplifiers, for a total purchase price of approximately $311.5 million in a transaction accounted for as a purchase. The consideration
consisted of $75.0 million in cash and approximately 7,954,000 shares of our common stock for a combined total fair value of $303.4 million in exchange for all of the outstanding stock of JCA. In addition, we issued approximately 2,079,000
shares of restricted stock subject to forfeiture. We recorded $56.0 million of unearned compensation related to the issuance of approximately 1,951,000 shares of restricted stock. Vesting for the remaining 128,000 shares of restricted stock was
contingent upon meeting certain fiscal year 2001 operating objectives. These contingent shares were forfeited in September 2001 when the objectives were not met. Approximately 85,000 shares of the restricted stock were forfeited prior to vesting due
to employee terminations. As of December 29, 2002, approximately 789,000 shares of the restricted stock remained subject to forfeiture. These shares were fully earned by February 2, 2003. JCA operates as a wholly owned subsidiary of New Focus, and
our financial statements for the year ended December 30, 2001 include the results of operations for JCA subsequent to January 16, 2001.



On February 15, 2001, we acquired Globe Y. Technology, Inc., a manufacturer of fused fiber coupling machines, for a total purchase price of approximately
$45.2 million in a transaction accounted for as a purchase. The consideration consisted of approximately 1,002,000 shares of our common stock in exchange for all of the outstanding stock of Globe Y. In addition, we recorded approximately $2.3
million of unearned compensation related to the issuance of approximately 53,000 shares of restricted stock subject to forfeiture. Prior to ceasing operations of Globe Y in the third quarter of 2002, Globe Y operated as a wholly-owned subsidiary of
New Focus, and our financial statements for the year ended December 30, 2001 include the results of operations for Globe Y subsequent to February 15, 2001.



Critical Accounting Policies and Estimates



We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of New Focus
consolidated financial statements:



Restructuring and asset
impairment.    For the fiscal year ended December 29, 2002, we recorded restructuring and asset impairment charges totaling $72.2 million. The restructuring and impairment charges included $44.3 million for the write-down of
our property, plant and equipment, $22.9 million for facility closure costs, and $5.0 million in severance costs (see note 12 to Notes to Consolidated Financial Statements). At December 29, 2002, we had a remaining restructuring accrual
of $21.4 million that represents the estimated cash outflows in future periods associated with our restructuring actions. Our restructuring plans included vacating certain of our leased facilities. At December 29, 2002, we have included in our
restructuring liability approximately $16.8 million related to estimated lease losses, net of expected sublease income. In determining the lease loss, various assumptions were used including the time period over which the facilities will be vacant,
expected sublease term and sublease rates. The reserve represents our current estimate and may be adjusted upon the occurrence of future events. These events may include, but are not limited to, changes in estimates relating to time to sublease the
facilities, sublease terms and sublease rates. Additionally, we have estimated the fair value of excess equipment, which we are in the process of disposing. These estimates may require an adjustment if actual results differ. Such adjustment could
materially affect our results of operations.



Inventories.    Inventories are stated at the lower of cost (determined using the first in, first out method) or market (estimated net realizable value). We generally plan production based on orders received and
forecasted demand. We also maintain a stock of certain products for our photonics tools business. We must order



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components and build inventories in advance of product shipments. These estimates are dependent on our assessment of current and expected orders from our
customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. As our markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs
by our customers, there is a risk that we will forecast incorrectly and produce excess inventories of particular products. As a result, actual demand will likely differ from forecasts, and such a difference may have a material adverse effect on
actual results of operations. In 2001, we incurred charges related to excess inventory write-downs and related order cancellation fees of $36.6 million due to the abrupt and severe downturn in the telecommunications industry. Further, we
recorded inventory write-downs of approximately $1.6 million in 2002 related to the divestiture of our passive component product line. The excess inventory write-downs and related order cancellation fees were calculated in accordance with our
policy, which is based on inventory levels in excess of estimated six-month demand and our judgment for each specific product. Should actual demand differ from our estimates, additional inventory write-downs or recoveries of amounts previously
written down may be required.



Allowance for doubtful
accounts.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We analyze historical bad debts, customer concentrations,
creditworthiness, customer payment history and the current economy when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.



Notes
receivable.    During 2000 and 2001, we made $16.8 million in full recourse loans to certain employees of the company. We maintain reserves for estimated losses resulting from the inability of these individuals to make their
required payments. At December 29, 2002, four loans with an aggregate principal and interest value of $8.0 million were outstanding, of which $4.7 million had been reserved. We analyze the need for a reserve by considering our collateral with
respect to each loan, payment history, our knowledge of each individuals other assets and the maturity date of the loan. Based on these factors, we recorded a charge of $4.7 million related to one loan during the fiscal year ended
December 29, 2002. Should the financial condition of the borrowers deteriorate in the future we may be required to take additional charges.



Impairment of goodwill and other intangible assets.    At December 29, 2002, we had $1.4 million of other intangible assets. In
assessing the recoverability of our intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If our estimates or their related assumptions change in the
future, we may be required to record additional impairment charges for these assets. We have written off $289.3 million and $7.7 million of goodwill and other intangible assets during fiscal years 2001 and 2002, respectively. See note 11 to
Notes to Consolidated Financial Statements.



Revenue recognition.    We recognize revenue at the time of title transfer, with provisions established for estimated product returns and allowances. These returns and allowances are estimated based on historical
experience. If our estimates do not accurately anticipate future returns, revenue could be misstated. Revenue on the shipment of evaluation units is deferred until customer acceptance.



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Results of Operations



We maintain a fifty-two/fifty-three week fiscal year cycle ending on the Sunday closest to December 31.



|                                                 |  | Fiscal Year Ended |  
|------------------------------------------------ |  | ----------------- | -
|                                                 |  | December 29,2002  |  
|Summary of Operations Data:                      |  |                   |  
|Net revenues                                     |  | 100.0             | %
|Cost of net revenues                             |  | 130.7             |  
|                                                 |  |                   |  
|Gross profit (loss)                              |  | (30.7)            |  
|Operating Expenses:                              |  |                   |  
|Research and development, net                    |  | 61.3              |  
|Sales and marketing                              |  | 24.6              |  
|General and administrative                       |  | 43.6              |  
|Amortization of goodwill and other intangibles   |  | 9.0               |  
|Impairment of goodwill and other intangibles     |  | 23.0              |  
|In-process research and development              |  |                  |  
|Restructuring and other charges                  |  | 216.4             |  
|Amortization of deferred compensation            |  | 24.0              |  
|                                                 |  |                   |  
|Total operating expense                          |  | 401.9             |  
|                                                 |  |                   |  
|Operating loss                                   |  | (432.6)           |  
|Interest and other income, net                   |  | 120.8             |  
|                                                 |  |                   |  
|Loss before provision (benefit) for income taxes |  | (311.8)           |  
|Provision (benefit) for income taxes             |  | 2.1               |  
|                                                 |  |                   |  
|Net loss                                         |  | (313.9)           | %
|                                                 |  |                   |  



Fiscal Years
Ended December 29, 2002, December 30, 2001 and December 31, 2000



Net Revenues



Net
revenues decreased to $33.4 million for the year ended December 29, 2002 from $92.6 million for the year ended December 30, 2001 and from $80.4 million for the year ended December 31, 2000. The decrease from fiscal year 2001 to fiscal year 2002 was
primarily a result of decreased sales of our telecom products attributed to the widespread business downturn in the telecommunications industry and our resulting decisions to divest of our passive component product line and cease development of our
next-generation, high-speed RF telecommunication system components. Lower sales of our photonics tools as a result of the broader economic downturn further contributed to the overall reduction in our net revenues, though to a significantly lesser
extent than the reduction in sales of our telecom products. The increase from fiscal year 2000 to fiscal year 2001 was primarily a result of increased sales of our telecom products and inclusion of sales of products manufactured by JCA and Globe Y
made subsequent to our acquisitions of these companies in mid-January and mid-February of 2001, respectively.



For the year ended December 29, 2002, no customer accounted for more than 10% of net revenues. For the year ended December 30, 2001, Agilent Technologies
and Alcatel S.A. accounted for 13.4% and 11.3% of net revenues, respectively. For the year ended December 31, 2000, Corvis Corporation, Agilent Technologies and Corning Incorporated accounted for 17.6%, 14.4% and 10.6% of net revenues, respectively.



Gross Profit (Loss)



Gross profit (loss) percentage, including amortization of deferred
compensation expenses, worsened to a loss of 30.9% in fiscal year 2002 from a loss of 30.2% in fiscal year 2001 and a profit of 14.7% in fiscal year



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2000. Excluding amortization of deferred stock compensation of $0.1 million, $8.6 million and $4.2 million, respectively, gross profit (loss) percentage
worsened to a loss of 30.7% for fiscal year 2002 from a loss of 20.9% for fiscal year 2001 and a profit of 19.9% for fiscal year 2000. Cost of net revenues for fiscal year 2002 includes inventory write-downs of approximately $1.6 million related to
the divestiture of our passive component product line. Cost of net revenues for fiscal year 2001 includes $36.6 million for the write-down of excess inventories and related charges, reflecting lower customer demand for our products and a current
lack of order flow resulting from the sudden and sharp decline in capital equipment expenditures by telecommunications carriers. There were no significant write-downs of inventories or related charges during fiscal year 2000. A high level of
manufacturing overhead adversely affected our gross margin performance in all three fiscal years. During fiscal year 2000 and in the early part of 2001 we incurred significant manufacturing overhead as we rapidly expanded capacity in response to the
strong demand for our telecom products. The sharp decline in the telecommunications industry that began in the second quarter of 2001, however, lowered our quarterly revenues and left us with significant underutilized manufacturing capacity and
associated manufacturing overhead during fiscal years 2001 and 2002. High manufacturing overhead costs persisted through the third quarter of 2002 until we were able to consolidate our worldwide manufacturing operations into one facility in
California.



Research and Development Expenses



Research and development expenses, including amortization
of deferred compensation expenses, decreased to 81.7% of net revenues, or $27.3 million, in fiscal year 2002 from 95.3% of net revenues, or $88.3 million, in fiscal year 2001 and increased from 41.2% of net revenues, or $33.1 million, in fiscal year
2000. Excluding amortization of deferred stock compensation of $6.8 million, $39.5 million and $6.7 million, respectively, research and development expenses were 61.3% of net revenues, or $20.5 million, in fiscal year 2002, 52.7% of net revenues, or
$48.8 million, in fiscal year 2001, and 32.8% of net revenues, or $26.4 million, in fiscal year 2000. In 2002, these expenses were incurred primarily in connection with the continued development of existing products. In 2001 and 2000, these expenses
were incurred primarily in connection with the continued development of existing telecom products and development of new telecom products. In addition, research and development expenses increased in fiscal year 2001 due to our acquisition of JCA.



Sales and Marketing Expenses



Sales and marketing expenses, including amortization of deferred
compensation expenses, increased to 25.0% of net revenues, or $8.4 million, in fiscal year 2002 from 14.6% of net revenues, or $13.5 million, in fiscal year 2001 and from 9.3% of net revenues, or $7.5 million, in fiscal year 2000. Excluding
amortization of deferred stock compensation of $0.1 million, $3.3 million and $1.6 million, respectively, sales and marketing expenses increased to 24.6% of net revenues, or $8.2 million, in fiscal year 2002 from 11.0% of net revenues, or
$10.2 million, in fiscal year 2001 and from 7.3% of net revenues, or $5.9 million, in fiscal year 2000. In fiscal year 2002, sales and marketing expenses, excluding amortization of deferred stock compensation, rose as a percentage of net
revenues as net revenues declined proportionally more than the absolute declines in sales and marketing expenses. Sales and marketing expenses increased in absolute dollars and as a percentage of net revenues in fiscal year 2001 as a result of the
hiring of additional sales and marketing personnel and the expansion of our sales and marketing efforts.



General and Administrative Expenses



General and administrative expenses, including amortization of deferred compensation expenses, increased to 46.6% of net revenues, or $15.6 million, in
fiscal year 2002 from 29.8% of net revenues, or $27.6 million, in fiscal year 2001 and from 26.2% of net revenues, or $21.1 million, in fiscal year 2000. Excluding amortization of deferred stock compensation of $1.0 million, $6.7 million and $11.2
million, respectively, general and administrative expenses increased to 43.6% of net revenues, or $14.6 million, in fiscal year 2002 from 22.5% of net revenues, or $20.9 million, in fiscal year 2001 and from 12.2% of net revenues, or $9.8 million,
in fiscal year 2000. General and administrative costs were higher in 2001 compared to 2002 primarily due to integration costs



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related to our acquisitions of JCA and Globe Y and higher legal costs related to an intellectual property dispute. Further, our restructuring efforts
resulted in lower general and administrative costs in 2002. In fiscal year 2002, general and administrative expenses, excluding amortization of deferred stock compensation, rose as a percentage of net revenues as net revenues declined proportionally
more than the absolute declines in general and administrative expenses. The increase in absolute dollar spending for general and administrative expenses from fiscal year 2000 to fiscal year 2001 was primarily due to increased staffing and associated
expenses necessary to manage and support our increased scale of domestic and international operations, and corporate-related expenses associated with operating as a public company, in addition to the previously mentioned higher integration costs
associated with our acquisitions of JCA and Globe Y and higher legal costs.



Amortization of Goodwill and Other Intangibles and Impairment of Goodwill



Amortization of goodwill and other intangibles that arose from our acquisitions of JCA and Globe Y in January and February 2001, respectively, totaled
$3.0 million and $54.5 million in the years ended December 29, 2002 and December 30, 2001, respectively. All of the goodwill associated with the acquisitions of JCA and Globe Y was written down through impairment charges in fiscal year 2001.



Acquired intangible assets are generally evaluated for
impairment on an individual acquisition basis whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. Periodically, we review our intangible assets for impairment
based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values
based on the expected discounted future cash flows attributable to the assets.



As a result of our June 2002 decision to discontinue new product development for certain high-speed RF products manufactured by JCA, we expected that revenues from JCAs telecom products would continue to
decline. In addition, due to the continuing downturn in the telecommunications industry, we expected that revenues from Globe Y products would be negligible. As a result, we decided to close the operations of Globe Y in early August 2002. In
accordance with our policy, undiscounted cash flows indicated that the remaining intangible assets associated with these acquisitions were impaired. We calculated the impairment charges by comparing the expected discounted future cash flows to the
carrying amount of the related intangible assets. The discount rate applied to these cash flows was based on our weighted average cost of capital, which represents the blended after-tax costs of debt and equity. This analysis resulted in a $7.7
million write-down of intangibles for the fiscal year ended December 29, 2002. In accordance with the same policy, we recorded a $289.3 million write-down of goodwill and other intangible assets during 2001. As of December 29, 2002, we had $1.4
million remaining in an acquired intangible related to JCA and no remaining acquired intangibles related to Globe Y. This asset is being amortized over its estimated useful life of approximately four years.



In-process Research and Development



In-process research and development represents the value assigned in a
purchase business combination to research and development activities of the acquired business that had not yet reached technological feasibility and have no alternative future use. A one-time in-process research and development charge of $13.4
million related to our acquisition of JCA was recorded in the fiscal year ended December 30, 2001. In conjunction with our decision to cease development of next-generation RF products for telecom applications, the acquired in-process research and
development activities had been discontinued by the middle of 2002.



Restructuring Charges



In 2002 we recorded
restructuring and impairment charges totaling $72.2 million for actions taken to resize our operations as a result of a continuing decline in demand for our products as well as the general decline in the telecommunications industry. These
restructuring activities included divesting our operations related to the



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manufacturing of passive optical components, including ceasing operations at our 243,000 square foot manufacturing facility in Shenzhen, China; discontinuing
our new product development of certain high-speed RF products for next-generation telecommunications applications, including reducing our Wisconsin-based engineering staff, decreasing the square footage occupied under our Wisconsin facility lease
and implementing additional workforce reductions in California; and closing and consolidating our remaining 130,000 square foot facility in San Jose, California into our smaller San Jose facility. The restructuring and asset impairment charges
included approximately $44.3 million for the write-down of assets, approximately $22.9 million related to facility closure costs and approximately $5.0 million for severance costs associated with the termination of 458 employees. Non-cash items
included in the restructuring charge totaled $44.3 million. As of December 29, 2002, approximately $21.4 million in accrued restructuring costs, consisting of approximately $0.7 million for severance and approximately $20.7 million for facility
closure costs, remained in current and long-term liabilities.



In 2001 we recorded restructuring charges totaling $17.8 million for actions taken to resize our operations as a result of a decline in demand for our products. These restructuring activities included closing and consolidating our older
Santa Clara, California facility and our smaller Shenzhen, China production facility into larger, existing facilities in San Jose and Shenzhen, respectively, and the anticipated subleasing of a previously unoccupied facility in Camarillo,
California. Restructuring activities also included the planned closing of our remaining manufacturing site in Camarillo, California in the third quarter of 2002 and the transfer of production from this operation to other facilities. Additionally, we
reduced our work force in our U.S. and China operations by approximately 1,200 employees from a peak of 2,100 in February 2001 to approximately 900 in December 2001 through a combination of reduction-in-force programs and attrition. The
restructuring charges included $7.1 million for severance costs covering approximately 910 employees (including approximately 160 employees associated with the planned closing of the Camarillo facility in 2002), $8.1 million for the write-down
of the net book value of impaired leasehold improvements and equipment, and $2.6 million for facility closure costs. Non-cash items included in the restructuring charges totaled $9.5 million.



Interest and Other Income (Expense), Net



Interest and other income, net totaled $40.3 million in fiscal year 2002,
$16.9 million in fiscal year 2001 and $13.9 million in fiscal year 2000. The gain on the sale of our network tunable laser technology to Intel Corporation was the largest component of interest and other income in 2002, totaling $38.6 million. The
sale of our passive component product line to Finisar Corporation resulted in a gain of $2.7 million in 2002. Interest income was $8.4 million in 2002, compared to $17.2 million in 2001 and $14.0 million in 2000. The decrease in interest income in
2002 compared to 2001 was due primarily to lower average interest rates in 2002. The increase in interest income in 2001 compared to 2000 was primarily due to interest earned on the $542.4 million in proceeds from the combination of our May 2000
initial public offering and August 2000 follow-on public offering, net of cash consumed.



Income Taxes



The
provision for income taxes of approximately $700,000 for the year ended December 29, 2002 consists of taxes owed in foreign jurisdictions. The expected tax benefit from loss carryforwards in other jurisdictions was offset by a valuation allowance
against those carryforwards. The benefit for income taxes of approximately $20 million for the year ended December 30, 2001 relates to the deferred tax benefit associated with the amortization of the other identifiable intangible assets and
deferred compensation resulting from our acquisitions of JCA and Globe Y. This benefit has been offset by minimal amounts of alternative minimum taxes and withholding taxes. The provision for income taxes of approximately $6,000 for the year ended
December 31, 2000 consists of current state minimum taxes and withholding taxes.



As of December 29, 2002, we had approximately $174.2 million of federal and $60.5 million of state net operating loss carryforwards for tax purposes and $5.9 million and $4.6 million of federal and state research and



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development tax credit carryforwards available to offset future taxable income. The net operating loss and federal tax credit carryforwards will expire at
various dates beginning in 2004 through 2022, if not utilized. We have not recognized any benefit from the future use of loss carryforwards for these periods or for any other periods since inception. Recognition of deferred tax assets is appropriate
when realization of the assets is more likely than not. Based upon the weight of available evidence, which included our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation
allowance against our net deferred tax assets.



Utilization of
the net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credit carryforwards before utilization.



Liquidity and Capital Resources



Our cash,
cash equivalents and short-term investments decreased to approximately $279.4 million at December 29, 2002 from approximately $294.7 million at December 30, 2001. The decrease in cash, cash equivalents and short-term investments was primarily due to
the net effect of the $43.5 million outflow from operating activities and the use of approximately $28.7 million to repurchase our common stock, partially offset by the receipt of $45.0 million in connection with the sale of our network tunable
laser technology to Intel Corporation and $8.9 million from asset sales, collection of officer notes, and proceeds from purchases of common stock under employee stock programs. The decrease in our cash, cash equivalents and short-term investments in
the year ended December 30, 2001 was primarily due to $81.7 million spent on the acquisitions of JCA and Globe Y and $52.5 million spent for the purchase of property, plant and equipment, and the operating cash outflow of $57.1 million. Net working
capital decreased by $24.4 million for fiscal year 2002.



Cash
used in operating activities was $43.5 million in fiscal year 2002, $57.1 million in fiscal year 2001 and $23.3 million in fiscal year 2000. Cash used in operating activities for the year ended December 29, 2002 was primarily attributable to the net
effect of our net loss of approximately $64.0 million (excluding non-cash charges of $82.1 million and net gains on sales of assets of $41.3 million) offset by an increase in accrued restructuring charges of approximately $16.4 million. Cash used in
operating activities for the year ended December 30, 2001 was primarily attributable to our net loss of $73.3 million (excluding non-cash charges) and decreases in accounts payable of $21.3 million, partially offset by decreases in accounts
receivable and inventories of $37.4 million.



Cash
provided by (used in) investing activities, excluding the purchase and sale activities related to available-for-sale investments, was $48.5 million provided in fiscal year 2002, $137.2 million used in fiscal year 2001 and $62.9 million used in
fiscal year 2000. Cash provided by investing activities in fiscal year 2002 was primarily attributable to the sale of our network tunable laser technology to Intel Corporation. In fiscal year 2001, we used $81.7 million to acquire JCA and Globe Y
and $52.5 million to acquire property, plant and equipment. In fiscal year 2000, cash used in investing activities was primarily to acquire property, plant and equipment.



Financing activities used $24.1 million in fiscal year 2002, provided $2.1 million in fiscal year 2001 and provided $543.5
million in fiscal year 2000. Cash used in financing activities in the year ended December 29, 2002 was primarily due to the use of $28.7 million to repurchase 8.25 million shares of our common stock, partially offset by proceeds from purchases under
employee stock programs and the repayment of notes receivable from stockholders. Cash generated by financing activities in the year ended December 30, 2001 was primarily due to proceeds from sales of stock under stock option and employee stock
purchase plans. Cash generated by financing activities in the year ended December 31, 2000 was primarily due to proceeds of $542.4 million from our initial and follow-on public offerings of common stock.



Our capital expenditures averaged approximately $0.3 million per quarter in
2002 and we expect that our capital expenditures will continue to be minimal throughout 2003.



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##### Table of Contents

As of December 29, 2002, our principal commitments consisted of obligations outstanding under our
restructuring activities, and our facility operating leases. Our future minimum lease payments under non-cancelable operating leases are as follows (in thousands):



|For Fiscal Year End |  |  
|------------------- |  | -
|2003                |  | $
|2004                |  |  
|2005                |  |  
|2006                |  |  
|2007                |  |  
|Thereafter          |  |  
|                    |  |  
|Total               |  | $
|                    |  |  



Included in future
minimum lease payments above is approximately $27.9 million related to unoccupied facilities as a result of our restructuring activities. As of December 29, 2002, the aggregate future minimum sublease income to be received under non-cancelable
subleases totaled approximately $1.9 million.



In January and
February 2003, we repurchased approximately 4.85 million shares of our common stock at a cost of approximately $16.5 million (before commissions), thereby completing our $45 million share repurchase program. We may repurchase additional shares of
our common stock in the future, which will decrease our cash balance. In addition, our strategy includes evaluating potential business combinations and partnering arrangements that may require the use of some portion of our existing cash balances.



We believe that our current cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.



Recent Accounting Pronouncements



In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for impairment or disposal of long-lived assets and was effective January 1, 2002. FAS 144 supersedes FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions relating to the disposal of segments of a business under Accounting Principles Board Opinion No. 30. The adoption of FAS 144 did not have
a material effect on our financial position or results of operations.



In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (FAS 146). FAS 146 addresses the financial accounting
and reporting for costs associated with exit or disposal activities, and supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, including Certain
Costs Incurred in a Restructuring (EITF 94-3). FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, FAS
No. 146 establishes that fair value is the objective for initial measurement of the liability. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect of adoption of FAS 146 is dependent on our activities
subsequent to adoption.



In November 2002, the Financial
Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires that upon issuance of a
guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002.



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##### Table of Contents

The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The company has adopted the
disclosure requirements for its financial statements included in this Form 10-K. We are currently evaluating the effects of FIN 45, however we do not expect that the adoption of FIN 45 will have a material effect on our financial position or results
of operations.



In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS 148). FAS 148 amends FAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure requirements are effective for fiscal
years ending after December 15, 2002. We adopted the disclosure provisions in this Form 10-K. We will continue to account for stock-based compensation under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), using the intrinsic value method. Accordingly, the adoption of FAS 148 is not anticipated to have a material effect on our financial position or results of operations.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We currently do not utilize derivative
financial instruments to hedge such risks.



Interest Rate
Sensitivity



The primary objective of our investment
activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We maintain our cash and cash equivalents primarily in money market funds. Our short-term investments consist of debt securities such
as commercial paper, corporate bonds and notes, and asset-backed securities with original maturity dates between three months and one year. We do not have any derivative financial instruments. Accordingly, we do not believe that our investments have
significant exposure to interest rate risk.



At December 29,
2002, our cash and cash equivalents totaled $178.4 million, with a weighted average interest rate of 1.32%. Our short-term investments totaled $100.9 million, with a weighted average interest rate of 4.04%.



Exchange Rate Sensitivity



A substantial majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. Accordingly, we do not believe we have significant exposure to exchange rate sensitivity.



Item 8.Financial Statements and Supplementary Data



The Financial Statements and Supplementary Data of the company required by this item are set forth as indicated at Item 15(a).



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



Not applicable.



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##### Table of Contents

PART III



Item 10.Directors and Executive Officers of the Registrant



The information required by this Item, which will be set forth under the captions Proposal No. 1 Election of Directors, Executive
Officers and Section 16(a) Beneficial Ownership Compliance in New Focus Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.



Item 11.Executive Compensation



The information required by this Item, which will be set forth under the captions, Director Compensation, Executive Compensation
and Compensation Committee Interlocks and Insider Participation in New Focus Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.



|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- |  | ----------------------------------------------------------------------------------------------



The information required by this Item, which will be set forth under the
caption Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters in New Focus Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.



Item 13.Certain Relationships and Related Transactions



The information required by this Item, which will be set forth under the caption Certain Relationships and Related Transactions in New
Focus Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.



Item 14.Controls and Procedures



Within 90 days prior to the filing date of this Annual Report on Form 10-K, we evaluated the effectiveness of our disclosure controls and
procedures. In addition, annually we also evaluate the effectiveness of our internal controls and procedures for financial reporting. These evaluations are done under the supervision and with the participation of management,
including our chief executive officer and our chief financial officer.



(a)    Evaluation of disclosure controls and procedures.    Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934 (the Exchange Act), such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions (SEC) rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.



Based on their evaluation, the chief executive officer and the chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.



(b)    Changes in internal controls.    Internal Controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with generally accepted accounting principles. Among other matters, we evaluated our internal controls to determine whether there were any significant deficiencies or material
weaknesses, and sought to determine whether the company had identified any acts of fraud involving personnel who have a significant role in our internal controls. In the professional auditing literature,



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##### Table of Contents

significant deficiencies are referred to as reportable conditions; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in the financial statements. A material weakness is defined in the auditing literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to our financial statements and would not be detected within a timely period by employees
in the normal course of performing their assigned functions.



In accordance with the requirements of the SEC, since the date of the evaluation of our disclosure controls and our internal controls to the date of this Annual Report, our chief executive officer and chief financial officer concluded that
there were no significant deficiencies or material weaknesses in our internal controls. In addition, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date
of their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses.



Limitations on the effectiveness of controls.    Our management, including our chief executive officer and chief financial
officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control system may become
inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected.



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##### Table of Contents

PART IV



Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



(a)    The following documents are filed as part of this Form:



1.    Consolidated Financial Statements.



Report of Ernst & Young LLP, Independent Auditors



Consolidated Balance Sheets at December 29,
2002 and December 30, 2001



Consolidated
Statements of Operations for the years ended December 29, 2002, December 30, 2001 and December 31, 2000.



Consolidated Statements of Stockholders Equity for the years ended December 29, 2002, December 30, 2001 and December 31,
2000.



Consolidated Statements of Cash Flows
for the years ended December 29, 2002, December 30, 2001 and December 31, 2000.



Notes to Consolidated Financial Statements



2.    Consolidated Financial Statement Schedules.



The following financial statement schedule of New Focus, Inc. for the years
ended December 29, 2002, December 30, 2001 and December 31, 2000 is filed as part of this Annual Report and should be read in conjunction with the Consolidated Financial Statements of New Focus, Inc.



Schedule IIValuation and Qualifying Accounts



3.    Exhibits.



The exhibits listed in the Index to Exhibits filed together with this Annual
Report are filed as a part of this Report on Form 10-K.



(b)    Reports on Form 8-K:



The company did not file any reports on Form 8-K during the quarter ended December 29, 2002.



42



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##### Table of Contents

NEW FOCUS, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                  |  | Page
|------------------------------------------------- |  | ----
|                                                  | 
|Report of Ernst & Young LLP, Independent Auditors |  | 44  
|                                                  | 
|Consolidated Balance Sheets                       |  | 45  
|                                                  | 
|Consolidated Statements of Operations             |  | 46  
|                                                  | 
|Consolidated Statements of Stockholders Equity   |  | 47  
|                                                  | 
|Consolidated Statements of Cash Flows             |  | 48  
|                                                  | 
|Notes to Consolidated Financial Statements        |  | 49  



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##### Table of Contents

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

New Focus, Inc.



We have audited the accompanying consolidated balance sheets of New Focus, Inc. as of December 29, 2002 and December 30, 2001, and the related
consolidated statements of operations, stockholders equity, and cash flows for the years ended December 29, 2002, December 30, 2001 and December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Focus, Inc. at December 29, 2002 and December 30, 2001, and the consolidated results of its
operations and its cash flows for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in the notes to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.



/S/    ERNST & YOUNG LLP



|San |  | Jose, California
|--- |  | ----------------

|January |  | 31, 2003
|------- |  | --------



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##### Table of Contents

NEW FOCUS, INC.



CONSOLIDATED
BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                        |  | December 29, 2002 |          |   | December 30, 2001 |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                  |  |                   |          |   |                   |  
|Current Assets:                                                                                         |  |                   |          |   |                   |  
|Cash and cash equivalents                                                                               |  | $                 | 178,430  |   |                   | $
|Short-term investments                                                                                  |  |                   | 100,928  |   |                   |  
|Trade accounts receivable, less allowances of $552 in 2002 and $1,848 in 2001                           |  |                   | 3,048    |   |                   |  
|Inventories:                                                                                            |  |                   |          |   |                   |  
|Raw materials                                                                                           |  |                   | 1,597    |   |                   |  
|Work in progress                                                                                        |  |                   | 356      |   |                   |  
|Finished goods                                                                                          |  |                   | 1,169    |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total inventories                                                                                       |  |                   | 3,122    |   |                   |  
|Prepaid expenses and other current assets                                                               |  |                   | 3,480    |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total current assets                                                                                    |  |                   | 289,008  |   |                   |  
|Property, plant and equipment:                                                                          |  |                   |          |   |                   |  
|Land and building                                                                                       |  |                   |         |   |                   |  
|Asset held for sale                                                                                     |  |                   | 15,675   |   |                   |  
|Manufacturing and development equipment                                                                 |  |                   | 7,727    |   |                   |  
|Computer software and equipment                                                                         |  |                   | 4,303    |   |                   |  
|Office equipment                                                                                        |  |                   | 984      |   |                   |  
|Leasehold improvements                                                                                  |  |                   | 1,903    |   |                   |  
|Construction in progress                                                                                |  |                   |         |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|                                                                                                        |  |                   | 30,592   |   |                   |  
|Less allowances for depreciation and amortization                                                       |  |                   | (7,525   | ) |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Net property, plant and equipment                                                                       |  |                   | 23,067   |   |                   |  
|Intangible assets, net of accumulated amortization and impairment of $1,365 in 2002 and $13,700 in 2001 |  |                   | 1,394    |   |                   |  
|Other assets                                                                                            |  |                   | 3,895    |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total assets                                                                                            |  | $                 | 317,364  |   |                   | $
|                                                                                                        |  |                   |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                    |  |                   |          |   |                   |  
|Current liabilities:                                                                                    |  |                   |          |   |                   |  
|Accounts payable                                                                                        |  | $                 | 1,522    |   |                   | $
|Accrued compensation and related benefits                                                               |  |                   | 4,252    |   |                   |  
|Other accrued expenses                                                                                  |  |                   | 3,201    |   |                   |  
|Restructuring accrual                                                                                   |  |                   | 6,534    |   |                   |  
|Deferred revenue and research and development funding                                                   |  |                   |         |   |                   |  
|Current portion of long-term debt                                                                       |  |                   |         |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total current liabilities                                                                               |  |                   | 15,509   |   |                   |  
|Restructuring accruallong term                                                                         |  |                   | 14,854   |   |                   |  
|Long-term debt, less current portion                                                                    |  |                   |         |   |                   |  
|Deferred rent                                                                                           |  |                   | 447      |   |                   |  
|                                                                                                        |  |                  
|Commitments and contingencies                                                                           |  |                   |          |   |                   |  
|                                                                                                        |  |                  
|Stockholders equity:                                                                                   |  |                   |          |   |                   |  
|Preferred stock, $0.001 par value:                                                                      |  |                   |          |   |                   |  
|Authorized shares10,000,000                                                                            |  |                   |          |   |                   |  
|Issued and outstandingnone                                                                             |  |                   |         |   |                   |  
|Common stock, $0.001 par value:                                                                         |  |                   |          |   |                   |  
|Authorized shares250,000,000                                                                           |  |                   |          |   |                   |  
|Issued and outstanding68,297,798 in 2002 and 75,980,323 in 2001                                        |  |                   | 68       |   |                   |  
|Additional paid-in capital                                                                              |  |                   | 941,505  |   |                   |  
|Notes receivable from stockholders                                                                      |  |                   | (1,401   | ) |                   |  
|Deferred compensation                                                                                   |  |                   | (2,546   | ) |                   |  
|Accumulated other comprehensive income                                                                  |  |                   | 647      |   |                   |  
|Accumulated deficit                                                                                     |  |                   | (651,719 | ) |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total stockholders equity                                                                              |  |                   | 286,554  |   |                   |  
|                                                                                                        |  |                   |          |   |                   |  
|Total liabilities and stockholders equity                                                              |  | $                 | 317,364  |   |                   | $
|                                                                                                        |  |                   |          |   |                   |  



See notes to
consolidated financial statements.



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##### Table of Contents

NEW FOCUS, INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                              |  | Year Ended        |         
|------------------------------------------------------------- |  | ----------------- | --------
|                                                              |  | December 29, 2002 |         
|Net revenues                                                  |  | $                 | 33,388  
|Cost of net revenues (1)                                      |  |                   | 43,627  
|                                                              |  |                   |         
|Gross profit (loss)                                           |  |                   | (10,239 
|Operating Expenses:                                           |  |                   |         
|Research and development (2)                                  |  |                   | 22,171  
|Less funding received from research and development contracts |  |                   | (1,693  
|                                                              |  |                   |         
|Net research and development                                  |  |                   | 20,478  
|Sales and marketing (3)                                       |  |                   | 8,227   
|General and administrative (4)                                |  |                   | 14,561  
|Amortization of goodwill and other intangibles                |  |                   | 3,014   
|Impairment of goodwill and other intangibles                  |  |                   | 7,692   
|In-process research and development                           |  |                   |        
|Restructuring and other charges                               |  |                   | 72,233  
|Amortization of deferred compensation                         |  |                   | 8,012   
|                                                              |  |                   |         
|Total operating expenses                                      |  |                   | 134,217 
|                                                              |  |                   |         
|Operating loss                                                |  |                   | (144,456
|Interest income                                               |  |                   | 8,350   
|Interest expense                                              |  |                   |        
|Other income (expense), net                                   |  |                   | 31,995  
|                                                              |  |                   |         
|Loss before provision (benefit) for income taxes              |  |                   | (104,111
|Provision (benefit) for income taxes                          |  |                   | 700     
|                                                              |  |                   |         
|Net loss                                                      |  | $                 | (104,811
|                                                              |  |                   |         
|Basic and diluted net loss per share                          |  | $                 | (1.40   
|                                                              |  |                   |         
|Shares used to compute basic and diluted net loss per share   |  |                   | 75,105  
|                                                              |  |                   |         

---

|(1) |  | Excluding $78, $8,580 and $4,206 in amortization of deferred stock compensation for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excluding $6,787, $39,500 and $6,713 in amortization of deferred stock compensation for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excluding $136, $3,325 and $1,580 in amortization of deferred stock compensation for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excluding $1,011, $6,727 and $11,248 in amortization of deferred stock compensation for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to consolidated financial statements.





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##### Table of Contents

NEW FOCUS, INC.



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                                  |        | Convertible Preferred Stock |   |        | Common Stock |     |        | Additional Paid-In Capital |            |        | Notes Receivable From Stockholders |   |    | Deferred Compensation |  |   | Accumulated Other ComprehensiveIncome |   |  | Accumulated Deficit |        |   | Total |  
|----------------------------------------------------------------- | ------ | --------------------------- | - | ------ | ------------ | --- | ------ | -------------------------- | ---------- | ------ | ---------------------------------- | - | -- | --------------------- |  | - | ------------------------------------- | - |  | ------------------- | ------ | - | ----- | -
|                                                                  | Shares |                             |   | Amount |              |     | Shares |                            |            | Amount |                                    |   |    |                       |  |   |                                      
|Balance at December 31, 1999                                      |        | 41,939,144                  |   |        | $            | 42  |        |                            | 2,578,824  |        |                                    | $ | 2  |                       |  | $ | 51,168                                |   |  | $                   |       |   |       | $
|Issuance of common stock from exercise of options andwarrants     |        |                            |   |        |              |    |        |                            | 10,439,992 |        |                                    |   | 10 |                       |  |   | 8,787                                 |   |  |                     | (7,690 | ) |       |  
|Issuance of stock in connection with business acquisition         |        |                            |   |        |              |    |        |                            | 116,000    |        |                                    |   |   |                       |  |   | 1,508                                 |   |  |                     |       |   |       |  
|Issuance of warrants for facility lease                           |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | 279                                   |   |  |                     |       |   |       |  
|Repurchase of common stock                                        |        |                            |   |        |              |    |        |                            | (500,000   | )      |                                    |   |   |                       |  |   | (312                                  | ) |  |                     | 312    |   |       |  
|Issuance of preferred stock from exercise of warrants             |        | 121,140                     |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | 145                                   |   |  |                     |       |   |       |  
|Conversion of preferred stock into common stock                   |        | (42,060,284                 | ) |        |              | (42 | )      |                            | 42,060,284 |        |                                    |   | 42 |                       |  |   |                                      |   |  |                     |       |   |       |  
|Issuance of common stock                                          |        |                            |   |        |              |    |        |                            | 9,675,000  |        |                                    |   | 10 |                       |  |   | 542,398                               |   |  |                     |       |   |       |  
|Deferred compensation                                             |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | 48,211                                |   |  |                     |       |   |       |  
|Amortization of deferred compensation                             |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Payments on notes receivable                                      |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     | 97     |   |       |  
|Net loss                                                          |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Unrealized gain on marketable equity securities                   |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Total comprehensive loss                                          |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Balance at December 31, 2000                                      |        |                            |   |        |              |    |        |                            | 64,370,100 |        |                                    |   | 64 |                       |  |   | 652,184                               |   |  |                     | (7,281 | ) |       |  
|Issuance of stock in connection with JCA business acquisition     |        |                            |   |        |              |    |        |                            | 10,033,556 |        |                                    |   | 10 |                       |  |   | 281,651                               |   |  |                     |       |   |       |  
|Issuance of stock in connection with Globe Y business acquisition |        |                            |   |        |              |    |        |                            | 1,055,264  |        |                                    |   | 1  |                       |  |   | 46,761                                |   |  |                     |       |   |       |  
|Issuance of common stock from exercise of options                 |        |                            |   |        |              |    |        |                            | 583,149    |        |                                    |   | 1  |                       |  |   | 757                                   |   |  |                     |       |   |       |  
|Payments of notes receivable                                      |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     | 658    |   |       |  
|Repurchase of common stock                                        |        |                            |   |        |              |    |        |                            | (525,667   | )      |                                    |   | (1 | )                     |  |   | (807                                  | ) |  |                     | 808    |   |       |  
|Issuance of stock in connection with employee stock purchase plan |        |                            |   |        |              |    |        |                            | 463,921    |        |                                    |   | 1  |                       |  |   | 3,929                                 |   |  |                     |       |   |       |  
|Deferred compensation adjustment on terminated employees          |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | (8,470                                | ) |  |                     |       |   |       |  
|Amortization of deferred compensation                             |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Other compensation charges                                        |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | 1,536                                 |   |  |                     |       |   |       |  
|Net loss                                                          |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Unrealized gain on marketable equity securities                   |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Total comprehensive loss                                          |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Balance at December 30, 2001                                      |        |                            |   |        |              |    |        |                            | 75,980,323 |        |                                    |   | 76 |                       |  |   | 977,541                               |   |  |                     | (5,815 | ) |       |  
|Issuance of common stock from exercise of options                 |        |                            |   |        |              |    |        |                            | 369,065    |        |                                    |   |   |                       |  |   | 236                                   |   |  |                     |       |   |       |  
|Repurchase of common stock from employees                         |        |                            |   |        |              |    |        |                            | (16,896    | )      |                                    |   |   |                       |  |   | (248                                  | ) |  |                     |       |   |       |  
|Payments of notes receivable                                      |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     | 2,527  |   |       |  
|Cancellation of notes receivable in exchange for unvestedshares   |        |                            |   |        |              |    |        |                            | (328,467   | )      |                                    |   |   |                       |  |   | (1,887                                | ) |  |                     | 1,887  |   |       |  
|Repurchase of common stock in open market                         |        |                            |   |        |              |    |        |                            | (8,248,387 | )      |                                    |   | (8 | )                     |  |   | (28,666                               | ) |  |                     |       |   |       |  
|Issuance of stock in connection with employee stock purchase plan |        |                            |   |        |              |    |        |                            | 742,487    |        |                                    |   |   |                       |  |   | 2,136                                 |   |  |                     |       |   |       |  
|Deferred compensation adjustment on terminated employees          |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | (7,662                                | ) |  |                     |       |   |       |  
|Amortization of deferred compensation                             |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Other compensation charges                                        |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   | 55                                    |   |  |                     |       |   |       |  
|Cancellation of restricted stock                                  |        |                            |   |        |              |    |        |                            | (200,327   | )      |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Net loss                                                          |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|Unrealized loss on marketable equity securities                   |        |                            |   |        |              |    |        |                            |           |        |                                    |   |   |                       |  |   |                                      |   |  |                     |       |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Total comprehensive loss                                          |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  
|Balance at December 29, 2002                                      |        |                            |   |        | $            |    |        |                            | 68,297,798 |        |                                    | $ | 68 |                       |  | $ | 941,505                               |   |  | $                   | (1,401 | ) |       | $
|                                                                  |        |                             |   |        |              |     |        |                            |            |        |                                    |   |    |                       |  |   |                                       |   |  |                     |        |   |       |  



See notes to
consolidated financial statements.



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##### Table of Contents

NEW FOCUS, INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                            |  | Year Ended        |         
|--------------------------------------------------------------------------- |  | ----------------- | --------
|                                                                            |  | December 29, 2002 |         
|Operating activities                                                        |  |                   |         
|Net loss                                                                    |  | $                 | (104,811
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                   |         
|Depreciation and amortization                                               |  |                   | 8,557   
|Restructuring and impairment charges                                        |  |                   | 48,889  
|Amortization of goodwill and other intangibles                              |  |                   | 3,014   
|Impairment of goodwill and other intangibles                                |  |                   | 7,692   
|Acquired in-process research and development                                |  |                   |        
|Amortization of deferred compensation                                       |  |                   | 8,012   
|Deferred rent                                                               |  |                   | 118     
|Loss on disposal of assets                                                  |  |                   | 359     
|Compensation charge                                                         |  |                   | 55      
|Loss on investment                                                          |  |                   | 4,726   
|Provision (benefit) for income taxes                                        |  |                   | 700     
|Gain from sale of assets related to divestiture                             |  |                   | (41,283 
|Changes in operating assets and liabilities:                                |  |                   |         
|Accounts receivable                                                         |  |                   | 1,977   
|Inventories                                                                 |  |                   | 5,006   
|Prepaid expenses and other current assets                                   |  |                   | 5,377   
|Accounts payable                                                            |  |                   | (916    
|Accrued expenses                                                            |  |                   | (5,600  
|Accrued restructuring                                                       |  |                   | 16,432  
|Deferred research and development funding                                   |  |                   | (1,775  
|                                                                            |  |                   |         
|Net cash used in operating activities                                       |  |                   | (43,471 
|                                                                            |  |                   |         
|Investing activities                                                        |  |                   |         
|Purchase of available-for-sale investments                                  |  |                   | (131,556
|Proceeds from sales and maturities of investments                           |  |                   | 250,454 
|Acquisition of businesses and related expenses, net of cash acquired        |  |                   |        
|Acquisition of property, plant and equipment                                |  |                   | (1,264  
|Proceeds from sale of property, plant and equipment                         |  |                   | 4,245   
|Proceeds from sale of assets related to divestiture                         |  |                   | 45,000  
|(Increase) decrease in investments and other assets                         |  |                   | 497     
|                                                                            |  |                   |         
|Net cash provided by (used in) investing activities                         |  |                   | 167,376 
|                                                                            |  |                   |         
|Financing activities                                                        |  |                   |         
|Payments on equipment loan                                                  |  |                   | (116    
|Proceeds from issuance of common stock, net of repurchase                   |  |                   | 2,124   
|Repurchase of common stock in open market                                   |  |                   | (28,674 
|Proceeds from payment of notes receivable with shareholders                 |  |                   | 2,527   
|                                                                            |  |                   |         
|Net cash provided by (used in) financing activities                         |  |                   | (24,139 
|                                                                            |  |                   |         
|Increase (decrease) in cash and cash equivalents                            |  |                   | 99,766  
|Cash and cash equivalents at beginning of period                            |  |                   | 78,664  
|                                                                            |  |                   |         
|Cash and cash equivalents at end of period                                  |  | $                 | 178,430 
|                                                                            |  |                   |         
|Supplemental disclosures of cash flow information                           |  |                   |         
|Cash paid for interest                                                      |  | $                 |        
|                                                                            |  |                   |         
|Supplemental disclosure of noncash financing and investing activities       |  |                   |         
|Warrant issued to long-term creditor/lessor                                 |  | $                 |        
|Stock issued in business acquisitions                                       |  | $                 |        
|Exchange of note receivable for Finisar Corporation common stock            |  | $                 | 6,750   
|Cancellation of notes receivable in exchange for unvested shares            |  | $                 | 1,887   



See notes to
consolidated financial statements.



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##### Table of Contents

NEW FOCUS, INC.



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



1.    Summary of
Significant Accounting Policies



Description of
Business



New Focus, Inc. (the Company) was incorporated
in California on April 17, 1990 and reincorporated in Delaware on May 8, 2000. The Company develops and manufactures photonics and microwave solutions for both commercial and research applications. The Companys product portfolio includes
advanced photonics tools, tunable lasers for test and measurement applications, and high-speed radio-frequency (RF) products.



Basis of Presentation



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



The Company maintains a fifty-two/fifty-three week
fiscal year cycle ending on the Sunday closest to December 31.



Use of Estimates



The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited
to, the allowances for doubtful accounts and warranty-related product returns; inventory write-downs and warranty accrual; the useful lives of fixed assets; impairment charges on long-lived assets, goodwill and other intangible assets; losses on
facility leases and other charges; and accrued liabilities and other reserves. Actual results could differ from these estimates and such differences may be material to the financial statements.



Cash Equivalents and Short-term Investments



The Company considers all liquid investment securities with an original
maturity date of three months or less to be cash equivalents, and all investment securities with original maturities of more than three months but less than one year to be short-term investments. The Companys short-term investments consist
primarily of debt securities such as commercial paper, corporate bonds and notes and asset-backed securities. All cash equivalents and short-term investments are classified as available-for-sale. Unrealized holding gains and losses are included in
Accumulated Other Comprehensive Income in the accompanying balance sheets. Realized gains and losses are included in other income (expense), net in the statement of operations, and the cost of securities sold is based on the specific identification
method.



Inventories



Inventories are stated at the lower of cost (determined using the first in,
first out method) or market (estimated net realizable value). The Company plans production based on orders received and forecasted demand and maintains a stock of certain of its catalog-based photonics tools products. The Company must order
components and build inventories in advance of product shipments. These estimates are dependent on the Companys assessment of current and expected orders from its customers, including consideration that orders are subject to cancellation with
limited advance notice prior to shipment. As the Companys markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by the Companys customers, there is a risk that the Company
will forecast incorrectly and produce excess inventories of particular products. Actual demand will likely differ from forecasts, and such a difference may have a material adverse effect on actual results of operations. In 2002 and 2001, the Company
incurred charges related to excess



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



inventory write-downs and related order cancellation fees of $1.6 million and $36.6 million, respectively, due to the severe downturn in the
telecommunications industry and the Companys decision to divest of its passive components product line. The excess inventory write-down and related order cancellation fees were calculated in accordance with the Companys policy, which is
based on inventory levels in excess of estimated six-month demand for each specific product. There were no significant write-downs of inventories or related charges during the year ended December 31, 2000.



Fixed Assets



The Company records its property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets, generally three to five years for equipment and twenty years for buildings. Amortization is computed on leasehold improvements using the straight-line method over
the shorter of the estimated useful lives of the assets or the term of the lease.



Asset Held For Sale



As
a result of difficult conditions within the telecommunications industry, the Company ceased operations at its China manufacturing facility in 2002. Accordingly, this facility is classified as an asset held for sale at December 29, 2002. In
conjunction with the ceasing of operations in China, the facility was written down to its estimated net realizable value of $15,675,000. Restructuring and impairment charges in 2002 included $9,678,000 for the write-down of the facility. The Company
estimated the net realizable value of its facility in Shenzhen, China based on consultation with real estate brokers located in Shenzhen, China. The Company believes the facility will be sold in fiscal year 2003.



Goodwill and Other Intangible Assets



Intangible assets represent purchased intangible assets and the excess
acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired (goodwill). Purchased intangible assets include developed technology, trademarks and trade names, assembled workforces and customer bases.
Intangible assets are being amortized using the straight-line method over estimated useful lives of two to four years.



Goodwill, other intangible assets and other long-lived assets are generally evaluated on an individual acquisition, market, or product basis whenever
events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. Periodically, the Company reviews its goodwill, other intangible assets and other long-lived assets for impairment
based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values
based on the expected discounted future cash flows attributable to the assets. At December 29, 2002 and December 30, 2001, there was no remaining goodwill balance.



Other Assets



Other assets consist primarily of deposits, notes receivable from a former officer (see Note 14Related Party Transaction), and equity investments.



Advertising Expenses



The cost of advertising is expensed as incurred. The Companys
advertising costs for the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 were approximately $530,000, $838,000 and $611,000.



50



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##### Table of Contents

NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Revenue Recognition



The Company recognizes revenue at the time of title transfer, with provisions established for estimated product returns and
allowances. Revenue on the shipment of evaluation units is deferred until customer acceptance. The Company provides for the estimated cost to repair products under warranty at the time of sale. Warranty claims have not been material to date.



Research and Development



Company-sponsored research and development costs as well as costs related to
research and development contracts are expensed as incurred. Total expenditures for research and development in the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 were $22,171,000, $50,762,000 and $27,165,000,
respectively. Funding earned under the contractual terms of research and development contracts is netted against research and development costs, which were $1,693,000, $1,938,000 and $774,000 for the fiscal years ended December 29, 2002, December
30, 2001 and December 31, 2000, respectively. The funding relates to various arrangements whereby the Company is reimbursed for substantially all of its costs incurred under the related project.



Stock-Based Compensation



The Company has employee stock plans that are described more fully in Note
7Stockholders Equity. The Company has elected to account for its employee stock plans in accordance with the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting For Stock Issued to Employees (APB
25). The following table illustrates the effect on net loss and loss per share had compensation expense for the Companys stock-based award plans been determined based upon the fair value at the grant dates for awards under the plan consistent
with the method of Statement of Financial Accounting Standards No. 123, Accounting For Stock Issued to Employees (FAS 123). For purposes of FAS 123 pro forma disclosures, the estimated fair value of the stock options (including shares issued
under the employee stock purchase plans, collectively the options) is amortized to expense over the options vesting period (in thousands, except per share amounts):



|                                                                                                    |  | Year Ended        |         
|--------------------------------------------------------------------------------------------------- |  | ----------------- | --------
|                                                                                                    |  | December 29, 2002 |         
|Net loss as reported                                                                                |  | $                 | (104,811
|Add:  Stock-based employee compensation expense included in reported net loss                       |  |                   | 8,012   
|Less:  Total stock-based employee compensation expense under fair value based method for all awards |  |                   | (11,273 
|                                                                                                    |  |                   |         
|Pro forma net loss                                                                                  |  | $                 | (108,072
|                                                                                                    |  |                   |         
|Basic and diluted net loss per shareas reported                                                    |  | $                 | (1.40   
|                                                                                                    |  |                   |         
|Basic and diluted net loss per sharepro forma                                                      |  | $                 | (1.44   
|                                                                                                    |  |                   |         



Excluded from total
stock-based employee compensation expense above for the year ended December 30, 2001 is compensation expense associated with restricted shares issued in connection with the Companys acquisitions of JCA and Globe Y. See Note 7
Stockholders Equity for a discussion of the assumptions used in the option pricing model and estimated fair value of employee stock options.



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##### Table of Contents

NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Comprehensive Income (loss)



For the years ended December 29, 2002, December 30, 2001 and December 31, 2000, the Companys comprehensive loss is
comprised of its net loss and unrealized holding gains (losses) on marketable equity securities and short-term investments.



Recent Accounting Pronouncements



In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for impairment or disposal of long-lived assets and was effective January 1, 2002. FAS 144 supersedes FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the accounting and reporting provisions relating to the disposal of segments of a business under Accounting Principles Board Opinion No. 30. The adoption of FAS 144 did not have
a material effect on the Companys financial position or results of operations.



In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (FAS 146). FAS 146 addresses
the financial accounting and reporting for costs associated with exit or disposal activities, and supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity, including Certain Costs Incurred in a Restructuring (EITF 94-3). FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or
disposal plan. In addition, FAS No. 146 establishes that fair value is the objective for initial measurement of the liability. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect of adoption of FAS 146
is dependent on the Companys activities subsequent to adoption.



In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45
requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure requirements for its financial statements included in this Form 10-K. The Company is currently evaluating the effects of FIN 45, however it does not
expect that the adoption of FIN 45 will have a material effect on the Companys financial position or results of operations.



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure (FAS 148). FAS 148 amends FAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The transition guidance and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions for this Form
10-K. The Company will continue to account for stock-based compensation under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), using the intrinsic value method. Accordingly, the adoption of
FAS 148 is not anticipated to have a material effect on the Companys financial position or results of operations.



52



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2.    Concentration of Revenues and Credit and Other Risks



Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash equivalents and short-term investments in high-credit quality financial institutions and limits
the amount of credit exposure to any one entity. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet.



The Company sells its products to customers in the semiconductor, industrial,
biomedical, defense and telecommunications industries, as well as commercial, academic and governmental research institutions that engage in advanced research and development activities. The Company performs ongoing credit evaluations of its
customers and does not require collateral. The Company provides reserves for potential credit losses, and such losses have been within managements expectations.



No customer accounted for more than 10% of net revenues for the year ended December 29, 2002. For the year ended December
30, 2001, Agilent Technologies and Alcatel S.A. accounted for 13.4% and 11.3% of net revenues, respectively. For the year ended December 31, 2000, Corvis Corporation, Agilent Technologies and Corning Incorporated accounted for 17.6%, 14.4% and 10.6%
of net revenues, respectively.



3.    Fair Value of
Financial Instruments



The cost and estimated fair value
of the Companys cash equivalents and short-term investments at December 29, 2002 and December 30, 2001 were as follows (in thousands):



|December 29, 2002         |  | Cost |         | Unrealized Gains |   | Unrealized Losses |  |   | Market Value
|------------------------- |  | ---- | ------- | ---------------- | - | ----------------- |  | - | ------------
|Money market fund         |  | $    | 178,430 |                  | $ |                  |  | $ |            
|Corporate bonds and notes |  |      | 10,011  |                  |   | 42                |  |   |            
|Federal agency securities |  |      | 90,270  |                  |   | 605               |  |   |            
|                          |  |      |         |                  |   |                   |  |   |             
|                          |  | $    | 278,711 |                  | $ | 647               |  | $ |            
|                          |  |      |         |                  |   |                   |  |   |             
|Reported as:              |  |      |         |                  |   |                   |  |   |             
|Cash and cash equivalents |  | $    | 178,430 |                  | $ |                  |  | $ |            
|Short-term investments    |  |      | 100,281 |                  |   | 647               |  |   |            
|                          |  |      |         |                  |   |                   |  |   |             
|                          |  | $    | 278,711 |                  | $ | 647               |  | $ |            
|                          |  |      |         |                  |   |                   |  |   |             
|                          |  |      |         |                 
|December 30, 2001         |  | Cost |         | UnrealizedGains  |   | UnrealizedLosses  |  |   | MarketValue 
|Money market fund         |  | $    | 78,664  |                  | $ |                  |  | $ |            
|Municipal bonds           |  |      | 1,030   |                  |   | 3                 |  |   |            
|Corporate bonds and notes |  |      | 41,377  |                  |   | 679               |  |   | (36         
|Euro dollar bonds         |  |      | 5,666   |                  |   | 57                |  |   |            
|Federal agency securities |  |      | 151,482 |                  |   | 961               |  |   | (228        
|Floating rate securities  |  |      | 15,000  |                  |   |                  |  |   |            
|                          |  |      |         |                  |   |                   |  |   |             
|                          |  | $    | 293,219 |                  | $ | 1,700             |  | $ | (264        
|                          |  |      |         |                  |   |                   |  |   |             
|Reported as:              |  |      |         |                  |   |                   |  |   |             
|Cash and cash equivalents |  | $    | 78,664  |                  | $ |                  |  | $ |            
|Short-term investments    |  |      | 214,555 |                  |   | 1,700             |  |   | (264        
|                          |  |      |         |                  |   |                   |  |   |             
|                          |  | $    | 293,219 |                  | $ | 1,700             |  | $ | (264        
|                          |  |      |         |                  |   |                   |  |   |             



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net losses realized on the sales of short-term investments during the years ended December 29, 2002
and December 30, 2001 were $2,475,000 (of which $2,126,000 related to the sale of Finisar Corporation common stock) and $280,000, respectively. Gains and losses realized on the sale of short-term investments during the year ended December 31, 2000
were immaterial. Net unrealized holding gains of $647,000 and $1,436,000 on cash equivalents and short-term investments were included in Accumulated Other Comprehensive Income in the accompanying balance sheet for the years ended December 29, 2002
and December 30, 2001, respectively.



4.    Commitments
and Contingencies



Operating Leases and Restructuring
Commitments



As of December 29, 2002, the Companys
principal commitments consisted of obligations outstanding under its restructuring activities (See Note 12Restructuring Charges), and facility operating leases.



The Company leases its facilities under non-cancelable operating lease agreements that expire at various dates from fiscal
year 2004 through fiscal year 2011. The Companys headquarters facility, which houses manufacturing, research and development and administration, is leased through 2007. Net rent expense for these leases aggregated $4,535,000, $7,333,000 and
$3,082,000 for the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.



Under the terms of a May 2000 facility lease agreement, the Company has provided an irrevocable letter of credit for $4,000,000 as collateral for the
performance of the Companys obligations under the lease.



The Companys future minimum lease payments under non-cancelable operating leases are as follows (in thousands):



|For Fiscal Year End |  |  
|------------------- |  | -
|2003                |  | $
|2004                |  |  
|2005                |  |  
|2006                |  |  
|2007                |  |  
|Thereafter          |  |  
|                    |  |  
|Total               |  | $
|                    |  |  



Included in future
minimum lease payments above is approximately $27.9 million related to unoccupied facilities as a result of the Companys restructuring activities. As of December 29, 2002, the aggregate future minimum sublease income to be received under
non-cancelable subleases totaled approximately $1.9 million.



Litigation



On February 13, 2002, a lawsuit
was filed purportedly on behalf of both Howard Yue and Globe Y Technology, a company acquired by New Focus, in Alameda County Superior Court. The action was subsequently transferred to Santa Clara County Superior Court. The action was captioned
Globe Y Technology, Inc. v. New Focus, Inc. et al., and asserted claims against the Company and several of its officers and directors. The original complaint alleged eight causes of action, including fraud and deceit by active concealment,
fraud and deceit based upon omissions of material facts, negligent misrepresentation, and breach of contract. The claims stemmed from the acquisition of Globe Y Technology, Inc. by the Company completed February 15, 2001. The complaint sought
unspecified economic, punitive, and exemplary damages, prejudgment interest,



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



costs, and equitable and general relief. On September 10, 2002, the Santa Clara County Superior Court entered an order dismissing without prejudice the
claims against the Company and its officers and directors. On November 15, 2002 Howard Yue filed an amended complaint on behalf of himself. Globe Y Technology, Inc. is not named as a plaintiff in the amended complaint. The amended complaint is
captioned Howard Yue v. New Focus, Inc., et al. and asserts claims against the Company and several of its officers and directors. The amended complaint alleges eight causes of action similar to those alleged in the original complaint. As with
the original complaint, the claims asserted in the amended complaint stem from the acquisition of Globe Y Technology, Inc. by the Company completed February 15, 2001. The amended complaint seeks unspecified economic, punitive, and exemplary damages,
prejudgment interest, costs, and equitable and general relief. On March 11, 2003, the court granted the Companys motion to dismiss several causes of action in the amended complaint for failure to state a claim. The court, however, gave the
plaintiff thirty days to amend his causes of action. Discovery in this matter is ongoing.



On July 20, 2001, Photonetics, Inc. and Photonetics, S.A. filed a complaint against the Company for patent infringement in the United States District Court for the District of Delaware. Photonetics, Inc. and
Photonetics, S.A. claimed that the Company infringed U.S. Patent No. 5,594,744 and sought preliminary and injunctive relief and damages. Photonetics, Inc. and Photonetics, S.A. alleged that the Companys infringement was willful and sought
enhanced damages and attorneys fees. The Company filed its answer and counterclaims on September 10, 2001. In the answer, the Company denied infringement of U.S. Patent No. 5,594,744 and asserted that the patent was invalid and
unenforceable. In a declaratory judgment counterclaim, the Company claimed that U.S. Patent No. 5,594,744 is invalid, unenforceable and not infringed. The Company also counterclaimed for patent infringement of U.S. Patent Nos. 5,995,521 and
5,319,668 and sought preliminary and injunctive relief and damages. Additionally, the Company claimed that Photonetics, Inc. and Photonetics, S.A.s infringement of the patents was willful and sought enhanced damages and attorneys fees.
On October 9, 2001, Photonetics, Inc. and Photonetics, S.A. filed its reply to the Companys counterclaims. Photonetics, Inc. and Photonetics, S.A. denied infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and alleged that the patents
were invalid. On January 7, 2003, the parties settled their claims and counterclaims. Under the terms of the settlement, the Company has obtained a license to two patents held by Photonetics and Photonetics has obtained a license to two patents
held by the Company. The settlement did not have a material effect on the Companys results of operations or financial condition.



On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al., Civil Action No. 01-CV-5822, was filed against the
Company and several of its officers and directors (the Individual Defendants) in the United States District Court for the Southern District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp. (collectively the Underwriter Defendants), the underwriters in the Companys initial public offering. Three subsequent lawsuits were filed containing
substantially similar allegations. These complaints have been consolidated. On April 19, 2002, plaintiffs filed a consolidated amended complaint. The amended complaint alleges violations of Section 11 of the Securities Act of 1933 against all
defendants related to the Initial Public Offering and the Secondary Offering, violations of Section 15 of the Securities Act of 1933 and Section 20(a) of the Securities Act of 1934 against the Individual Defendants, violations of Section 10(b)
and Rule 10b-5 against the Company and violations of Section 12(a)(2) of the Securities Act of 1933 and Section 10(b), and Rule 10b-5 promulgated thereunder, of the Securities Act of 1934 against the Underwriter Defendants. The amended
complaint seeks unspecified damages on behalf of a purported class of purchasers of the Companys common stock between May 18, 2000 and December 6, 2000.



Various plaintiffs have filed similar actions in the United States District Court for the Southern District of New York asserting virtually identical
allegations concerning the offerings of more than 300 other issuers. These cases have all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions on pretrial motions,



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



discovery, and related matters other than trial. On or about July 15, 2002, defendants filed an omnibus motion to dismiss in the coordinated proceedings on
common pleadings issues. On or about October 9, 2002, the court entered as an order a stipulation dismissing the Individual Defendants from the litigation without prejudice. On February 19, 2003, the omnibus motion to dismiss was denied by the court
as to the claims against New Focus.



On or about February 28,
2003, a similar purported class action complaint entitled Liu v. Credit Suisse First Boston Corporation et al. was filed in the United States District Court for the Southern District of Florida against Credit Suisse First Boston Corporation,
approximately 50 issuers, including New Focus, and various individuals of the issuer defendants, including William L. Potts, Jr., the Companys Chief Financial Officer. As against New Focus, the complaint alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as claims for common law fraud, negligent misrepresentation, and violations of the Florida Blue Sky Law arising out of the initial public offering of the Companys
common stock. As against Mr. Potts, the complaint alleges violations of Sections 10(b) and 15 of the Securities Exchange Act of 1934 and Rule 10b-5 as well as claims for common law fraud, negligent misrepresentation, and violations of the Florida
Blue Sky Law, also arising out of the initial public offering of the Companys common stock.



An unfavorable resolution of any of the foregoing lawsuits could have a material adverse effect on the business, results of operations or financial
condition of the Company.



In addition, the Company is subject
to various claims that arise in the normal course of business.



5.    Employee Benefit Plan



The Company sponsors a 401(k) Plan that allows voluntary contributions by eligible employees, who may elect to contribute up to the maximum allowed under the Internal Revenue Service regulations. The Company matches employee contributions
at 25%, up to $2,000 per year. The Company made 25% matching contributions of participants salary deferrals in each period and recognized costs of $505,000, $645,000 and $327,000 related to this plan in the fiscal years ended December 29,
2002, December 30, 2001 and December 31, 2000, respectively.



6.    Income Taxes



The
Companys provision (benefit) for income taxes consists of the following (in thousands):



|          |  | Year Ended       
|--------- |  | -----------------
|          |  | December 29, 2002
|Current:  |  |                  
|Federal   |  | $                
|State     |  |                  
|Foreign   |  |                  
|          |  |                  
|          |  |                  
|          |  |                  
|Deferred: |  |                  
|Federal   |  |                  
|State     |  |                  
|          |  |                  
|          |  |                  
|          |  |                  
|          |  | $                
|          |  |                  



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The difference between the provision (benefit) for income taxes and the amount computed by applying
the federal statutory income tax rate (34%) to loss before provision for income taxes is explained below (in thousands):



|                                                        |  | Year Ended        |        
|------------------------------------------------------- |  | ----------------- | -------
|                                                        |  | December 29, 2002 |        
|Tax benefit at federal statutory rate                   |  | $                 | (35,630
|Loss for which no tax benefit is currently recognizable |  |                   | 30,872 
|Foreign losses with no current benefit                  |  |                   | 4,656  
|Current foreign taxes                                   |  |                   | 700    
|Goodwill impairment and amortization                    |  |                   |       
|In-process research and development                     |  |                   |       
|Other                                                   |  |                   | 102    
|                                                        |  |                   |        
|Total provision (benefit)                               |  | $                 | 700    
|                                                        |  |                   |        



Pretax loss from
foreign operations was approximately $13,690,000, $27,090,000 and $15,350,000 for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.



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



|                                     |  | December 29, 2002 |         |   | December 30, 2001 |  
|------------------------------------ |  | ----------------- | ------- | - | ----------------- | -
|Deferred tax liabilities:            |  |                   |         |   |                   |  
|Stock option compensation            |  | $                 | (930    | ) |                   | $
|Purchased intangibles                |  |                   | (350    | ) |                   |  
|                                     |  |                   |         |   |                   |  
|                                     |  |                   | (1,280  | ) |                   |  
|Deferred tax assets:                 |  |                   |         |   |                   |  
|Net operating loss carryforwards     |  |                   | 59,620  |   |                   |  
|Tax credit carryforwards             |  |                   | 9,940   |   |                   |  
|Inventory valuation                  |  |                   | 3,540   |   |                   |  
|Accruals and reserves                |  |                   | 12,410  |   |                   |  
|Capitalized research and development |  |                   | 3,900   |   |                   |  
|Other individually immaterial items  |  |                   | (120    | ) |                   |  
|                                     |  |                   |         |   |                   |  
|Gross deferred tax assets            |  |                   | 89,290  |   |                   |  
|Valuation allowance                  |  |                   | (88,010 | ) |                   |  
|                                     |  |                   |         |   |                   |  
|Net deferred tax assets              |  |                   | 1,280   |   |                   |  
|                                     |  |                   |         |   |                   |  
|                                     |  | $                 |        |   |                   | $
|                                     |  |                   |         |   |                   |  



The valuation
allowance increased by $35,030,000, $35,640,000 and $10,262,000 for the years ended December 29, 2002, December 30, 2001 and December 31, 2000.



Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence,
which included the Companys historical operating performance and the reported cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its net deferred tax assets.



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 29, 2002 the Company had federal and state net operating loss carryforwards of
approximately $174,200,000 and $60,480,000, respectively, for tax purposes. As of December 29, 2002, the Company also had federal and state research and development tax credit carryforwards of approximately $5,890,000 and $4,580,000, respectively,
available to offset future taxable income. The net operating loss and federal tax credit carryforwards will expire at various dates beginning in 2004 through 2022, if not utilized.



Utilization of the net operating loss and tax credit carryforwards may be subject to substantial annual limitations due to
the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credit carryforwards before utilization.



7.    Stockholders Equity



Reincorporation in Delaware



On May 8, 2000, the Company reincorporated in the state of Delaware. The par
value of the preferred and common stock is $0.001 per share. The Companys Certificate of Incorporation was amended to authorize 10,000,000 shares of preferred stock and 250,000,000 shares of common stock. The Board of Directors has the
authority to fix or alter the designations, powers, preferences, and rights of the shares of preferred stock.



Stock Option Plans



Under its 1990 Incentive Stock Option Plan, the Company may grant incentive stock options and nonstatutory stock options to employees, directors, and
consultants. Under its 1998 and 1999 Stock Plans, the Company may grant options and stock purchase rights to employees and consultants provided that incentive stock options may only be granted to employees. Options may be granted to purchase common
stock at an exercise price of not less than 100% of the fair value of the stock at the date of grant as determined by the Board of Directors. Generally, options vest over five years and expire after ten years. The normal vesting schedule for options
includes an initial vesting equal to 20% of the underlying shares after the first year of service and monthly vesting of the remaining shares over the next four years.



In February 2000, the Board of Directors adopted the 2000 Stock Plan (2000 Plan), which was approved by the stockholders in
April 2000. The 2000 Plan provides for the grant of stock options to purchase shares of common stock to employees, directors and consultants. A total of 1,000,000 shares of common stock were reserved for issuance plus any shares reserved for
issuance under the 1998 and 1999 Stock Plans and any shares returned to the 1998 and 1999 Stock Plans. The number of shares of common stock reserved for issuance increases annually beginning in fiscal year 2001 by an amount equal to the lesser of
six percent of the outstanding shares of common stock on the first day of the year, 9,000,000 shares, or a lesser amount as determined by the Companys board of directors.



In February 2000, the Board of Directors adopted the 2000 Director Option Plan (Directors Plan), which was approved by
the stockholders in April 2000, to provide for the automatic grant of options to purchase shares of common stock to non-employee directors who are not employees or consultants of the Companys affiliates. The Directors Plan is
administered by the Board of Directors, and may be delegated to a committee. A total of 200,000 shares of common stock were reserved for issuance. The Directors Plan generally provides for an automatic initial grant of an option to purchase
25,000 shares of common stock to each non-employee director on the date when the person first becomes a non-employee director on, or after the closing of the initial public offering, whether through election by the Companys stockholders or
appointment by the Companys Board of Directors to fill a vacancy. In addition, upon the date of each annual stockholders meeting subsequent to the date



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of each non-employee directors initial grant under the directors plan, each person who is then serving as a non-employee director automatically
shall be granted an option to purchase 5,000 shares of common stock.



In June 2001, the Board of Directors adopted the 2001 Stock Plan (2001 Plan). The 2001 Plan provides for the grant of nonstatutory stock options, stock purchase rights, stock appreciation rights and restricted stock to employees and
consultants. Officers and directors of the Company are not eligible to receive grants under the 2001 Plan. A total of 100,000 shares of common stock were reserved for issuance.



The following table summarizes activity under all stock option plans:



|                                         |  | Options Available For Grant |   |  | Options Outstanding |   |  | Weighted Average Exercise Price
|---------------------------------------- |  | --------------------------- | - |  | ------------------- | - |  | -------------------------------
|Balance at December 31, 1999             |  | 5,882,000                   |   |  | 8,439,000           |   |  | $                              
|Authorized                               |  | 1,200,000                   |   |  |                    |   |  |                                
|Granted                                  |  | (7,389,000                  | ) |  | 7,389,000           |   |  | $                              
|Exercised                                |  |                            |   |  | (9,501,000          | ) |  | $                              
|Canceled                                 |  | 847,000                     |   |  | (847,000            | ) |  | $                              
|Repurchased                              |  | 500,000                     |   |  |                    |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Balance at December 31, 2000             |  | 1,040,000                   |   |  | 5,480,000           |   |  | $                              
|Authorized                               |  | 3,862,000                   |   |  |                    |   |  |                                
|Granted                                  |  | (5,234,000                  | ) |  | 5,234,000           |   |  | $                              
|Exercised                                |  |                            |   |  | (583,000            | ) |  | $                              
|Cancelled                                |  | 3,647,000                   |   |  | (3,647,000          | ) |  | $                              
|Repurchased                              |  | 526,000                     |   |  |                    |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Balance at December 30, 2001             |  | 3,841,000                   |   |  | 6,484,000           |   |  | $                              
|Authorized                               |  | 5,158,000                   |   |  |                    |   |  |                                
|Granted                                  |  | (7,000,000                  | ) |  | 7,000,000           |   |  | $                              
|Exercised                                |  |                            |   |  | (369,000            | ) |  | $                              
|Cancelled                                |  | 5,001,000                   |   |  | (5,001,000          | ) |  | $                              
|Repurchased                              |  | 328,000                     |   |  |                    |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Balance at December 29, 2002             |  | 7,328,000                   |   |  | 8,114,000           |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Options exercisable at December 31, 2000 |  |                             |   |  | 711,000             |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Options exercisable at December 30, 2001 |  |                             |   |  | 1,494,000           |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                
|Options exercisable at December 29, 2002 |  |                             |   |  | 2,878,000           |   |  | $                              
|                                         |  |                             |   |  |                     |   |  |                                



The weighted average
fair value of options granted in the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 was $3.31, $15.85 and $14.99, respectively. Options to purchase approximately 240,000 shares that were outstanding at December
29, 2002 expired on January 2, 2003 (see Stock Option Exchange Program).



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following summarizes option information relating to outstanding options under the plans as of
December 29, 2002:



|Range of Exercise Prices |                    | Options Outstanding |                                             | Options Exercisable
|------------------------ | ------------------ | ------------------- | ------------------------------------------- | -------------------
|                         | Number Outstanding |                     | Weighted Average Remaining Contractual Life |                    
|$0.125$2.70             |                    | 960,000             |                                             | 6.37 years         
|$2.79$2.81              |                    | 1,215,000           |                                             | 9.72 years         
|$2.83                    |                    | 1,000,000           |                                             | 9.61 years         
|$2.90$3.68              |                    | 285,000             |                                             | 9.50 years         
|$3.70$3.81              |                    | 944,000             |                                             | 8.87 years         
|$3.89                    |                    | 2,070,000           |                                             | 9.01 years         
|$3.99$100.375           |                    | 1,640,000           |                                             | 6.75 years         
|                         |                    |                     |                                             |                    
|$0.125$100.375          |                    | 8,114,000           |                                             | 8.42 years         
|                         |                    |                     |                                             |                    



In addition, non-plan
options to purchase 800,000 shares of common stock at an exercise price of $0.0025 per share were granted to the Companys founder and then-Chairman of the Board in fiscal year 1991. These options were exercised during the year ended December
31, 2000.



Stock Option Exchange Program



On June 1, 2001, the Company announced a voluntary stock option exchange
program for eligible employees. Under the program, New Focus employees who held stock options granted between June 1, 2000 and February 28, 2001 were given the opportunity, if they chose, to cancel those outstanding stock options in exchange
for an equal number of replacement options to be granted at two future dates. The elections to cancel options were effective on June 29, 2001. The exchange resulted in the voluntary cancellation of options to purchase 2,321,000 shares of common
stock with exercise prices ranging from $20.3125 to $138.0625 per share in exchange for the same number of replacement options. In addition, supplemental options to purchase 309,000 shares of common stock with exercise prices of $27.00 per share
were cancelled and no replacement options were granted. The replacement options were granted under the Companys 2000 Stock Plan as follows: (i) 30% of the aggregate number of shares subject to the cancelled options were granted on July 2, 2001
(the First New Options), and (ii) the remaining 70% of the aggregate number of shares subject to the cancelled options were granted on January 3, 2002 (the Second New Options). Members of the Companys Board of Directors
were not eligible to participate in the program. Employees who terminated prior to the Second New Options grant were not eligible to receive the Second New Options.



The First New Options to purchase a total of 696,000 shares of common stock were granted on July 2, 2001 at an exercise
price of $8.25 per share, which was the closing fair market value of the Companys common stock on June 29, 2001. The First New Options vested ratably over twelve (12) months and expired on January 2, 2003. None of the First New Options
were exercised prior to their expiration. The Second New Options to purchase a total of 1,508,000 shares of common stock were granted on January 3, 2002 at an exercise price of $3.89 per share, which was the closing fair market value of the
Companys common stock on January 2, 2002. The Second New Options vest ratably over 48 months and will expire ten years after the grant date.



The First New Options resulted in variable accounting treatment for approximately 768,000 shares, which included 696,000 shares granted under the exchange
offer and 72,000 shares that were subject to the exchange offer but were not exchanged. No compensation expense was recognized in fiscal year 2002 or 2001, as the



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



exercise price of the First New Options exceeded the fair market value of the Companys common stock. At December 29, 2002, approximately 243,000
shares were outstanding under options subject to variable accounting treatment. On January 3, 2003, options to purchase approximately 240,000 of these shares expired and were cancelled, leaving options to purchase approximately 3,000 shares subject
to variable accounting treatment. The Second New Options are not subject to variable accounting, as they were granted at least six months and one day after cancellation of the initial stock options.



Notes Receivable from Stockholders



During the year ended December 31, 2000, the Company made full recourse
loans aggregating approximately $8,800,000 to certain employees in connection with their purchase of shares of common stock. Each of these loans was made pursuant to a full recourse promissory note secured by a stock pledge. The notes bear no
interest but interest is imputed and reported annually as compensation on the employees W-2. All unvested shares purchased by employees are subject to repurchase by the Company at the original exercise price if the employees employment
is terminated. At December 29, 2002 and December 30, 2001, the balance outstanding under these notes was $1,540,000 and $6,874,000, respectively, of which $1,401,000 and $5,815,000, respectively, related to the exercise of stock options and was
included in stockholders equity. The remaining balance relates to the tax liability associated with the stock option exercise and has been included in Other Assets.



Deferred Compensation



During the year ended December 30, 2001, the Company recorded aggregate deferred compensation of $58,369,000 primarily associated with the issuance of
restricted stock subject to forfeiture in connection with the acquisitions of JCA and Globe Y. During the year ended December 31, 2000, the Company recorded aggregate deferred compensation of $48,211,000 representing the difference between the
exercise price of stock options granted and the then deemed fair value of the Companys common stock. No deferred compensation was recorded during the year ended December 29, 2002. These amounts are being amortized as charges to operations,
using the graded method, over the vesting periods of the individual stock options, generally five years. Under the graded method, approximately 51.53%, 24.62%, 14.16%, 7.37% and 2.32%, respectively, of each options compensation expense is
recognized in each of the five years following the date of grant. Upon termination of an employee, the amortization method for that employee reverts to straight-line and the excess compensation expense recorded under the graded method is reversed.
For the year ended December 29, 2002, the Company reversed $6,285,000 of excess compensation expense related to terminated employees. For the years ended December 29, 2002, December 30, 2001 and December 31, 2000, the Company amortized deferred
compensation, net of reversals, of $8,012,000, $58,132,00 and $23,747,000, respectively.



Pro Forma Disclosure of the Effect of Stock-Based Compensation



The Company uses the intrinsic value method in accounting for its employee stock options (including shares issued under employee stock purchase plans,
collectively the options) because, as discussed below, the alternative fair value accounting method requires use of option valuation models that were not developed for use in valuing employee stock options. Under the intrinsic value
method, when the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, there is no compensation expense recognized.



Pro forma information regarding net loss, assuming the Company had accounted
for its employee stock options granted during the fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



under the fair value method, was estimated at the date of grant using the Black-Scholes option-pricing model, with the following weighted average
assumptions:



|                        |  | Employee Stock Option Plans  |  | Employee Stock Purchase Plans
|----------------------- |  | ---------------------------- |  | -----------------------------
|                        |  | Year Ended December 29, 2002 |  | Year Ended December 30, 2001 
|Risk-free interest rate |  | 4.4%                         |  | 4.9%                         
|Dividend yield          |  | 0%                           |  | 0%                           
|Expected volatility     |  | 119.0%                       |  | 138.0%                       
|Expected option life    |  | 7.5 years                    |  | 7.5 years                    



The option valuation
models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the
expected life of the option. Because the Companys employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period under the graded method.



Employee Stock Purchase Plan



In February 2000, the Companys Board of Directors approved the 2000 Employee Stock Purchase Plan (Purchase Plan), which was approved by the Companys stockholders in April 2000. A total of 1,000,000 shares of common stock were
initially reserved for issuance. The number of shares of common stock reserved for issuance increases annually by an amount equal to the lesser of 1,000,000 shares, 1.25% of the outstanding shares on that date, or an amount determined by the
Companys board of directors. Accordingly, in fiscal year 2002 an additional 754,000 shares were made available for issuance. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees in periodic
offerings following the adoption of the Purchase Plan. The offering period for any offering will be no more than 24 months except for the first purchase period for which the offering period will be no more than 27 months. Under the Purchase Plan,
participating employees may choose to have up to 15% of their annual base pay plus commissions withheld to purchase the Companys common stock. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the common stock on the commencement date of each offering period or the relevant purchase date. During the year ended December 29, 2002, 742,000 shares were issued under the Purchase Plan at an average price of approximately
$2.88 per share. During the year ended December 30, 2001, 464,000 shares were issued under the Purchase Plan at an average price of approximately $8.47 per share.



Warrants



During the year ended December 31, 2000, the Company issued to a facility lessor a two-year warrant to purchase 30,000 shares of the Companys common
stock with an exercise price of $20.00 per share. The warrant was non-forfeitable and immediately exercisable. The fair value of the warrant was determined to be $279,000 using the Black-Scholes method and the following assumptions: expected life 2
years, exercise price $20.00, stock price on date of grant $20.00, expected dividend yield of 0%, risk free interest rate of 6%, and expected volatility 80%. This amount was capitalized and was being amortized over the life of the facility lease. In
the third quarter of 2002, the Company expensed the remaining unamortized portion as part of its restructuring charges incurred in connection with closing and consolidating the Companys San Jose facilities (see Note 12 Restructuring
Charges). The warrant expired during the year ended December 29, 2002.



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Common Stock



Common stock reserved for future issuance is as follows:



|                             |  | December 29, 2002
|---------------------------- |  | -----------------
|Stock option plan:           |  |                  
|Outstanding options          |  | 8,114,000        
|Reserved for future grants   |  | 7,328,000        
|                             |  |                  
|                             |  | 15,442,000       
|Employee Stock Purchase Plan |  | 1,548,000        
|                             |  |                  
|                             |  | 16,990,000       
|                             |  |                  



8.    Segments
of an Enterprise and Related Information



The Company is
organized and operates as one operating segment: the design, development, manufacturing, marketing and selling of photonics and microwave solutions for commercial and research applications. The Company evaluates performance and allocates resources
based on consolidated revenues and overall profitability.



Geographic information for fiscal years 2002, 2001 and 2000 is presented below. Revenues are attributed to countries based on the location of customers.



|                            |  | Year Ended       
|--------------------------- |  | -----------------
|                            |  | December 29, 2002
|                            |  | (in thousands)   
|Geographic information      |  |                  
|Revenues                    |  |                  
|United States               |  | $                
|Asia                        |  |                  
|Europe                      |  |                  
|                            |  |                  
|Consolidated total revenues |  | $                
|                            |  |                  



9.    Net Loss
Per Share



Basic and diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares outstanding during the period less outstanding nonvested shares. Outstanding nonvested shares are not included in the computation of basic net loss per share until the
time-based vesting restrictions have lapsed.



|                                                                             |  | Year Ended                               |         
|---------------------------------------------------------------------------- |  | ---------------------------------------- | --------
|                                                                             |  | December 29, 2002                        |         
|                                                                             |  | (in thousands, except per share amounts) |         
|                                                                             |  |                                          |         
|Net loss (numerator)                                                         |  | $                                        | (104,811
|                                                                             |  |                                          |         
|Shares used in computing basic and diluted net loss per share (denominator): |  |                                          |         
|Weighted average common shares outstanding                                   |  |                                          | 75,837  
|Less shares subject to repurchase                                            |  |                                          | (732    
|                                                                             |  |                                          |         
|Denominator for basic and diluted net loss per share                         |  |                                          | 75,105  
|                                                                             |  |                                          |         
|Basic and diluted net loss per share                                         |  | $                                        | (1.40   
|                                                                             |  |                                          |         



At December 29, 2002,
approximately 459,000 shares were subject to repurchase at a weighted average price of $1.22.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has excluded the effect of all convertible preferred stock, common shares subject to
repurchase, warrants for convertible preferred stock and common stock and outstanding stock options from the calculation of historical diluted loss per common share because all such securities are antidilutive for all periods presented. The total
number of shares, including options and warrants to purchase shares, excluded from the calculations of historical diluted net loss per share was 8,114,000, 6,518,000 and 5,510,000 for the years ended December 29, 2002, December 30, 2001 and December
31, 2000, respectively.



10.    Business Acquisitions



Acquisition of JCA Technology, Inc.



On January 16, 2001, the Company acquired JCA Technology, Inc. (JCA), a
privately held designer and manufacturer of fiber-optic products for modulators, for a total purchase price of approximately $311.5 million in a transaction accounted for as a purchase. The Company paid $75.0 million in cash and exchanged
approximately 7,954,000 shares of common stock with a combined total fair value of $303.4 million for all of the outstanding stock of JCA. In addition, the Company issued approximately 2,079,000 shares of restricted stock subject to forfeiture. The
common stock was valued using the Companys average stock price for the seven-day period ending December 27, 2000. The average price was $28.71. Direct transaction costs related to the acquisition were approximately $8.1 million. In addition,
the Company recorded $56.0 million of unearned compensation related to approximately 1,951,000 shares of restricted stock. Vesting for the remaining 128,096 shares of restricted stock was contingent upon meeting certain fiscal year 2001 operating
objectives. These contingent shares were forfeited in September 2001 when the operating objectives were not met. Approximately 85,000 shares of the restricted stock were forfeited prior to vesting due to employee terminations. As of December 29,
2002, approximately 789,000 shares of the restricted stock remained subject to forfeiture. These shares were fully earned by February 2, 2003.



The acquisition was accounted for as a purchase and accordingly, the accompanying financial statements include the results of operations of JCA subsequent
to January 16, 2001. The purchase price has been allocated to the tangible net assets acquired based on managements estimate of their fair values, and to the intangible assets acquired and in-process research and development based on their
estimated fair values. The fair values of the current technology, customer base and in-process research and development were based upon the income approach to valuation. Under the income approach, the Company assumed a cash flow period of 5 years,
revenue growth rates of 15% to 154% on a sequential annual basis, and discount rates of 21% to 31%. The cost approach was used to value the workforce by estimating the cost to recruit and train a comparable workforce. The purchase price allocation
was as follows (in thousands):



|                                    |  |   |         |  
|----------------------------------- |  | - | ------- | -
|Tangible net assets acquired        |  | $ | 6,660   |  
|Intangible assets acquired:         |  |   |         |  
|Current technology                  |  |   | 31,300  |  
|Customer base                       |  |   | 4,000   |  
|Workforce                           |  |   | 3,560   |  
|In-process research and development |  |   | 13,400  |  
|Goodwill                            |  |   | 267,777 |  
|Net deferred tax liability          |  |   | (15,200 | )
|                                    |  |   |         |  
|Total purchase price allocation     |  | $ | 311,497 |  
|                                    |  |   |         |  



Tangible net assets
acquired included cash, accounts receivable, inventories and fixed assets. Liabilities assumed principally included accounts payable, accrued expenses and a note payable. Intangible assets acquired



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and goodwill were each being amortized on a straight-line basis over estimated useful lives ranging from two to four years (see Note 11Impairment of
Goodwill). In-process research and development, which had not reached technological feasibility and therefore had no alternative future use, was expensed during 2001. In conjunction with the Companys decision to cease development of
next-generation RF products for telecom applications, the acquired in-process research and development activities had been discontinued by the middle of 2002.



Acquisition of Globe Y. Technology, Inc.



On February 15, 2001, the Company acquired Globe Y. Technology, Inc. (Globe Y), a privately-held manufacturer of fused fiber coupling machines, for a
total purchase price of approximately $45.2 million in a transaction accounted for as a purchase. The Company exchanged approximately 1,002,000 shares of common stock with a fair value of $44.4 million for all of the outstanding stock of Globe Y. In
addition, the Company issued approximately 53,000 shares of restricted stock subject to forfeiture. The common stock was valued using the Companys closing stock price of $44.31 on February 15, 2001. Direct transaction costs related to the
merger were approximately $800,000. In addition, the Company recorded $2.3 million of unearned compensation related to the approximately 53,000 shares of restricted stock.



The acquisition was accounted for as a purchase and accordingly, the accompanying financial statements include the results
of operations of Globe Y subsequent to February 15, 2001. The purchase price has been allocated to the tangible net assets acquired based on managements estimate of fair values, and to the intangible assets acquired based on their estimated
fair values. The fair values of the current technology, customer base, non-compete agreement and in-process research and development were based upon the income approach to valuation. Under the income approach, the Company assumed a cash flow period
of 5 years, revenue growth rates of 19% to 116% on a sequential annual basis, and a discount rate of 36.0%. The cost approach was used to value the workforce by estimating the cost to recruit and train a comparable workforce. The purchase price
allocation is as follows (in thousands):



|                                     |  |   |        |  
|------------------------------------ |  | - | ------ | -
|Tangible net assets acquired         |  | $ | 1,577  |  
|Intangible assets acquired:          |  |   |        |  
|Current technology                   |  |   | 7,100  |  
|Customer base                        |  |   | 2,400  |  
|Non-complete agreement and workforce |  |   | 1,960  |  
|Goodwill                             |  |   | 37,567 |  
|Deferred tax liability               |  |   | (5,381 | )
|                                     |  |   |        |  
|Total purchase price allocation      |  | $ | 45,223 |  
|                                     |  |   |        |  



Tangible net assets
acquired included cash, accounts receivable, inventories and fixed assets. Liabilities assumed principally included accounts payable, accrued expenses, income taxes payable and customer deposits. Intangible assets acquired and goodwill were each
being amortized on a straight-line basis over estimated useful lives ranging from two to four years (See Note 11Impairment of Goodwill).



Unaudited Pro Forma Information



The following unaudited pro forma information presents the consolidated results of operations of the Company, excluding the charge for acquired in-process
research and development, as if the acquisitions of JCA and Globe Y had occurred at the beginning of fiscal year 2000. The pro forma 2001 and 2000 results of operations combine the consolidated results of operations of the Company, excluding the
charge for in-process



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NEW FOCUS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



research and development attributable to JCA, for the years ended December 30, 2001 and December 31, 2000 with the historical results of operations of JCA
and Globe Y for the years ended December 31, 2001 and December 31, 2000, respectively. The unaudited pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of the beginning of fiscal
year 2000 or of results which may occur in the future.



|                   |  | Year Ended                              |         
|------------------ |  | --------------------------------------- | --------
|                   |  | December 30, 2001                       |         
|                   |  | (In thousands, except per shareamounts) |         
|Revenues           |  | $                                       | 94,241  
|Net loss           |  | $                                       | (451,011
|Net loss per share |  | $                                       | (5.45   



Other



On February 28, 2000, the Company issued 116,000 shares
of the Companys common stock in connection with a business acquisition. A shareholder/employee of the acquired company received 100,000 of the shares, which vest 20% after one year and 1/60 each month thereafter provided the
shareholder/employee is an employee of the Company. The unvested shares are subject to repurchase by the Company at $5.00 per share if the employee is terminated. Under Emerging Issues Task Force No. 95-8, Accounting for Contingent
Consideration Paid to Shareholders of an Acquired Enterprise in a Purchase Business Combination, this arrangement is, in substance, compensation for post-combination services rather than additional purchase price. The $1,300,000 value of
the 100,000 shares issued was recorded in deferred compensation and is being amortized into expenses over the vesting period. The purchase price of $208,000, which is the fair market value of the remaining 16,000 shares resulted in goodwill.
The acquisition was accounted for under the purchase method. In November 2001, upon the employees termination of employment, the Company repurchased 16,897 unvested shares at $5.00 per share.



11.    Impairment of Goodwill



Pursuant to accounting rules, the majority of the goodwill associated with
the business acquisitions of JCA and Globe Y was recorded based on stock prices at the time acquisition agreements were executed and announced. Goodwill and intangible assets are generally evaluated for impairment on an individual acquisition,
market, or product basis whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. Periodically, the Company reviews its goodwill and other intangible assets for
impairment based on estimated future undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair
values based on the expected discounted future cash flows attributable to the assets.



In 2001, due to the circumstances created by the significant downturn in the telecommunications market, the Company recorded impairment charges against goodwill and other intangible assets associated with its
acquisitions of JCA and Globe Y. The downturn negatively affected the forecasted revenues and cash flows from the JCA and Globe Y businesses acquired in early 2001. In accordance with the Companys policy, undiscounted cash flows indicated that
the assets were impaired. Financial Strategies Consulting Group, LLC, an independent appraiser, calculated the impairment charge by comparing the fair value of the intangible assets, based on future discounted cash flow expectations from these
acquired businesses, to the carrying amount of the related intangible assets. The discount rate applied to these cash flows was based on the Companys weighted average



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cost of capital, which represents the blended after-tax costs of debt and equity. The impairment charges resulted in a $289.3 million write-down of goodwill
and other intangible assets for fiscal year 2001. At December 30, 2001, there was no remaining goodwill balance associated with the acquisitions of JCA and Globe Y, and net other intangible assets totaled $12.3 million.



In 2002, the Company determined that it would discontinue new product
development for certain high-speed radio-frequency products manufactured by JCA. As a result of this decision the Company expected that revenues from JCAs telecom products would further decline. In addition, due to the continuing downturn in
the telecommunications market, the Company expected that revenues from Globe Y products would be negligible and the Company made the decision to close the operations of Globe Y in August. In accordance with the Companys policy, undiscounted
cash flows indicated that the remaining intangible assets associated with these acquisitions were impaired. The Company calculated the impairment charges by comparing the expected discounted future cash flows to the carrying amount of the related
intangible assets. The discount rate applied to these cash flows was based on the Companys weighted average cost of capital, which represents the blended after-tax costs of debt and equity. This analysis resulted in a $7.7 million write-down
of intangibles in fiscal year 2002. As of December 29, 2002, the Company had $1.4 million remaining in an acquired intangibles related to the acquisition of JCA and no remaining acquired intangibles related to the acquisition of Globe Y.



The remaining intangible asset is being amortized using the straight-line
method over its estimated useful life of approximately four years. The components of intangible assets are as follows (in thousands):



|                                    |  | December 29, 2002 |        |   | December 30, 2001 |  
|----------------------------------- |  | ----------------- | ------ | - | ----------------- | -
|Developed technology                |  | $                 | 2,759  |   |                   | $
|Customer base                       |  |                   |       |   |                   |  
|Non-compete agreement and workforce |  |                   |       |   |                   |  
|Other intangibles                   |  |                   |       |   |                   |  
|                                    |  |                   |        |   |                   |  
|Total intangibles assets            |  |                   | 2,759  |   |                   |  
|Less:  accumulated amortization     |  |                   | (1,365 | ) |                   |  
|                                    |  |                   |        |   |                   |  
|                                    |  | $                 | 1,394  |   |                   | $
|                                    |  |                   |        |   |                   |  



In accordance with FAS
142, the Company is required to disclose its historical results of operations as though the accounting for goodwill and intangible assets was consistent for all periods presented. Because the Companys goodwill arose during 2001 and would have
been written off in its entirety in 2001 under both FAS 142 and prior accounting guidance, no difference to the Companys historical financial results would have resulted from the retroactive adoption of FAS 142.



12.    Restructuring Charges



In 2002, the Company recorded restructuring and impairment charges totaling
$72.2 million for actions taken to resize the Companys operations as a result of a continuing decline in demand for its products as well as the general decline in the telecommunications industry. These restructuring activities included
divesting the Companys operations related to the manufacturing of passive optical components, including ceasing operations at its 243,000 square foot manufacturing facility in Shenzhen, China; discontinuing the Companys new product
development of certain high-speed RF products for next-generation telecommunications applications, including reducing its Wisconsin-based engineering staff, decreasing the square footage occupied under its Wisconsin facility lease and implementing
additional workforce reductions in California; and closing and consolidating the



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Companys remaining 130,000 square foot facility in San Jose, California into its smaller San Jose facility. The restructuring and asset impairment
charges included approximately $44.3 million for the write-down of assets, approximately $22.9 million related to facility closure costs and approximately $5.0 million for severance costs associated with the termination of 460 employees. Non-cash
items included in the restructuring charge totaled $44.3 million. As of December 29, 2002, approximately $21.4 million in accrued restructuring costs, consisting of approximately $700,000 for severance and approximately $20.7 million for
facility closure costs, remained in current and long-term liabilities. The Company had approximately 250 employees in December 2002, down from approximately 900 employees in December 2001.



In 2001, the Company recorded restructuring charges totaling $17.8 million
for plans to resize the Companys operations as a result of a decline in demand for its products. These restructuring activities included closing and consolidating the Companys older Santa Clara, California facility and its smaller
Shenzhen, China production facility into larger, existing facilities in San Jose and Shenzhen, respectively, and the anticipated subleasing of a previously unoccupied facility in Camarillo, California. Restructuring activities also included the
planned closing of the Companys remaining manufacturing site in Camarillo, California in the early part of the third quarter of 2002 and the transfer of production from this operation to other facilities. Additionally, the Company reduced its
workforce in its U.S. and China operations through reduction in force programs and attrition by approximately 1,200 employees from a peak of approximately 2,100 in February 2001 to approximately 900 employees in December 2001. The restructuring
charges included $7.1 million for severance costs covering approximately 910 employees (including approximately 160 employees associated with the planned closing of the Camarillo facility in 2002), $8.1 million for the write-down of the net book
value of impaired leasehold improvements and equipment, and $2.6 million for facility closure costs. Non-cash items included in the restructuring charges totaled $9.5 million. As of December 30, 2001, $5.0 million in accrued restructuring costs,
consisting of $1.9 million for facility closure costs and $3.1 million for severance costs, remained in current liabilities.



The table below summarizes the Companys restructuring activities (in thousands):



|                                     |  | Beginning Balance December 30, 2001 |       | Provision Year Ended December 29, 2002 |   | Cash Payments |  |   | Non-cash Charges |   |  | Provision Balance as of December 29, 2002
|------------------------------------ |  | ----------------------------------- | ----- | -------------------------------------- | - | ------------- |  | - | ---------------- | - |  | -----------------------------------------
|Restructuring activities:            |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          
|Workforce reduction severance        |  | $                                   | 3,058 |                                        | $ | 5,066         |  | $ | (7,448           | ) |  | $                                        
|Facility closure                     |  |                                     | 1,898 |                                        |   | 22,873        |  |   | (4,059           | ) |  |                                          
|Leasehold improvements and equipment |  |                                     |      |                                        |   | 44,294        |  |   |                 |   |  |                                          
|                                     |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          
|Restructuring charges                |  | $                                   | 4,956 |                                        | $ | 72,233        |  | $ | (11,507          | ) |  | $                                        
|                                     |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          
|                                     |  |                                     |       |                                        |  
|                                     |  | Beginning Balance December 31, 2000 |       | Provision Year Ended December 30, 2001 |   | Cash Payments |  |   | Non-cash Charges |   |  | Provision Balance as of December 30, 2001
|Restructuring activities:            |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          
|Workforce reduction severance        |  | $                                   |      |                                        | $ | 7,096         |  | $ | (2,637           | ) |  | $                                        
|Facility closure                     |  |                                     |      |                                        |   | 2,581         |  |   | (683             | ) |  |                                          
|Leasehold improvements and equipment |  |                                     |      |                                        |   | 8,093         |  |   |                 |   |  |                                          
|                                     |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          
|Restructuring charges                |  | $                                   |      |                                        | $ | 17,770        |  | $ | (3,320           | ) |  | $                                        
|                                     |  |                                     |       |                                        |   |               |  |   |                  |   |  |                                          



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



13.    Divestitures



On April 24, 2002, the Company announced the sale of its passive component product line to Finisar Corporation. Under the
terms of the agreement, Finisar acquired the physical assets and intellectual property associated with this product line. The physical assets included development and production equipment as well as certain raw material and finished goods
inventories. New Focus assigned to Finisar the intellectual property rights to fifty-one pending and issued patents, the Companys proprietary know-how, and certain trademarks associated with this product line. New Focus retained exclusive
rights for use of this intellectual property outside the field of fiber-optic communications. Finisar granted to New Focus the ability to resell these passive component products through New Focus photonics tools catalog, website and related
sales and marketing channels. Additionally, as part of the transaction, Finisar employed certain key personnel from New Focus associated with this product line.



New Focus will receive consideration of approximately $12.15 million under the terms of the agreement. New Focus received initial consideration of
approximately $6.75 million in the form of a note receivable from Finisar payable in August 2002 in either Finisar common stock or cash. In settlement of this note, New Focus received 4,027,446 shares of Finisar common stock based on the $1.676 per
share average closing price of Finisar common stock for the ten trading days ending August 7, 2002. The Company sold all of the Finisar shares and recognized a loss of $2.1 million for the year ended December 29, 2002. New Focus will also receive
cash royalty payments that are subject to guaranteed minimum payments totaling $5.4 million payable in annual installments of $1.4 million, $2.0 million and $2.0 million in the third quarter of 2003, 2004 and 2005, respectively. The royalty payments
are based on a percentage of the sales of all products that utilize the transferred technology and will be recognized as income as payments are received. Under the terms of the agreement, Finisar also has the right to purchase prior to July 1, 2003
certain product inventories for an additional payment of $600,000.



On May 23, 2002, New Focus completed the sale of its network tunable laser technology to Intel Corporation for $50.0 million in cash, including $5.0 million held in escrow. Under the terms of the transaction New Focus assigned certain
intellectual property rights and transferred certain physical assets associated with its network tunable laser program to Intel. In addition, Intel hired approximately 40 New Focus employees associated with this technology. Under the agreement,
Intel granted a license to New Focus that allows New Focus to use the tunable laser technology involved in this transaction for test and measurement and other non-network applications. Under the terms of the agreement, ten percent of the sale
proceeds, or $5.0 million, will be held in escrow for eighteen months to satisfy claims, if any, against breaches of representations and warranties in the agreement. The Company will record a gain and cash receipt upon the release of the escrowed
funds, if any, at the close of the escrow period. New Focus and Intel also entered into a supply arrangement under which New Focus has the ability to purchase products developed by Intel using the acquired New Focus technology for use in non-network
applications.



14.    Related Party Transaction



On July 12, 2001, New Focus extended to Kenneth E.
Westrick two secured full recourse short-term loans in the aggregate of $8.0 million. Mr. Westrick was the Companys president and chief executive officer and a member of the Companys board of directors at the time these loan agreements
were executed. The principal amount of approximately $2.1 million on the first note plus the accrued interest on this note was paid by the scheduled maturity date of June 30, 2002. The second note in the principal amount of approximately $5.9
million currently bears interest at the per annum rate of 9.99% compounded annually and is secured by a second deed of trust on certain real property held by Mr. Westrick. Mr. Westrick also had a note in the principal amount of approximately $1.3
million issued to the Company in connection with the exercise of stock options, which was



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



repaid in accordance with its terms in March 2002. The principal amount of this note is included in the totals under Notes Receivable from
Stockholders in Note 7 Stockholders Equity above.



Mr. Westrick resigned as the Companys president and chief executive officer and as a member of the Companys board of directors effective October 10, 2001. In connection with his resignation, Mr. Westrick and the Company entered
into a Separation and Release Agreement. The agreement extended the due date of the $5.9 million note to June 30, 2004 from June 30, 2002. Additionally, the Company accelerated unvested options to purchase 633,333 shares of the Companys
common stock and agreed to pay the equivalent of eighteen months of compensation to Mr. Westrick. The Company recorded a charge of approximately $2.3 million related to the acceleration of stock option vesting and payment of compensation, which was
included in Restructuring and other charges in its statement of operations for fiscal year 2001.



Principal and accrued interest on the $5.9 million note receivable totaled $6.4 million through the end of the second quarter of 2002. Based on declines
in the value of Mr. Westricks assets, the Company recorded an impairment charge of $4.7 million during the third quarter of 2002. The Company stopped accruing interest on Mr. Westricks note for financial reporting purposes beginning
in the third quarter of 2002. The Company has not forgiven or modified the terms of the note receivable.



15.    Stockholder Rights Agreement



On July 26, 2001, the Companys Board of Directors approved a Stockholder Rights Agreement under which the Company declared a dividend of one right
for each share of common stock outstanding. Prior to the Distribution Date referred to below, the rights will be evidenced by and trade with the certificates for the common stock. After the Distribution Date, the Company will mail rights
certificates to the stockholders and the Rights will become transferable apart from the common stock. Rights will separate from the common stock and become exercisable following (a) the tenth business day (or such later date as may be determined by
a majority of the Directors) after a person or group acquires beneficial ownership of 15% or more of the Companys common stock or (b) the tenth business day (or such later date as may be determined by a majority of the Directors) after a
person or group announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Companys common stock. After the Distribution Date, each right will entitle the holder to
purchase for $40.00 a fraction of a share of the Companys preferred stock with economic terms similar to that of one share of the Companys common stock.



16.    Subsequent Events



In January and February 2003, the Company repurchased approximately 4.85 million shares of its common stock at a cost of
approximately $16.5 million. Shares repurchased subsequent to December 29, 2002 represented approximately 6% of the weighted average shares outstanding at December 29, 2002.



70



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##### Table of Contents

(a) 2.  Financial Statement Schedules



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



Allowance For Doubtful Accounts and Sales Returns (in thousands):



|                             |  | Balances at Beginning of Period |       | Additions (Deductions) Charged (Credited) to Costs and Expenses |   |        | Deductions Write-Offs |  |   | Balances at Endof Period
|---------------------------- |  | ------------------------------- | ----- | ---------------------------------------------------------------- | - | ------ | ---------------------- |  | - | ------------------------
|Year ended December 31, 2000 |  | $                               | 160   |                                                                  | $ | 1,258  |                        |  | $ | (28                     
|Year ended December 30, 2001 |  | $                               | 1,390 |                                                                  | $ | 482    |                        |  | $ | (24                     
|Year ended December 29, 2002 |  | $                               | 1,848 |                                                                  | $ | (1,148 | )                      |  | $ | (148                    



Schedules other than
that listed above have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes.



71



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##### Table of Contents

(a) 3.  Exhibits



|              |  |                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                        
|              | 
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                               
|              | 
|3.2(11)       |  | Bylaws of the Registrant, as amended.                                                                                                                                              
|              | 
|4.1(1)        |  | Form of stock certificates.                                                                                                                                                        
|              | 
|10.1(1)       |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers.                                                                                   
|              | 
|10.2(3)       |  | 2000 Stock Plan.                                                                                                                                                                   
|              | 
|10.3(3)       |  | 2000 Employee Stock Purchase Plan.                                                                                                                                                 
|              | 
|10.4(2)       |  | 2000 Director Option Plan and form of agreement thereunder.                                                                                                                        
|              | 
|10.5(3)       |  | 2001 Stock Plan.                                                                                                                                                                   
|              | 
|10.6(1)       |  | Lease Agreement between Registrant and Silicon Valley Properties dated December 23, 1999.                                                                                          
|              | 
|10.7(1)       |  | Shenzhen Real Estate Sales and Purchase Contract by and between the Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated
April 6, 2000.                           
|              | 
|10.8(1)       |  | Shenzhen Futian Free Trade Zone Premises lease by and between Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April
6, 2000.                                 
|              | 
|10.9(4)       |  | Lease Agreement between Registrant and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC, dated May 15, 2000.                                                                         
|              | 
|10.10(5)      |  | Lease Agreement between Registrant and Boyd C. Smith, Trustee, or his Successor Trustee, UTA dated 12/27/76 (John Arrillaga 1976 Children
Trusts) as amended, dated March 30, 1995.
|              | 
|10.11(5)      |  | Lease Agreement by and between Registrant and PEGH Investments, LLC, dated January 9, 2001.                                                                                        
|              | 
|10.12(6)      |  | Preferred Stock Rights Agreement, dated July 26, 2001.                                                                                                                             
|              | 
|10.13(7)      |  | Employment Agreement between Registrant and R. Clark Harris, dated October 10, 2001.                                                                                               
|              | 
|10.14(7)      |  | Compensation Agreement between Registrant and Peter Hansen, dated December 20, 2001.                                                                                               
|              | 
|10.15(7)      |  | Stock Exchange Agreement and Release between Registrant and Peter Hansen, dated January 10, 2002.                                                                                  
|              | 
|10.16(8)      |  | Severance Agreement and Release by and between Registrant and Peter Hansen, effective as of September 27, 2002.                                                                    
|              | 
|10.17(9)      |  | Severance Agreement and Release by and between Registrant and Elaine Fortier, dated June 23, 2002.                                                                                 
|              | 
|10.18(8)      |  | Reimbursement Agreement by and between Registrant and Dr. Timothy Day, dated as of October 1, 2002.                                                                                
|              | 
|10.19(11)     |  | Employment Agreement by and between Registrant and Nicola Pignati, dated as of August 28, 2002, as amended March 18,
2003.                                                         
|              | 
|10.20(11)     |  | Form of Stock Option Agreement entered into by and between Registrant and Nicola Pignati as of August 28, 2002.                                                                    
|              | 
|10.21(11)     |  | Form of Stock Option Agreement entered into by and between Registrant and each of William L. Potts, Jr. and Dr. Timothy Day and each dated
September 16, 2002.                     
|              | 
|10.22(8)      |  | Amendment to Non-statutory Stock Option Agreement by and between Registrant and R. Clark Harris, dated as of October 10,
2002.                                                     
|              | 
|13.1(10)      |  | Proxy Statement for Registrants 2003 Annual Meeting of Stockholders.                                                                                                              
|              | 
|21.1(11)      |  | List of Subsidiaries.                                                                                                                                                              
|              | 
|23.1          |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                



72



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##### Table of Contents

|ExhibitNumber |  | Description                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|23.2          |  | Consent of Financial Strategies Consulting Group, LLC.                                                                                                                       
|              | 
|24.1(12)      |  | Power of Attorney.                                                                                                                                                           
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Act, as
amended.                                                    
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Act, as
amended.                                                    
|              | 
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer in accordance with 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) |  | Incorporated by reference from our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference from our registration statement on Form S-8 filed with the Securities and Exchange Commission on July 18, 2002. The form of agreement thereunder is
incorporated by reference from our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from our registration statement on Form S-8 filed with the Securities and Exchange Commission on April 26, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference from our post-effective amendment to our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and
Exchange Commission on May 18, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference from our registration statement on Form 8-A filed with the Securities and Exchange Commission on August 15, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference from our report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference from our report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(10) |  | Filed with the Securities and Exchange Commission on April 11, 2003.
|---- |  | --------------------------------------------------------------------

|(11) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------

|(12) |  | Incorporated by reference to Exhibit 24.1 from our report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------



73



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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, in the City of San Jose, State of California, on the
30th day of January 2004.



NEW FOCUS, INC.By:

/s/    NICOLA
PIGNATINicola Pignati President and Chief Executive Officer




Pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated:



|                                                  |  |                                                                                    |  |                 
|------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------
|Signature                                         |  | Title                                                                              |  | Date            
|                                                  |  |                                                                                   
|/s/    NICOLA
PIGNATINicola
Pignati               |  | President, Chief Executive Officer and Director (Principal Executive Officer)      |  | January 30, 2004
|                                                  |  |                                                                                   
|/s/    WILLIAM L. POTTS,
JR.William L. Potts,
Jr. |  | Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | January 30, 2004
|                                                  |  |                                                                                   
|*Dr. Peter F. Bordui                              |  | Director                                                                           |  | January 30, 2004
|                                                  |  |                                                                                   
|*John Dexheimer                                   |  | Director                                                                           |  | January 30, 2004
|                                                  |  |                                                                                   
|*Dr. Winston Fu                                   |  | Director                                                                           |  | January 30, 2004
|                                                  |  |                                                                                   
|*Don G. Hallacy                                   |  | Director                                                                           |  | January 30, 2004

|     |  |                                
|---- |  | -------------------------------
|     | 
|*By: |  | /S/    NICOLA PIGNATI          
|     |  |                                
|     |  | Nicola Pignati Attorney-in-fact



74



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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                                    
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                        
|               | 
|3.1(1)         |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                               
|               | 
|3.2(11)        |  | Bylaws of the Registrant, as amended.                                                                                                                                              
|               | 
|4.1(1)         |  | Form of stock certificates.                                                                                                                                                        
|               | 
|10.1(1)        |  | Form of Indemnification Agreement between the Registrant and each of its directors and officers.                                                                                   
|               | 
|10.2(3)        |  | 2000 Stock Plan.                                                                                                                                                                   
|               | 
|10.3(3)        |  | 2000 Employee Stock Purchase Plan.                                                                                                                                                 
|               | 
|10.4(2)        |  | 2000 Director Option Plan and form of agreement thereunder.                                                                                                                        
|               | 
|10.5(3)        |  | 2001 Stock Plan.                                                                                                                                                                   
|               | 
|10.6(1)        |  | Lease Agreement between Registrant and Silicon Valley Properties dated December 23, 1999.                                                                                          
|               | 
|10.7(1)        |  | Shenzhen Real Estate Sales and Purchase Contract by and between the Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated
April 6, 2000.                           
|               | 
|10.8(1)        |  | Shenzhen Futian Free Trade Zone Premises lease by and between Registrant and Shenzhen Libaoyi Industry Development Co., Ltd., dated April
6, 2000.                                 
|               | 
|10.9(4)        |  | Lease Agreement between Registrant and Lincoln-RECP Hellyer Opco, LLC, a Delaware LLC, dated May 15, 2000.                                                                         
|               | 
|10.10(5)       |  | Lease Agreement between Registrant and Boyd C. Smith, Trustee, or his Successor Trustee, UTA dated 12/27/76 (John Arrillaga 1976 Children
Trusts) as amended, dated March 30, 1995.
|               | 
|10.11(5)       |  | Lease Agreement by and between Registrant and PEGH Investments, LLC, dated January 9, 2001.                                                                                        
|               | 
|10.12(6)       |  | Preferred Stock Rights Agreement, dated July 26, 2001.                                                                                                                             
|               | 
|10.13(7)       |  | Employment Agreement between Registrant and R. Clark Harris, dated October 10, 2001.                                                                                               
|               | 
|10.14(7)       |  | Compensation Agreement between Registrant and Peter Hansen, dated December 20, 2001.                                                                                               
|               | 
|10.15(7)       |  | Stock Exchange Agreement and Release between Registrant and Peter Hansen, dated January 10, 2002.                                                                                  
|               | 
|10.16(8)       |  | Severance Agreement and Release by and between Registrant and Peter Hansen, effective as of September 27, 2002.                                                                    
|               | 
|10.17(9)       |  | Severance Agreement and Release by and between Registrant and Elaine Fortier, dated June 23, 2002.                                                                                 
|               | 
|10.18(8)       |  | Reimbursement Agreement by and between Registrant and Dr. Timothy Day, dated as of October 1, 2002.                                                                                
|               | 
|10.19(11)      |  | Employment Agreement by and between Registrant and Nicola Pignati, dated as of August 28, 2002, as amended March 18,
2003.                                                         
|               | 
|10.20(11)      |  | Form of Stock Option Agreement entered into by and between Registrant and Nicola Pignati as of August 28, 2002.                                                                    
|               | 
|10.21(11)      |  | Form of Stock Option Agreement entered into by and between Registrant and each of William L. Potts, Jr. and Dr. Timothy Day and each dated
September 16, 2002.                     
|               | 
|10.22(8)       |  | Amendment to Non-statutory Stock Option Agreement by and between Registrant and R. Clark Harris, dated as of October 10,
2002.                                                     
|               | 
|13.1(10)       |  | Proxy Statement for Registrants 2003 Annual Meeting of Stockholders.                                                                                                              
|               | 
|21.1(11)       |  | List of Subsidiaries.                                                                                                                                                              
|               | 
|23.1           |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                                
|               | 
|23.2           |  | Consent of Financial Strategies Consulting Group, LLC.                                                                                                                             



---

##### Table of Contents

|               |  |                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                  
|               | 
|24.1(12)       |  | Power of Attorney.                                                                                                                                                           
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.                                           
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.                                           
|               | 
|32             |  | Certification of Chief Executive Officer and Chief Financial Officer in accordance with 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) |  | Incorporated by reference from our registration statement on Form S- 1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference from our registration statement on Form S-8 filed with the Securities and Exchange Commission on July 18, 2002. The form of agreement thereunder is
incorporated by reference from our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and Exchange Commission on May 17, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from our registration statement on Form S-8 filed with the Securities and Exchange Commission on April 26, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference from our post-effective amendment to our registration statement on Form S-1, registration number 333-31396, declared effective by the Securities and
Exchange Commission on May 18, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference from our registration statement on Form 8-A filed with the Securities and Exchange Commission on August 15, 2001.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference from our report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference from our report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(10) |  | Filed with the Securities and Exchange Commission on April 11, 2003.
|---- |  | --------------------------------------------------------------------

|(11) |  | Incorporated by reference from our report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------

|(12) |  | Incorporated by reference to Exhibit 24.1 from our report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2003.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------