##### Table of Contents






SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K



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

EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2001 or



|  |                                                                     
|- | --------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES

EXCHANGE ACT OF 1934


Commission File Number 000-30633

ONI SYSTEMS CORP.

(Exact name of registrant as specified in its
charter)


|                                   |  |                                              
|---------------------------------- |  | ---------------------------------------------
|Delaware
	(State of Incorporation) |  | 77046-9657
	(IRS Employer Identification No.)

5965 Silver Creek Valley Road, San Jose, CA
95138

(Address of Principal Executive Offices,
including zip code)


(408) 965-2600

(Registrants Telephone Number, including
area code)


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

None

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

Common Stock, $0.0001 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 o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K 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.
o

As of March 11, 2002, the aggregate market
value of the shares of common stock held by non-affiliates of
the Registrant (based on the average bid and asked prices of our
common stock as quoted by the Nasdaq National Market on that
date), was approximately $892,199,171.

As of March 1, 2002, there were 141,554,944
shares of the Registrants common stock, $0.0001 par value,
outstanding. This is the only outstanding class of common stock
of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

None



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|              | ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|              | SIGNATURES                                                                                   
|EXHIBIT 10.15
|EXHIBIT 21.01
|EXHIBIT 23.01



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##### Table of Contents



FISCAL 2001 FORM 10-K

ONI SYSTEMS CORP.

INDEX

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|ITEM       |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|ITEM 1:    |  | Business                                                                               |    |      | 3  | 
|ITEM 2:    |  | Properties                                                                             |    |      | 12 | 
|ITEM 3:    |  | Legal Proceedings                                                                      |    |      | 13 | 
|ITEM 4:    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 14 | 
|ITEM 4A:   |  | Directors and Executive Officers of the Registrant                                     |    |      | 14 | 
|PART II   
|ITEM 5:    |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |    |      | 16 | 
|ITEM 6:    |  | Selected Financial Data                                                                |    |      | 17 | 
|ITEM 7:    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 18 | 
|ITEM 7A:   |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |    |      | 39 | 
|ITEM 8:    |  | Financial Statements and Supplementary Data                                            |    |      | 41 | 
|ITEM 9:    |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |    |      | 71 | 
|PART III  
|ITEM 10:   |  | Directors and Executive Officers of the Registrant                                     |    |      | 71 | 
|ITEM 11:   |  | Executive Compensation                                                                 |    |      | 72 | 
|ITEM 12:   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 78 | 
|ITEM 13:   |  | Certain Relationships and Related Transactions                                         |    |      | 80 | 
|PART IV   
|ITEM 14:   |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |    |      | 82 | 
|Signatures |  |                                                                                        | 85 |     

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CAUTION REGARDING FORWARD-LOOKING
STATEMENTS

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

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




PART I




ITEM 1. BUSINESS

Corporate Background

We develop, market and sell optical
communications networking equipment specifically designed to
address the bandwidth and service limitations of metropolitan
area and regional networks. Communication service providers can
cost-effectively deploy our products to relieve the traffic
bottleneck in these networks and offer new revenue-generating
services including wavelength, private line, ethernet and data
storage services. By deploying our equipment, service providers
can rapidly build high-capacity, flexible and scalable networks
that are able to support multiple services on a single platform
from their central offices at the core of their networks to
their customers sites at the edge of their networks. In
addition, our equipment can be introduced into a network without
requiring complete replacement of the existing network
infrastructure.

We were incorporated in California on
October 20, 1997 as Optical Networks, Incorporated. In
April 2000, we reincorporated in Delaware and changed our name
to ONI Systems Corp. In June 2000, we completed our initial
public offering. Our principal executive offices are located at
5965 Silver Creek Valley Road, San Jose, California 95138. Our
telephone number is (408) 965-2600. When we refer to
we, ONI or ONI Systems in
this Annual Report on Form 10-K, we mean the current
Delaware corporation (ONI Systems Corp.), its California
predecessor and all of our subsidiaries.

The matters discussed in this section should be
read in conjunction with the consolidated financial statements
provided under Part II, Item 8 of this Annual Report on
Form 10-K.

Recent Events

On February 17, 2002, we entered into a
definitive Agreement and Plan of Merger with CIENA Corporation,
a Delaware corporation. According to the Agreement and Plan of
Merger, effective on and as of the closing date, which has not
yet been determined, we will merge with and into CIENA, with
CIENA surviving the merger. The proposed transaction remains
subject to a number of contingencies, including approval of the
stockholders of both ONI Systems and CIENA, receipt of
regulatory approvals and other customary closing conditions. The
date of our stockholder meeting has not yet been determined. In
anticipation of the stockholder meeting, our board of directors
intends to solicit proxies by circulating a proxy statement that
will be contained in a registration statement on Form S-4
to be filed by CIENA under the Securities Act of 1933, as
amended. The proposed merger is intended to qualify as a
tax-free reorganization and will be accounted for under the
purchase method of accounting.

Upon consummation of the merger, CIENA will issue
0.7104 shares of its common stock for each outstanding share of
our common stock and will convert all outstanding ONI Systems
options and warrants into options and warrants to purchase
shares of CIENA common stock. CIENA will assume our outstanding
5% convertible subordinated notes due 2005.

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When and if the proposed transaction is
completed, based on securities outstanding on February 17,
2002, the former holders of our common stock, options and
warrants will hold securities representing approximately 24% of
the combined companys total outstanding common stock,
options and warrants.

In conjunction with the execution of the
Agreement and Plan of Merger, various executive officers and
directors of ONI Systems executed voting agreements under which
they agreed to vote their shares of ONI Systems common stock,
collectively constituting approximately 11.5% of our outstanding
common stock as of February 17, 2002, in favor of the
merger and against any proposal made in opposition to or in
competition with the merger.

Industry Background

Increased
demand for network capacity and need for network
evolution

Over the last five years, rapid growth in the
popularity of the Internet and in the number of Internet-based
applications and services fueled dramatic growth in the volume
of data traffic. This growth led to increased demand for
capacity in the public communications network. This capacity is
usually measured in bits of data per second and is commonly
known as bandwidth. As new bandwidth-intensive services are
introduced and gain commercial acceptance, additional network
bandwidth and optical infrastructure will be required.

Following deregulation of the telecommunications
industry, entrepreneurs created new telecommunications service
providers to address this need for additional bandwidth. These
emerging competitive service providers sought to build
completely new next generation optical networks to provide
access to bandwidth and services to their customers. In order to
meet these same customer requirements, we believe that large
established service providers must also increase capacity and
seek to introduce new services. However, they must add next
generation equipment without disruption to their existing
network infrastructure. These established service providers
require solutions that increase network efficiency, lead to
lower operational expenses, and provide the ability to manage
and operate new equipment using their existing operations
support systems.

Building new networks or upgrading existing
networks with next generation optical equipment requires
substantial capital investment, but in recent periods the
ability of telecommunications service providers to obtain new
funds from the capital markets has been significantly
restricted. As a result, both emerging competitive and
established service providers are scaling back or delaying plans
to expand or upgrade their networks until they have specific
customer demand or contracts to support. This has resulted in a
significant industry-wide downturn in the communications
networking equipment market. The emerging competitive service
providers, who often lack the financial resources and consistent
revenue streams of established service providers, have been
especially impacted by the lack of available financing. Many of
these service providers have gone or will go out of business.

Evolution of
optical networking

The existing communications network
infrastructure was designed and built to carry voice calls,
based on standards such as the synchronous optical networking
standard, or SONET, in North America and synchronous digital
hierarchy, or SDH, in the rest of the world. The rapid adoption
of the Internet and the resulting growth of data traffic
continues to drive service providers toward deploying equipment
and networks designed, built and optimized for both data and
voice traffic. Given the scope of existing and projected
Internet traffic, many emerging and established communication
service providers are designing and installing networks based on
optical technology, which generally enables greater capacity and
higher transmission speed.

Optical networking technology transmits data and
voice using pulses of light over optical fiber, rather than
pulses of electricity over copper wires. Advances in optical
technology allow transmission of multiple signals on a single
strand of optical fiber, each signal using a different
wavelength of light.

The current communications network infrastructure
can be divided into four major segments  long-haul,
metro core, metro access and enterprise networks. To satisfy the
technical, pricing and performance needs of service providers,
we believe that optical networking equipment must be
specifically designed for each of these segments.

Long-haul networks.Long-haul networks connect the
communications networks of metropolitan areas around the world
with each other. Ultra-long haul networks move large amounts of
data and voice traffic point-to-point over distances of greater
than 2,000 kilometers, and regional networks move similarly
large amounts of data and voice traffic between metropolitan
areas separated by relatively shorter distances of 500 to 2,000
kilometers. The focus of companies designing long-haul equipment
has historically been to provide as much bandwidth as possible
between any two points on these networks.

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Metro core networks.Metro core networks connect long-haul
networks to metro access networks over distances of a few miles
in dense urban business corridors or a few hundred miles in
suburban settings. These networks aggregate metro access traffic
and distribute it throughout the metropolitan area and to and
from long-haul networks. They face a heterogeneous networking
environment due to the number and variety of access providers
that they serve and the various service types that they support.

Metro access networks.Metro access networks connect
end-users such as enterprises and individuals to the metro core
network. These networks include the point at which traffic
enters and exits the public communications network, which is
also referred to as the edge of the metro network. Metro access
networks are complex because they must manage a wide variety of
services to meet the rapidly changing needs of end-users. Today,
fiber optic cables are being deployed to provide high-bandwidth
access to more and more enterprises. Various types of data
services such as ethernet and storage services can be provided
to enterprises, along with traditional voice services, using
fiber-based metro access networks.

Enterprise networks.Enterprise networks provide data and
voice connections among end-users within a building or group of
buildings. These networks also connect end-users to the public
communications network infrastructure.

Metro network
challenges

Optical technologies were first deployed in
long-haul networks, where the capacity constraints of the
existing infrastructure were first encountered and the simple
architecture and homogeneous traffic made it technically
feasible and cost effective. Since deregulation of the
telecommunications industry, emerging competitive service
providers sought to rapidly build networks across long haul
areas as well as metro areas, utilizing many kinds of optical
communication technologies. However, optical solutions
specifically designed to address the challenges faced by metro
core and metro access networks have only recently become
available at the performance and price levels that make them
appealing to service providers.

As a result, we believe that the transmission
capacity and speed in the metro portion of the network over the
last several years grew at a smaller fraction of the growth rate
seen in long-haul and enterprise networks. This has created a
need for higher bandwidth in metro networks. In addition,
without equipment specifically designed for the challenges of
metro networks, service providers have not been able to
efficiently offer a broad range of services to their customers
on a single platform. Since metro networks provide the
connection between inter-office facilities and between the
enterprise end-user and the rest of the network, equipment
designed to meet the requirements of metro networks must also
provide support for multiple service types including voice,
data, and storage. Design and installation of metro networks
pose additional challenges for large established service
providers because any additions to their networks require
compatibility with their existing management systems and
integration with their current infrastructure, which is based
largely on SONET/ SDH technologies and products.

The ONI Systems Solution

We develop, market and sell optical networking
equipment that enables communication service providers to offer
new revenue-generating services while fully supporting existing
voice and data services. Our data-optimized, scalable solutions
increase available bandwidth in metropolitan and regional areas
and deliver end-to-end manageability and rapid restoration for
all services.

Our products provide the following benefits to
communication service providers:

Multi-service capability.Our equipment and interfaces support
multiple service offerings. As a result, a service provider
using our solution can provide a changing mix of services as
customer needs evolve, without deploying dedicated equipment for
each service. Our solution is compatible and integrated with
SONET/ SDH, providing service providers with an evolutionary
upgrade path. Our products are also designed for efficient
transmission of high-speed data traffic and delivery of emerging
services, while supporting voice services. For example, multiple
services, including services based on SONET/ SDH, gigabit
ethernet, fibre channel and ESCON, are supported on the same
platform by our equipment and interfaces.

Manageability and flexibility.As network complexity increases,
service providers require software and systems that allow easy
end-to-end service management. Our products combine a network
operating system, management software and inter-network
communications protocols to enable:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | real-time control of optical layer parameters,
	including power, amplifier gain and data rate;
|
| |  | real-time surveillance of network performance on
	each channel;                               

5



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| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | interoperability with third-party management
	software and data routing and switching equipment; and
|
| |  | point-and-click activation of services and
	equipment.                                              

Cost effectiveness and scalability.Our solution is designed to scale
efficiently as demand for bandwidth and new services increases.
Our products lower service providers equipment acquisition
and network operating costs by reducing the amount of equipment
required, and by allowing them to install their equipment
incrementally in a pay-as-you-grow fashion without sacrificing
their existing infrastructure investments. In addition, our
solution requires less space in service providers
facilities because our products are designed to handle current
networking standards and can readily be upgraded to handle
emerging services without the deployment of additional equipment.

Low cost access.Our
solution includes technology adapted specifically for building
access networks that connect enterprises to the network and
supports multiple services including voice, data and storage.

Rapid and efficient service restoration.Survivability is a key factor for all
networking services. Our products provide multiple options for
restoration of service within SONET/ SDH standard of 50
milliseconds, without the need to dedicate bandwidth for
restoration by carrying duplicated traffic, as is required by
typical SONET/ SDH-based equipment. Since our products do not
require carrying duplicated traffic, communication service
providers can utilize their existing fiber more efficiently by
placing more traffic on each fiber route.

Sophisticated optical architecture.Rather than processing network signals
by converting incoming optical signals to electrical form,
processing them and converting them back to optical form, our
product architecture supports the following functions in an
optical manner:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | combination and separation of multiple optical
	channels;                               
|
| |  | per channel and grouped wavelength routing;                                             
|
| |  | real-time flexible adding or dropping of optical
	channels;                             
|
| |  | switching and routing around optical fiber
	failure or equipment failure;               
|
| |  | signal amplification; and                                                               
|
| |  | supervisory data channels for network management
	and monitoring of network performance.

Integration with SONET/ SDH.Our products are designed to support
capabilities for multiplexing, grooming, and add-drop of SONET/
SDH format signals in an integrated fashion within our platform
and for easy integration into existing SONET/ SDH networks.

The ONI Systems Strategy

The key elements of our strategy are to:



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Leverage our optical approach to achieve
	early design wins across metro and regional
	networks

We believe that the challenges facing metro and
regional service providers are most efficiently addressed
through our optical approach. Since service providers are in the
early stages of deployment of optical metro and regional
networks, we expect that service providers will select vendors
with the strongest technology positions. We plan to take
advantage of our position as a technology leader to achieve
design wins with these service providers, which will position us
to grow as these new networks are deployed.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Enable our customers to offer new
	revenue-generating services to their end-users

We intend to continue to develop and provide
solutions that will enable our customers to deliver emerging
revenue-generating services to end-users. We believe the demand
for new services is a key driver of our customers growth
and we intend to ensure that our hardware and software
architectures continue to offer the performance and flexibility
to allow rapid introduction of new services. We intend to work
closely with our customers to help them identify new services
that they can deliver using our products, including wavelength
services, data services such as gigabit ethernet and storage
services based on fibre channel or ESCON communication protocols.

Extend
technology leadership

Our flexible optical architecture and dynamic
network operating system are key elements of our technology
leadership. We believe that these elements can be incorporated
into future product offerings for other segments of the

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communications network. We intend to extend our
technology leadership and to develop new product offerings and
future product enhancements through continued investment in
research and development.


Leverage
optical manufacturing expertise

Our ability to manufacture complex optical
networking products is a key to our success. We believe we have
developed a world-class manufacturing capability through a
combination of our experienced manufacturing team, our own
manufacturing systems and strong third-party manufacturing
relationships. We believe that this combination gives us a
competitive advantage and will enable us to reduce our
manufacturing costs, while providing us with manufacturing
flexibility to meet changing demand.

Expand direct
sales, service and support organizations to address global
opportunities

We intend to expand our direct sales capability
worldwide. We believe that sales efforts on a
customer-by-customer basis are most effective because deployment
of communications equipment involves careful technical
evaluation, multiple levels of decision making and significant
investments by our customers. While we may consider indirect
sales channels where appropriate, we intend to continue to focus
our sales and distribution efforts on direct sales. We have
developed a direct sales organization in North America, Europe
and Asia and are expanding this sales force worldwide. In
addition, we have established and, as necessary to support
customers, will continue to expand our service and support teams
to support our domestic and international customers.

Establish
strategic alliances and pursue acquisitions to extend our
leadership in optical networking

We intend to continue to establish strategic
alliances with complementary technology suppliers in order to
leverage our technology leadership in providing optical
networking solutions to our customers. We believe that alliances
with companies that provide complementary products to enable new
services will bring our customers greater value. In addition, we
believe that strategic alliances to provide system integration,
installation and services will enable us to expand our
addressable customer base and provide lower cost solutions to
our existing and potential customers. In addition, we intend to
pursue acquisitions that will enable us to broaden our product,
service and technology portfolios.

Products

ONLINETMProducts

Our ONLINE products can be used in conventional
linear or ring network topologies and can transport a variety of
traffic patterns, including mesh. These products share the same
management and operating systems and can be deployed together as
required to provide flexible network solutions for service
providers.

ONLINE9000

The ONLINE9000 is designed for
metropolitan area networks and delivers cost-effective, scalable
capacity for the metro communications service provider. It
provides restoration faster than the synchronous optical network
standard of 50 milliseconds and supports dynamic optical
add-drop capabilities on all deployed channels. To help service
providers deploy large networks, the ONLINE9000 includes
optical amplifiers to extend transmission distances. In a
typical configuration, the ONLINE9000 includes the
following key features:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 33 protected or 66 unprotected channels per
	system in a network;                                                                                                                                    
|
| |  | line-based optical rerouting of channels in the
	event of optical fiber failure;                                                                                                                     
|
| |  | client interfaces supporting all digital rates
	and protocols between 100 megabits per second and
	2.5 gigabits per second, including OC-3, OC-12, OC-48,
	gigabit ethernet, fibre channel and ESCON;
|
| |  | OC192/ STM-64 client interface supporting a
	digital rate of 10 gigabits per second;                                                                                                                 
|
| |  | integrated operation with our ONWAVETM
	SONET/ SDH and ONWAVE Data products; and                                                                                                                     
|
| |  | integrated optical amplifiers with sophisticated
	power management capabilities.                                                                                                                     

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ONLINE7000

The ONLINE7000 is designed to provide
metro service providers with a cost-effective solution for metro
access applications where the system configurations require a
lower channel count. The ONLINE7000 is scalable up to
33 protected or 66 unprotected channels per network.
In a typical configuration, key features of the
ONLINE7000 include:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | system configuration with one to 11 channels;                                                                                                                                                        
|
| |  | path-based rerouting of channels in the event of
	optical fiber failure;                                                                                                                             
|
| |  | client interfaces supporting all digital rates
	and protocols between 100 megabits per second and
	2.5 gigabits per second, including OC-3, OC-12, OC-48,
	gigabit ethernet, fibre channel and ESCON;
|
| |  | OC192/ STM-64 client interface supporting a
	digital rate of 10 gigabits per second;                                                                                                                 
|
| |  | integrated operation with our ONWAVE SONET/ SDH
	and ONWAVE Data products; and                                                                                                                       
|
| |  | optional integrated optical amplifiers with
	sophisticated power management capabilities.                                                                                                            

ONLINE11000

The ONLINE11000 is designed to offer
service providers a cost effective optical transport solution
for large regional networks. The product is designed to include
optical line amplifiers to enable operation of the
ONLINE11000 in large optical rings ranging in
circumference from a few hundred kilometers up to
2,000 kilometers. This product provides full add/drop
capabilities for any number of channels at all nodes in a ring.
In a typical configuration, key features include:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 640 kilometer reach from node to node without the
	need for regeneration of optical signals;                                                                                                         
|
| |  | optical line amplifiers together with integrated
	optical amplifiers and sophisticated power management
	capabilities;                                                                               
|
| |  | line-based or path-based rerouting of channels in
	the event of optical fiber failure;                                                                                                               
|
| |  | 33 protected or 66 unprotected channels per
	system for line-based rerouting or per network for path-based
	rerouting;                                                                               
|
| |  | client interfaces supporting all digital rates
	and protocols between 100 megabits per second and
	2.5 gigabits per second, including OC-3, OC-12, OC-48,
	gigabit ethernet, fibre channel and ESCON;
|
| |  | OC192/ STM-64 client interface supporting a
	digital rate of 10 gigabits per second; and                                                                                                             
|
| |  | integrated operation with our ONWAVE SONET/ SDH
	and ONWAVE Data products.                                                                                                                           

ONLINE2500

The ONLINE2500 is designed to be a cost
effective, flexible optical transport solution which enables
service providers to deliver a comprehensive set of high
bandwidth services to customer sites at the optical edge of
their metro networks. The ONLINE2500 shares the same
management and operating system as our other ONLINE products and
can be deployed together with them as required to provide
flexible network solutions for service providers. In a typical
configuration, key features include:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 8 coarse wave division multiplexing channels with
	protection;                                                                                                                                           
|
| |  | point-to-point or ring configurations;                                                                                                                                                                   
|
| |  | path-based rerouting of channels in the event of
	optical fiber failure;                                                                                                                                 
|
| |  | client interfaces supporting all digital rates
	and protocols between 100 megabits per second and
	2.5 gigabits per second, including OC-3, OC-12, OC-48,
	gigabit ethernet, fibre channel and ESCON; and
|
| |  | integrated operation with ONWAVE products
	specifically designed for the ONLINE2500.                                                                                                                     

ONWAVE
Products

Our ONWAVE SONET/ SDH multiplexer and ONWAVE Data
multiplexer products allow multiple SONET/ SDH or data signals
to be combined within an individual wavelength channel. Our
ONWAVE product family currently includes our ONWAVE OC-48 SONET/
SDH Add/ Drop Multiplexer (ADM), ONWAVE OC-192/ STM-64
Multiplexer, ESCON Multiplexer and Data Multiplexer which can be
configured for gigabit ethernet or fibre channel services. In

8



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addition, we expect that our ONWAVE OC-192 SONET/
SDH Add/ Drop Multiplexer (ADM) will be generally available in
the fourth quarter of 2002. Service providers, who deploy our
ONWAVE products with our ONLINE 7000, 9000and
11000 products, can combine multiple SONET/ SDH, gigabit
ethernet, fiber channel and ESCON signals into a single
wavelength channel, resulting in efficiencies by eliminating the
need for traditional SONET/ SDH or other data equipment in the
network.


The key features of our ONWAVE SONET/ SDH
multiplexer products include:



| |   |                                                   
| | - | --------------------------------------------------
| |  | OC-3, OC-12 and OC-48 tributary inputs;           
|
| |  | OC-48 and OC-192 line outputs;                    
|
| |  | STS-1 switching;                                  
|
| |  | tributary side protection options; and            
|
| |  | sophisticated performance monitoring capabilities.

The key features of our ONWAVE Data multiplexer
products include:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the capability to combine either two fibre
	channels or two gigabit ethernet signals, or twelve ESCON
	signals onto a single wavelength using standards-based OC-48/
	STM-16 frames for direct connection from metro to long-haul
	networks; and
|
| |  | sophisticated performance monitoring capabilities.                                                                                                                                                                                              

ONLINE GP
Product

We recently announced our ONLINE GP gateway
platform product, which we anticipate will be generally
available in the first quarter of 2002. This product is a
multi-service software platform for aggregating and grooming
data and TDM traffic into OC-48 or OC-192 payloads. The new
product is designed to reduce the need for standalone data and
SONET/ SDH equipment used to interconnect diverse networks or
sub-networks, including metro and long-haul networks.

The key features of our ONLINE GP gateway
platform include:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | OC-3, OC-12, OC-48 SONET/ SDH service interfaces;                                       
|
| |  | gigabit ethernet, fibre channel, FICON, ESCON
	service interfaces;                      
|
| |  | OC-48 and OC-192 transport interfaces;                                                  
|
| |  | SONET/ SDH service and transport interfaces for
	international gateway applications; and
|
| |  | single or multiple wavelength support up to
	33 wavelengths on each fiber.              

Software
Products

OPTXTMNetwork Operating System

Our ONLINE products incorporate our OPTX network
operating system which provides a unified environment for
service providers to manage diverse networking resources and
hardware and software systems. Analogous to the operating
systems of personal computers, the OPTX network operating system
manages all resources in an ONI Systems network, including
transmission systems, connections, protection resources and
terminals, and allocates resources to various applications and
interfaces. The OPTX network operating system enables service
providers to manage, arbitrate and dynamically control
network-wide resources. Multiple software interfaces, including
SNMP, TL1 and CLI, within the OPTX network operating system link
to other vendors management systems and applications. The
architecture and infrastructure of the OPTX network operating
system makes extensive use of the XML standard as an internal
communications protocol between the OPTX network operating
system and our OPTX applications.

OPTX
Software Applications

We offer a variety of software applications which
leverage our OPTX network operating system to allow our
customers to manage, plan and monitor our ONLINE products. Our
OPTX software application offerings include:



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | OPTX Network Manager, an element management
	system that allows service providers to remotely control and
	manage the nodes in their networks from a central location,
	including single-step, network-wide wavelength provisioning and
	SONET Add/ Drop Multiplexer (ADM) path management;

9



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| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | OPTX Network Designer, an integrated optical
	network design tool that provides automatic optical link
	analysis, link optimization and configuration for each node in
	the network;                                             
|
| |  | OPTX Management Portal, a management tool that
	enables service providers to allow their end-users to manage and
	monitor virtual private optical networks leased from the service
	provider via the Internet;                   
|
| |  | OPTX Automation Engine, a tool that allows our
	customers to efficiently configure their networks by downloading
	network design information from OPTX Network Designer directly
	into our ONLINE products;                      
|
| |  | OPTX Graphical Craft Interface Terminal (CIT), a
	craft interface terminal that allows our customers field
	service engineers to configure, manage and monitor our ONLINE
	products from a workstation or portable computer; and
|
| |  | OPTX CORBA Gateway, a CORBA-based interface to
	the service providers network operations support systems.                                                                                                                       

Customers

Our target customers include carriers and
communication service providers such as competitive local
exchange carriers, inter-exchange carriers, Internet service and
application service providers, cable operators, utilities and
their affiliates and incumbent local exchange carriers. As of
December 31, 2001, we had 30 customers, including
Qwest Communications International, Inc. and Dynegy Global
Communications, each of whom represented more than 10% of our
revenues for the year ended December 31, 2001.

We believe that our long-term success depends
significantly on our ability to attract incumbent local exchange
carriers as customers. These include the regional bell operating
companies in the United States and the postal telephone and
telegraph operators in Europe. In order to become a vendor to
these service providers, we must execute on all the elements of
our strategy discussed in this section with the needs of these
carriers in mind. In addition, we must also ensure that our
products will function effectively in the established networks
of these companies. Specifically, in order to sell our products
to the regional bell operating companies, Telcordia
Technologies, Inc. must certify that each of our products have
successfully completed the Operations Systems Modification of
Intelligent Network Elements, or OSMINE, process. We have
completed the first phase of this process for some of our
existing products and we plan to continue to pursue this
certification for our existing and future products.

Sales and Marketing

In North America, Europe and Asia, we have
developed a direct sales force and in some limited circumstances
may join with other communications equipment providers to bid on
major proposals. Our direct sales force consists of sales teams
made up of an account manager, systems engineers and technical
support and training personnel. Each team is assigned
responsibility for specific geographic territories and specific
customers within each territory. We are continuing to expand our
existing direct sales force to sell to potential customers
worldwide. In some international regions where it is difficult
or expensive to maintain a direct sales force, we may rely on
resellers for distribution of our products. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Risks That Could
Affect Future Results.

Our marketing programs are designed to inform
existing and potential customers about the capabilities and
benefits of our products. We also use our marketing programs to
support the sale and distribution of our products through our
direct sales force. Our marketing efforts include advertising,
public relations, participation in industry trade shows and
conferences.

Customer Service and Support

Our customer service and support organization
provides installation, maintenance services and training in the
use of our products. Installation services are provided by ONI
Systems directly or by qualified third-party providers of
engineering, furnishing and installation services. Our customer
service centers, located at our facilities in San Jose,
California and London, England, include highly-qualified teams
of systems engineers and technical personnel who work closely
with our direct sales force and provide 24-hour-a-day,
7-day-a-week support for our customers.

Research and Development

We believe that to be successful we must continue
to enhance our existing products and develop new products that
meet our customers needs and maintain technological
competitiveness. As of December 31, 2001, we had assembled
a team of approximately 297 highly skilled optical hardware
and software engineers, manufacturing and test engineers and
system and network architects. Research and development
expenses, excluding stock-based compensation, were

10



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$78.4 million in 2001, $53.7 million in
2000 and $24.9 million in 1999. We will continue to make
substantial investments in research and development.


Our product development process is driven by
market demand and a close collaboration among our product
marketing, sales and product development organizations. Our
product development process begins with a detailed set of
specifications prepared by our product management organization.
We also incorporate feedback from our customers in the product
development process. In addition, we participate in industry and
standards organizations where appropriate and incorporate
information from these contacts throughout the product
development process.

Manufacturing and Supply

We perform supply chain management, production
engineering, documentation control and quality assurance at our
facility in San Jose, California. We outsource most of the
manufacturing of the optical modules used in our products, and
we complete some of the final assembly and test of these optical
modules at our facilities. The majority of our electronic
manufacturing and assembly is outsourced. Currently, we use two
manufacturing vendors for electronic assemblies, while JDS
Uniphase Corporation, performs the majority of our outsourced
optical assembly.

This approach to manufacturing allows us to:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | reduce the capital equipment expenditures that
	would be required for a full manufacturing operation;         
|
| |  | reduce our facilities requirements by limiting
	the amount of space dedicated to manufacturing and operations;
|
| |  | conserve working capital by reducing the amount
	of inventory we must stock; and                              
|
| |  | respond to changes in market demand.                                                                          

We currently purchase most of our electrical and
optical components through purchase orders.

Competition

Competition in the metro and regional
communications networking equipment market is intense. Numerous
other companies, including ADVA, Alcatel, CIENA, Cisco Systems,
Corvis, Fujitsu, Lucent Technologies, Marconi Communications,
Nortel Networks, Sorrento Networks, Sycamore Networks and
Tellabs, currently offer or plan to offer products that compete
with our products. Many of these existing and potential
competitors, have substantially greater financial, marketing and
development resources than we have, which puts us at a
competitive disadvantage. Many of them have existing
relationships with communication service providers, which will
make it more difficult for us to sell our products to those
customers. A number of private companies have also announced
plans for new products to address the same problems that our
products address and have attracted substantial amounts of
venture capital funding. Some competitors may seek to use
intellectual property rights to limit our ability to compete.
For example, Nortel Networks claims that we infringe some of its
patents. See Item 3 Legal Proceedings.

We believe that the principal methods of
competition in the market for metro and regional communications
networking equipment are product performance, reliability and
scalability, and the ability of a product to deliver
cost-effective results. We believe that to be competitive in the
communications networking equipment market we must deliver
products that:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | provide extremely high network reliability;                                                       
|
| |  | provide high performance capabilities;                                                            
|
| |  | scale easily and efficiently with minimum
	disruption to the network;                             
|
| |  | interoperate with existing network designs and
	equipment vendors;                                
|
| |  | reduce the complexity of the network by
	decreasing the need for multiple layers of equipment; and
|
| |  | provide a cost-effective solution for service
	providers.                                         

We believe that positive factors pertaining to
our competitive position include our technology, the expertise
of our research and development personnel, our manufacturing
expertise and our intellectual property rights. We believe that
the negative factors pertaining to our competitive position
include our relative newness in the market, our relatively
smaller size and the fact that some of our competitors have
greater financial resources available to promote sales of their
products and to develop new products. In addition, some of our
competitors have larger service and support organizations to
support the requirements of large orders from incumbent local
exchange carriers. If we are unable to compete successfully
against

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our current and future competitors, we could
experience price reductions, reduced gross margins and loss of
market share, any one of which could materially harm our
business, operating results and financial condition.


Acquisitions

In February 2001, we acquired technology and
other assets associated with Finisar Corporations customer
premises equipment business. The acquired technology is being
incorporated into our ONLINE2500. We accounted for this
transaction as a business combination using the purchase method.
This acquisition continues to involve many risks, including
problems combining technology, diversion of management attention
from our core business, and risks associated with entering new
markets. If we do not effectively address these risks, this
acquisition could negatively impact our operating results and
financial condition.

Intellectual Property

Our success and ability to compete depends on our
ability to develop technology internally. We rely on a
combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual
property rights. As of March 1, 2002, we have been issued
eleven patents in the United States. However, only seven of
these patents are currently significant to our business. These
patents are of various durations, and the earliest that any will
expire is 2017. In addition to these issued patents, we
currently have 42 patent applications pending with the United
States Patent and Trademark Office as of March 1, 2002, as
well as related international patent applications. These patents
and patent applications relate to optical architecture,
hardware, software and management systems. Issued patents may
not protect our intellectual property or may be challenged by
third parties. In addition, others may independently develop
similar or competing technology or design around our patents.

We enter into confidentiality or license
agreements with our employees, consultants and corporate
partners and control access to and distribution of our software,
documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or
technology. These precautions may not prevent misappropriation
or infringement of our intellectual property.

Many of our products are designed to include
software or other intellectual property licensed from third
parties. Some of these licenses are perpetual, but subject to
termination in the event of an uncured material breach of the
license agreement. For our licenses which are not perpetual, it
may be necessary in the future to renew these licenses or seek
alternative licenses relating to various aspects of our
products. We believe that these licenses generally could be
obtained on commercially reasonable terms.

ONI Systems, ONI, the ONI logo, ONLINE, OPTX,
ONWAVE, Opticity and Powering the Optical Internet are
trademarks or registered trademarks of ONI Systems. All other
names or trademarks appearing in this annual report are the
property of their holders.

Employees

As of December 31, 2001, we had a total of
671 employees:



| |   |                                    
| | - | -----------------------------------
| |  | 240 in research and development;   
|
| |  | 141 in sales and marketing;        
|
| |  | 85 in customer service and support;
|
| |  | 121 in manufacturing; and          
|
| |  | 84 in finance and administration.  

Our future success will depend in part on our
ability to attract and retain highly qualified technical and
management personnel. Competition for such talent can be
intense, especially for highly skilled optical engineering
personnel. None of our employees are represented by any
collective bargaining unit, and we believe that our relations
with our employees are good.




ITEM 2. PROPERTIES

Our headquarters are currently located in leased
facilities in San Jose, California, consisting of approximately
247,500 square feet under a lease that expires in 2011. We
also lease a facility of approximately 54,000 square feet
in Durham, North Carolina, under a lease that expires in 2006.
In addition to these facilities, we have leased a research and

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development facility in Montreal, Canada and
office space for our sales and customer service operations in
several locations worldwide. We also lease two buildings in San
Jose, California consisting of approximately 160,000 square
feet that we do not occupy at this time or have vacated.





ITEM 3. LEGAL PROCEEDINGS

On March 10, 2000, Nortel Networks filed
suit against us in the United States District Court for the
Northern District of California. This suit involves allegations
that our products infringe five patents held by Nortel Networks,
and sets forth allegations of misappropriation of trade secrets,
unlawful business practices and common law unfair competition.
Nortel Networks seeks preliminary and permanent injunctions and
damages against us in connection with these claims.

In April 2000, we filed a motion to dismiss
Nortel Networks claims for misappropriation of trade
secrets, unlawful business practices and common law unfair
competition. We also filed an answer and counterclaims asserting
unfair business practices, tortious interference, breach of
contract and seeking declarations of invalidity,
unenforceability and non-infringement of the patents against
Nortel Networks. On June 23, 2000, the court dismissed one
of Nortel Networks unfair competition claims.

In December 2001, Nortel Networks filed a motion
seeking a summary judgment on its claim that our products
infringe one of its patents. At that time, we also filed a
motion seeking a summary judgment that the patent at issue was
invalid. In February 2002, the court denied both motions.

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

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

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

Beginning in August 2001, a number of
substantially identical class action complaints alleging
violations of the federal securities laws were filed in the
United States District Court for the Southern District of New
York. These complaints name ONI Systems, Hugh C. Martin,
our chairman, president and chief executive officer;
Chris A. Davis, our former executive vice president, chief
financial and administrative officer; and certain underwriters
of the Companys initial public offering as defendants. The
complaints have since been consolidated into a single action.
The complaints allege, among other things, that the underwriter
defendants violated the securities laws by failing to disclose
alleged compensation arrangements (such as undisclosed
commissions or stock stabilization practices) in the initial
public offerings registration statement. The Company and
these officers are named in the complaints pursuant to
Section 11 of the Securities Act of 1933, and one of the
complaints includes a claim against the Company and these
officers under Section 10(b) of the Securities Exchange Act
of 1934. No specific amount of damages has been claimed. Similar
complaints have been filed against more than 300 other issuers
that have had initial public offerings since 1998, and all of
these actions have been included in a single coordinated
proceeding. We intend to defend these actions vigorously.
However, due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of the
litigation. Any unfavorable outcome of this litigation could
have a negative impact on our business, financial condition and
results of operations.

On February 20, 2002, a complaint was filed
on behalf of a purported class of ONI Systems security holders
in the Superior Court of the State of California, County of San
Mateo, against ONI Systems, Matthew Bross, Kevin Compton,
Jonathan Feiber, Gregory Maffei and Hugh Martin seeking an
injunction to prevent the consummation of the proposed merger
with CIENA. The complaint is encaptioned K.W. Sams, On
Behalf of Himself and All Others Similarly Situated v. ONI
Systems Corporation, et al, Case No. CIV-420819. The
complaint alleges that the defendants, in connection with

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the approval of the proposed merger with CIENA,
breached their fiduciary duties, including duties of loyalty and
good faith, to ONI Systems stockholders by, among other things,
allegedly failing to obtain the highest value for ONI Systems
stockholders, engaging in self-dealing and unjustly enriching
themselves and other insiders or affiliates of ONI Systems. We
believe that the lawsuit is without merit and intend to defend
this action vigorously.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

Not applicable.




ITEM 4A. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT

The following table shows directors and executive
officers and their areas of responsibility as of March 1,
2002. Biographies are included after the table.

|                    |  |     |    |          |  |                                                                           
|------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Hugh C. Martin      |  |     | 48 |          |  | President, Chief Executive Officer and Chairman
	of the Board of Directors
|George Reyes        |  |     | 47 |          |  | Interim Chief Financial Officer                                           
|William R. Cumpston |  |     | 40 |          |  | Executive Vice President and Chief Operating
	Officer                     
|Michael A. Dillon   |  |     | 43 |          |  | Vice President, General Counsel and Secretary                             
|Robert J. Jandro    |  |     | 46 |          |  | Executive Vice President, Global Sales and
	Services                      
|Rohit Sharma        |  |     | 33 |          |  | Executive Vice President and Chief Technology
	Officer                    
|Matthew W. Bross    |  |     | 41 |          |  | Director                                                                  
|Kevin R. Compton    |  |     | 43 |          |  | Director                                                                  
|Jonathan D. Feiber  |  |     | 45 |          |  | Director                                                                  
|James F. Jordan     |  |     | 62 |          |  | Director                                                                  
|Gregory B. Maffei   |  |     | 41 |          |  | Director                                                                  

Hugh C. Martinhas
served as President and Chief Executive Officer of ONI Systems,
and a member of the board of directors, since January 1998. He
was appointed Chairman of the Board of Directors in February
2000. From July 1997 to January 1998, he served as
Entrepreneur-in-Residence at Kleiner Perkins Caufield &
Byers, a venture capital firm. Mr. Martin served as
President of The 3DO Company, an entertainment software company,
from 1992 to June 1997. He holds a B.S. in Electrical
Engineering from Rutgers University.

George Reyeshas
served as Interim Chief Financial Officer of ONI Systems since
February 2002. Prior to joining us, Mr. Reyes was employed
by Sun Microsystems from 1988 to July 2001, where he most
recently served as Vice President and Treasurer, and previously
served as Vice President and Corporate Controller. He holds an
M.B.A. from Santa Clara University and a B.A. in Accounting from
the University of South Florida. Mr. Reyes serves on the
boards of directors of Symantec Corporation and Chordiant
Software Inc.

William R. Cumpstonhas served as Executive Vice President
and Chief Operating Officer of ONI Systems since August 2001 and
served as Executive Vice President, Engineering and Operations
from June 1999 to August 2001, and as Vice President,
Engineering of ONI Systems from September 1998 to June 1999.
Prior to joining us, Mr. Cumpston served in various
management positions at DSC Communications Corp., a
telecommunications company, from 1995 to August 1998. He holds a
B.S. in Math Science from the University of North Carolina at
Chapel Hill.

Michael A. Dillonhas served as Vice President and
General Counsel of ONI Systems since October 1999 and as
Secretary since March 2000. From August 1995 to October 1999,
Mr. Dillon served as Director and as Senior Director of Sun
Microsystems, Inc., a computer company, and from 1993 to August
1995, he served as Senior Counsel for Sun Microsystems. He holds
a J.D. from Santa Clara University and a B.A. in Communications/
Sociology from the University of California, San Diego.

Robert J. Jandrohas
served as Executive Vice President, Global Sales and Services of
ONI Systems since March 2000. Mr. Jandro served as Group
Vice President of Oracle Corporation, a database software
company, from May 1999 to March 2000. From 1996 to May 1999, he
served as Oracles Vice President, North America
Communications and Vice President, United States Central Region,
Latin America and Canada. He holds an M.B.A. from the Kellogg
Graduate School of Management at Northwestern University and a
B.S. in Business from the University of Missouri, St. Louis.

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Rohit Sharmafounded
ONI Systems in our spin-out from Optivision, Inc. and has served
as Executive Vice President since December 2001 and as Chief
Technology Officer since August 2000. Mr. Sharma served as
our Vice President, Optical Hardware Development from January
1999 to July 2000. He served as Chief Architect from April 1998
to January 1999. Prior to the spin-out, he served as a member of
Optivisions technical staff from October 1996 to April
1998. He holds a Ph.D. and a M.Sc. in Electrical Engineering
from the University of Alberta, Canada and a B.Sc. in
Electronics and Communications Engineering from R.E.C.
Kurukshetra, India.

Matthew W. Brosshas
served as a director of ONI Systems since November 1999. Since
January 2002, Mr. Bross has served as Group Senior Vice
President and General Manager of Emerging Markets of Williams
Communications Group, Inc., a communications service provider.
From May 1999 to January 2002, he served as Senior Vice
President and Chief Technology Officer of Williams
Communications. From March 1997 to May 1999, he served in
various other management capacities for Williams Communications.
From 1991 to March 1997, he served as the founder and Chief
Executive Officer of Critical Technologies, Inc., a
telecommunications infrastructure company, which was acquired by
Williams Communications in March 1997.

Kevin R. Comptonhas
served as a director of ONI Systems since January 1998.
Mr. Compton has served as a general partner at Kleiner
Perkins Caufield & Byers, a venture capital firm, since
1990. Mr. Compton serves on the boards of directors of
Citrix Systems, Inc. and VeriSign, Inc.

Jonathan D. Feiberhas served as a director of ONI
Systems since January 1998. Mr. Feiber has served as a
general partner at Mohr Davidow Ventures, a venture capital
investment firm, since 1991. From 1983 to 1991, he served in
various capacities at Sun Microsystems, most recently as Vice
President of Networking. He is a director of several
privately-held companies. He holds a B.A. in Computer Science
and Mathematics from the University of Colorado.

James F. Jordanhas
served as a director of ONI Systems since March 1998.
Mr. Jordan has privately managed his investment fund since
1994. He was one of the founders of Ungermann-Bass Inc. and was
President and Chief Executive Officer of Kalpana, Inc. prior to
the sale of the company to Cisco Systems in 1994. He holds a
B.S. in Business and Marketing from the University of Utah.

Gregory B. Maffeihas served as a director of ONI
Systems since February 2000. Mr. Maffei has served as
President and Chief Executive Officer and as a member of the
board of directors of 360networks inc., a communications service
provider, since January 2000. From 1993 to January 2000,
Mr. Maffei served in various capacities with Microsoft
Corporation, a software company, most recently as Senior Vice
President, Finance and Administration, and Chief Financial
Officer. He also serves on the board of directors of Expedia,
Inc. and Starbucks Corporation. He holds an M.B.A. from Harvard
University Graduate School of Business and a B.A. from Dartmouth
College.

Our board of directors is divided into three
classes, and members of each class are elected for three-year
terms. The Class I directors, Messrs. Feiber and
Compton, will serve until the 2004 annual meeting or until their
successors are duly elected and qualified. The Class II
directors, Messrs. Jordan and Martin, will serve until the
2002 annual meeting or until their successors are duly elected
and qualified. The Class III directors, Messrs. Bross
and Maffei, will serve until the 2003 annual meeting or until
their successors are duly elected and qualified.

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PART II






|        |                                                                       
|------- | ----------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
	RELATED STOCKHOLDER MATTERS

Market Information for Common Stock

ONI Systems common stock began trading on
the Nasdaq National Market on June 1, 2000 under the symbol
ONIS. The following table sets forth the high and low sale
prices reported on the Nasdaq National Market for the periods
indicated. Prices reflect inter-dealer prices without retail
markup, markdown or commissions. The market price of our common
stock has been volatile. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Risks That Could Affect Future
Results. On March 18, 2002, the closing price of our
common stock was $6.09.

|                                       |  |      |          |     |  |   |         | 
|-------------------------------------- |  | ---- | -------- | --- |  | - | ------- | 
|                                       |  | High |          | Low
|                                       |  |      |          |    
|Fiscal Year Ended December 31,
	2000   |  |      |          |     |  |   |         | 
|Second quarter (starting June 1, 2000) |  | $    | 142.0000 |     |  | $ | 72.9844 | 
|Third quarter                          |  | $    | 128.6250 |     |  | $ | 71.9375 | 
|Fourth quarter                         |  | $    | 82.7500  |     |  | $ | 30.7500 | 
|                                      
|Fiscal Year Ended December 31,
	2001   |  |      |          |     |  |   |         | 
|First quarter                          |  | $    | 58.6250  |     |  | $ | 16.0625 | 
|Second quarter                         |  | $    | 40.9500  |     |  | $ | 15.7500 | 
|Third quarter                          |  | $    | 27.4500  |     |  | $ | 3.5000  | 
|Fourth quarter                         |  | $    | 10.6500  |     |  | $ | 3.8000  | 

Stockholders

As of March 1, 2002, we had approximately
810 record holders of our common stock, and approximately 33,000
beneficial holders.

Meetings of Stockholders

We plan to hold a Special Meeting of Stockholders
to vote on the proposed merger with CIENA, but a date has not
yet been set for this meeting. No date has been set for our
Annual Meeting of Stockholders in 2002.

Dividends

ONI Systems has never paid any cash dividends on
its common stock. We currently anticipate that we will retain
all future earnings for use in our business, and do not
anticipate paying any cash dividends in the foreseeable future.

Recent Sales of Unregistered
Securities

On January 25, 2002, we issued 24,897 shares
of ONI Systems common stock to FMR Corp. upon exercise of a
previously issued warrant to purchase an aggregate of 223,000
shares of common stock at an exercise price of $0.91 per share.
Following this partial exercise, there are 186,953 shares of our
common stock remaining subject to the warrant. Our issuance of
the shares upon the exercise of this warrant was exempt from
registration pursuant to Rule 506 promulgated under the
Securities Act of 1933 and Section 4(2) of the Securities
Act.

On December 5, 2001, we issued 116,960
shares of ONI Systems common stock as a charitable donation to
the Citizens Scholarship Foundation of America 
Families of Freedom Scholarship Fund, a charitable
fund that seeks to aid family members of victims of the
September 11, 2001 terrorist attacks with post-secondary
education expenses. Our issuance of these shares was exempt from
registration pursuant to Rule 506 and Section 4(2).

In October 2001, we filed a Tender Offer
Statement on Schedule TO with the Securities and Exchange
Commission. Under the terms of the exchange offer included in
this Tender Offer Statement, we offered some of our employees
the right to exchange their options for our commitment to issue
new options with a new exercise price at least six months and a
day from the cancellation date. The offer expired at
9:00 p.m. Pacific Daylight Time on Monday,
November 19, 2001. Under the exchange offer, we accepted
for exchange options to purchase an aggregate of 7,262,858
shares of our common stock, representing approximately 83% of
the shares subject to options that were eligible to be exchanged
under the

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exchange offer. Subject to the terms and
conditions of the exchange offer, we will issue new options to
purchase an aggregate of up to 7,262,858 shares of our common
stock to an aggregate of approximately 550 option holders.





ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial
data should be read in conjunction with the consolidated
financial statements and related notes and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial
data included elsewhere in this report. The consolidated
statement of operations data for each of the four years ended
December 31, 2001 and the period from October 20, 1997
(inception) to December 31, 1997, and the balance sheet
data as of December 31, 2001, 2000, 1999 and 1998 are
derived from our audited financial statements. The historical
results are not necessarily indicative of results to be expected
for any future period.

|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |    |      |  
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------- | -------- | -------------- | -------- | ---- | -------- | ------ | -------- | ----------- | ------- | ------ | ------- | - | ------ | ----- | ------ | - | ----- | -- | ---- | -
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          | Period from
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          | October 20,
|                                                                                            |                                                                                    |                                       |          | 1997          
|                                                                                            |                                                                                    | Years Ended December 31,              |          | (inception) to
|                                                                                            |                                                                                    |                                       |          | December 31,  
|                                                                                            |                                                                                    | 2001                                  |          | 2000           |          | 1999 |          | 1998   |          | 1997       
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |            
|                                                                                            |                                                                                    |                                      
|                                                                                            |                                                                                    | (In thousands, except per share data)
|Consolidated Statements of Operations
	Data:                                                |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|Revenue                                                                                     |                                                                                    | $                                     | 195,680  |                |          | $    | 59,662   |        |          | $           | 3,034   |        |         | $ | 1,733  |       |        | $ |      |   
|Costs of goods sold, excluding amortization of
	deferred stock compensation:                |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            | Product sales                                                                      |                                       |          | 121,281        |          |      |          | 39,980 |          |             |         | 1,032  |         |   |        | 1,208 |        |   |       |   |     
|                                                                                            | Inventory related charges                                                          |                                       |          | 45,335         |          |      |          |       |          |             |         |       |         |   |        |      |        |   |       |   |     
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            | Gross profit                                                                       |                                       |          | 29,064         |          |      |          | 19,682 |          |             |         | 2,002  |         |   |        | 525   |        |   |       |   |     
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|Operating expenses:                                                                         |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            | Research and development, excluding amortization
	of deferred stock compensation   |                                       |          | 78,355         |          |      |          | 53,654 |          |             |         | 24,858 |         |   |        | 4,009 |        |   |       | 39 |     
|                                                                                            | Sales and marketing, excluding amortization of
	deferred stock compensation        |                                       |          | 51,322         |          |      |          | 25,304 |          |             |         | 4,557  |         |   |        | 649   |        |   |       | 21 |     
|                                                                                            | General and administrative, excluding
	amortization of deferred stock compensation |                                       |          | 37,388         |          |      |          | 16,385 |          |             |         | 3,455  |         |   |        | 1,591 |        |   |       | 49 |     
|                                                                                            | Restructuring and impairment charges                                               |                                       |          | 17,350         |          |      |          |       |          |             |         |       |         |   |        |      |        |   |       |   |     
|                                                                                            | Amortization of deferred stock compensation                                        |                                       |          | 27,009         |          |      |          | 66,413 |          |             |         | 11,422 |         |   |        | 3,310 |        |   |       | 89 |     
|                                                                                            | Amortization of goodwill and intangibles                                           |                                       |          | 9,067          |          |      |          | 3,594  |          |             |         | 1,842  |         |   |        |      |        |   |       |   |     
|                                                                                            | Common stock warrant expense                                                       |                                       |          |               |          |      |          | 4,545  |          |             |         | 2,891  |         |   |        |      |        |   |       |   |     
|                                                                                            | In-process research and development                                                |                                       |          | 8,240          |          |      |          |       |          |             |         | 170    |         |   |        |      |        |   |       |   |     
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            |                                                                                    | Total operating expenses              |          |                | 228,731  |      |          |        | 169,895  |             |         |        | 49,195  |   |        |       | 9,559  |   |       |    | 198  |  
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            |                                                                                    | Operating loss                        |          |                | (199,667 | )    |          |        | (150,213 | )           |         |        | (47,193 | ) |        |       | (9,034 | ) |       |    | (198 | )
|Interest and other income (expense), net                                                    |                                                                                    |                                       | 11,813   |                |          |      | 13,333   |        |          |             | 623     |        |         |   | 183    |       |        |   | (1    | ) 
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            |                                                                                    | Loss before income taxes              |          |                | (187,854 | )    |          |        | (136,880 | )           |         |        | (46,570 | ) |        |       | (8,851 | ) |       |    | (199 | )
|Income taxes                                                                                |                                                                                    |                                       | 412      |                |          |      | 7        |        |          |             | 2       |        |         |   | 1      |       |        |   |      |   
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|                                                                                            |                                                                                    | Net loss                              |          |                | (188,266 | )    |          |        | (136,887 | )           |         |        | (46,572 | ) |        |       | (8,852 | ) |       |    | (199 | )
|Beneficial conversion of preferred stock                                                    |                                                                                    |                                       |         |                |          |      | (4,242   | )      |          |             |        |        |         |   |       |       |        |   |      |   
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|Net loss attributable to common stockholders                                                |                                                                                    | $                                     | (188,266 | )              |          | $    | (141,129 | )      |          | $           | (46,572 | )      |         | $ | (8,852 | )     |        | $ | (199  | ) 
|                                                                                            |                                                                                    |                                       |          |                |          |      |          |        |          |             |         |        |         |   |        |       |        |   |       |   
|Basic and diluted net loss per share                                                        |                                                                                    | $                                     | (1.40    | )              |          | $    | (1.22    | )      |          | $           | (2.58   | )      |         | $ | (0.74  | )     |        | $ | (0.77 | ) 
|Weighted-average shares outstanding used in
	computing basic and diluted net loss per share |                                                                                    |                                       | 134,756  |                |          |      | 115,587  |        |          |             | 18,043  |        |         |   | 11,919 |       |        |   | 257   |   

|                                                 |  |              |         |              |  |              |           |              |  |   |         |  |  |   |        | 
|------------------------------------------------ |  | ------------ | ------- | ------------ |  | ------------ | --------- | ------------ |  | - | ------- |  |  | - | ------ | 
|                                                 |  | December 31, |         | December 31, |  | December 31, |           | December 31,
|                                                 |  | 2001         |         | 2000         |  | 1999         |           | 1998        
|                                                 |  |              |         |              |  |              |           |             
|Balance Sheet Data:                              |  |              |         |              |  |              |           |              |  |   |         |  |  |   |        | 
|Cash, cash equivalents and marketable securities |  | $            | 678,802 |              |  | $            | 852,360   |              |  | $ | 80,023  |  |  | $ | 19,092 | 
|Working capital                                  |  |              | 415,336 |              |  |              | 917,608   |              |  |   | 81,758  |  |  |   | 19,627 | 
|Total assets                                     |  |              | 916,355 |              |  |              | 1,015,468 |              |  |   | 100,942 |  |  |   | 21,312 | 
|Long term debt, less current portion             |  |              | 300,048 |              |  |              | 300,187   |              |  |   | 367     |  |  |   | 79     | 
|Total stockholders equity                       |  | $            | 557,780 |              |  | $            | 677,644   |              |  | $ | 91,728  |  |  | $ | 20,565 | 

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial
condition and results of operations should be read in
conjunction with the Selected Consolidated Financial Data and
the Consolidated Financial Statements and related notes included
elsewhere in this Annual Report on Form 10-K. This
discussion includes forward-looking statements, such as our
projections about expected levels of future revenue and
expenses, potential application of accounting policies and
future liquidity, which are inherently uncertain. Our actual
results could differ materially from those anticipated in our
forward-looking statements as a result of many factors,
including but not limited to those discussed in Factors
that May Affect Future Results in this document.

Overview

We develop, market and sell optical
communications networking equipment specifically designed to
address the bandwidth and service limitations of metropolitan
and regional networks. From our inception in October 1997
through November 1999, our operating activities consisted
primarily of research and development. During that time, we also
formed and expanded our administrative, marketing, sales,
manufacturing and customer service and support organizations and
commenced sales and marketing activities. In January 2000, we
released our first product, the ONLINE9000, which is
designed for metropolitan markets. In June 2000, we released the
ONLINE7000, which is designed to provide metropolitan
service providers with a more cost-effective solution for metro
access applications. In the fourth quarter of 2000, we announced
the ONLINE11000, which is designed for regional markets,
and we released the ONWAVE SONET/SDH Multiplexer and ONWAVE Data
Multiplexer products that allow multiple data signals to be
combined within an individual wavelength channel and eliminate
the need for traditional multiplexing equipment. In 2001, we
introduced the ONLINE2500, which is designed to enable
service providers to deliver high bandwidth services to
customers at the optical edge of their metro networks.

We have incurred significant losses since our
inception, and as of December 31, 2001, we had an
accumulated deficit of $380.8 million. We have not achieved
profitability on a quarterly or annual basis. We expect to
continue to incur significant research and development, sales
and marketing, and general and administrative expenses and, as a
result, we will need to generate significantly greater revenue
if we are to achieve and maintain profitability. Our operating
expenses are largely based on anticipated revenue trends and a
high percentage of our expenses are, and will continue to be,
fixed in the short term. As a result, delays in generating or
recognizing revenue can cause significant variations in our
operating results from quarter to quarter and can result in
substantial operating losses.

In recent periods, there has been a significant
downturn in the communications equipment market due to
substantially reduced spending levels by communications service
providers. In 2001, lower spending by our customers and
potential customers in the communications services provider
market has substantially reduced our order levels and revenues.
In the third and fourth quarters of 2001, we commenced a
restructuring program to re-align our business operations to
market conditions. This restructuring included consolidation of
our facilities and a reduction of approximately 16% in our
worldwide workforce, resulting in charges totaling
$17.4 million that have been included in our results of
operations for 2001. We also reduced our manufacturing levels
and planned inventory requirements based on expected lower order
and shipping volumes. We recorded charges totaling
$45.3 million to write down excess and obsolete inventory,
provide for obligations to third party contract manufacturers
for materials in excess of required quantities and provide for
certain manufacturing equipment impaired by changes in
manufacturing levels in 2001. In 2001, we also recorded charges
associated with assets whose values were impacted by the
downturn in the market, including a $10.6 million provision
for doubtful accounts related to customer receivables and a
$4.0 million write-down of an equity investment in a
privately-held company in the communications sector because the
recoverable value was impaired by the market downturn.

In addition to the reduced spending by service
providers in 2001, some of our existing and potential customers
have recently further reduced or delayed anticipated purchases
of our products. As a result, we expect a significant decline in
our revenues for the quarter ending March 31, 2002,
compared with revenues for the quarter ended December 31,
2001, which were $42.2 million. This significant decline in
revenue will result in lower gross margins and increased net
loss for the quarter ending March 31, 2002.

We believe seasonality is inherent in the sales
patterns of our products. Historically, the telecommunications
equipment market has experienced seasonal variations due in part
to purchasers budgetary cycles for capital equipment. The
impact of the general spending downturn in the communications
networking equipment market on seasonality patterns is unclear.

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On February 17, 2002, we entered into an
Agreement and Plan of Merger with CIENA Corporation, a Delaware
corporation. According to the Agreement and Plan of Merger,
effective on and as of the closing date, which has not yet been
determined, we will merge with and into CIENA, with CIENA
surviving the merger. The proposed transaction remains subject
to a number of contingencies, including approval of the
stockholders of both ONI Systems and CIENA, receipt of
regulatory approvals and other customary closing conditions. The
proposed merger will be accounted for under the purchase method
of accounting. Upon consummation of the merger, CIENA will issue
0.7104 shares of its common stock for each outstanding share of
our common stock and will convert all outstanding ONI Systems
options and warrants into options and warrants to purchase
shares of CIENA common stock. CIENA will assume our outstanding
5% convertible subordinated notes due 2005. We expect that we
will incur increased general and administrative expenses,
particularly related to legal and accounting fees, in future
periods, especially the first and second quarters of 2002,
related to this transaction.

In February 2001, we acquired technology and
other assets associated with Finisar Corporations customer
premises equipment business for up to $51.3 million,
comprised of up to $30.0 million in cash and
$21.3 million of our common stock. At closing, we paid
$5.0 million in cash and issued 488,624 shares of common
stock to Finisar Corporation. At acquisition date, the remaining
cash payments of up to $25.0 million were contingent upon
the timely delivery of certain mutually agreed deliverables. The
additional deliverables represent the completion of various
feature sets of one of the purchased products. In accordance
with the terms of the acquisition agreement the number of common
shares issued to Finisar Corporation was determined based on the
average closing price of our common stock for the ten days prior
to closing of the transaction on February 28, 2001. For
accounting purposes the value of the shares issued was
determined in accordance with Emerging Issues Task Force
(EITF) 99-12, Determination of the Measurement Date
for the Market Price of Acquirer Securities Issued in a Purchase
Business Combination and Accounting Principles Board (APB)
Opinion No. 16, Business Combinations.
Accordingly, the 488,624 shares issued to Finisar Corporation
were valued based on the market price of our shares over a
reasonable period of time before and after the announcement date
of the transaction, which was February 13, 2001.

Certain core and developed technology, determined
to have future use, were classified as identifiable intangible
assets at acquisition. At acquisition, a value of
$17.3 million was determined for the core and developed
technology based on a valuation analysis which contemplated the
value of the products purchased, including the feature sets
included in the additional deliverables. Accordingly, we
capitalized $17.3 million of identified intangibles at the
acquisition date.

Purchased in-process research and development was
determined through established valuation techniques in the
high-technology communications industry. At the acquisition
date, Finisar Corporation was in the process of conducting
research and development on a compact optical transport platform
designed for the network edge. Technological feasibility had not
been established for this product and no alternative future use
existed at the date of acquisition. Accordingly, we expensed
$8.2 million of purchased in-process research and
development in the first quarter of 2001. The purchased
in-process research and development was valued using a
discounted cash flow method with a risk adjusted discount rate
of 30%. Management believes that the assumptions used in the in
process research and development analysis were reasonable at the
time of the acquisition. Although the assumptions used were
based on market information for competitive products and costed
bills of materials, no assurance can be given that the
underlying assumptions used to estimate expected revenues,
operating costs or profitability, or the events associated with
the product, will transpire as estimated. The primary risks and
uncertainties associated with this project relate to new feature
sets and functionality, such as allowing for adding or dropping
of optical channels and supporting a ring-based network
topology. Under the terms of the acquisition agreement, there
are contingent payments based upon delivery by Finisar
Corporation and acceptance by us of certain additional
deliverables within a specified timeframe. The product
associated with these deliverables became generally available in
June of 2001.

During the year ended December 31, 2001, we
made additional purchase price payments based on delivery and
acceptance of the mutually agreed deliverables specified in the
purchase agreement. Under the agreement, the additional payments
totaled up to $25.0 million. The actual amounts of the
additional payments were subject to the timing of deliverables.
In June 2001, we paid an additional $5.0 million upon
delivery and acceptance of a first mutually agreed deliverable.
This payment included $0.3 million related to the purchase
of fixed assets, which has been capitalized as property and
equipment. The remaining amount of this payment was capitalized
as additional goodwill. In July 2001, we paid $4.3 million
upon delivery and acceptance of a second mutually agreed
deliverable, which was capitalized as additional goodwill. In
October 2001, we paid $3.5 million to Finisar Corporation
upon delivery and acceptance of a third mutually agreed
deliverable and capitalized this amount as additional goodwill.
As of December 31, 2001, the remaining cash payments of up to
$6.0 million are contingent upon the timely delivery and
acceptance of mutually agreed deliverables. Total purchase
consideration also includes acquisition expenses incurred, which
were not significant.

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A summary of the allocation of the purchase price
paid through December 31, 2001 was as follows (in thousands):

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Property and equipment              |  | $ | 344    | 
|Identifiable intangible assets      |  |   | 17,290 | 
|In-process research and development |  |   | 8,240  | 
|Goodwill                            |  |   | 13,429 | 
|                                    |  |   |        | 
|Total                               |  | $ | 39,303 | 
|                                    |  |   |        | 

In October 2001, we announced a voluntary stock
option exchange program for our employees. Under the program,
some of our employees were given the opportunity, if they chose,
to cancel outstanding stock options previously granted to them
in exchange for an equal number of replacement options to be
granted at a future date, at least six months and a day from the
cancellation date, which was November 19, 2001. Under the
exchange program, options for 7,262,858 shares of our common
stock were tendered and cancelled. We expect to grant the
replacement options in May 2002. Each participant who is an
employee at that time will receive, for each option surrendered,
a one-for-one replacement option with an exercise price equal to
the fair market value of our common stock on the date of the
grant of the replacement option. Other terms and conditions of
the replacement options will be substantially the same as those
of the canceled options. The exchange program is not expected to
result in any additional compensation charges or variable plan
accounting. Members of our board of directors and our executive
officers were not eligible to participate in this program.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements
requires us to make estimates and judgments in determining the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We
regularly evaluate our estimates, including those related to
customer arrangements, allowances for doubtful accounts,
inventories, valuation of assets, warranty obligations, and
contingencies and litigation. When making estimates, we consider
our historical experience, our knowledge of economic and market
factors and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.

We believe that the following critical accounting
policies represent areas where significant judgments and
estimates have been used in the preparation of our consolidated
financial statements.

Revenue

We derive revenue from sales of hardware,
software and services. Revenue is accounted for in accordance
with Staff Accounting Bulletin (SAB) 101, Revenue
Recognition, Statement of Position (SOP) 97-2,
Software Revenue Recognition and SOP 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements. For hardware transactions where software is
not incidental, we apply the provisions of SOP 97-2 and
SOP 98-9, and we do not segregate the fee between hardware
and software or apply separate accounting guidance to the
hardware and software elements. For hardware transactions where
no software is involved, we apply the provisions of
SAB 101. The application of the provisions of SAB 101,
SOP 97-2 and SOP 98-9 require us to make significant
judgments and estimates in connection with the revenue
recognized in any accounting period. Therefore, our estimates
and judgments have a direct effect on the amount and timing of
revenue recognized in any period.

We generally recognize hardware and software
revenue upon shipment when the following provisions are met:
(a) persuasive evidence of an arrangement exists, generally
based on an executed contract and non-binding purchase order;
(b) the product has been delivered, typically to a common
carrier; (c) the fee is fixed and determinable; and
(d) collection of the resulting receivable is probable.
When the arrangement with the customer includes future
obligations or obtaining customer acceptance, revenue is
recognized when those obligations have been met or customer
acceptance has been received. We assess collection based on a
number of factors, including the customers payment
patterns, the credit-worthiness of the customer and the
potential effect of market or economic factors on the
customers financial condition. If we determine that
collection of a fee is not probable based on our assessment, we
defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon receipt of cash.

For arrangements with multiple elements we
allocate fair value to each element based on separate sales or
renewals to other customers or upon renewal rates quoted in the
contracts. Fair value of services, such as training, is based
upon separate sales by us of these services to other customers.
For transactions that include hardware, software and installation

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services within one arrangement, installation
services are not considered essential to the functionality of
the products sold. Installation services do not significantly
change the function of the products sold, have in the past
generally been completed within our expected timelines and have
at times been performed by other vendors. Revenue associated
with the hardware and software in these arrangements are
generally recognized upon shipment. Revenues from installation
services are recognized upon completion of the installation.
Revenues from service contracts are recognized over the life of
the service contract, generally twelve months.


To the extent customer arrangements contain
incentive offerings such as volume-based pricing, special
pricing agreements or other special terms, we may deem it
necessary to record reductions in revenue or to make estimates
of revenue deferrals.

Valuation
of assets

We maintain an allowance for doubtful accounts
for estimated impairment of our receivables resulting from the
inability of our customers to make required payments. We
estimate the impairment of a receivable based on our judgment of
a customers financial condition and ability to pay, as
well as any deterioration in a customers financial
condition due to market, economic or other factors. We evaluate
customers credit worthiness and payment patterns in
assessing their financial condition. Some of our customers have
limited operating histories, which can limit the amount of
financial information available to us. We currently sell our
products to a limited number of customers, which results in
concentrations of credit risk at any given point in time. For
example, at December 31, 2001, four of our customers
represented approximately 61% of our total accounts receivable.
Many of our customers require access to significant amounts of
capital to fund or expand their operations. Access to capital
has been significantly restricted and lack of sufficient funds
can result in deterioration in the financial condition of our
customers or potential customers or cause them to substantially
reduce or cease operations. For example, three of our customers
have gone out of business or filed for bankruptcy. If, in future
periods, we determine that a customers financial condition
has deteriorated, resulting in an impairment of their ability to
make payments, additional allowances may be required.

We regularly evaluate inventory values for
impairment to determine whether our carrying value exceeds the
estimated market value of our inventory. Our estimates of the
market value of our inventory are based on several factors,
including our assumptions about future demand of each of our
products, expected product lives, planned product releases and
new product introductions and overall market conditions. If
actual demand is less favorable than we have projected based on
our assumptions of estimated customer order levels, we may need
to record additional write-downs of inventory. The market in
which we operate is characterized by rapid technological
changes. If technological changes occur more rapidly than we
expected when making our estimates of product lives, planned
product releases and new product introductions, we may have risk
of inventory becoming technologically obsolete. Additionally, we
provide requirement forecasts to our contract manufacturers and
certain component vendors up to six months in advance. If actual
requirements are less than forecasts provided to our contract
manufacturers or vendors, we may be required to record
additional charges for excess inventory.

The values of our long-lived assets, including
property and equipment, identifiable intangible assets and
goodwill, are reviewed for potential impairment whenever events
or changes in circumstances indicate that the carrying values
may not be recoverable. The carrying value of our property and
equipment depends upon our estimates of useful lives over future
periods. Changes in our business or operational strategy or in
our manufacturing levels can result in impairment in the
carrying values of our property and equipment. Our determination
of the value of, and any impairment related to, identifiable
intangible assets and goodwill associated with our technology
purchase is affected by our estimates of the expected use of the
acquired assets and changes in our business strategy. If the
assumptions we use to determine valuation of these long-lived
assets prove to be wrong, we may be required to record
impairment charges to the carrying value of these assets in
future periods.

Our determination of impairment related to
certain equity investments in privately-held companies is based
on lower financing rounds or assumptions related to projected
operating results of the privately-held company and potential
effects of declines in market trends that are determined to be
other than temporary. If the operating results of the
privately-held company or the market in which it operates
decline in the future, we may be required to record impairment
charges to reduce the carrying amount in future periods.

The valuation of assets is based on facts known
to management at the balance sheet date. If additional
information becomes available at a later date, current estimates
could change.

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Warranty
Accrual

We record provisions for estimated costs of
product warranties at the time revenue is recognized. Our
warranty accrual is based on estimates of product failure rates,
material usage and expected service costs incurred in correcting
any product failure reported under warranty coverage. Our
products are technically advanced and highly complex. The
occurrence of defects in complex hardware and software, and the
related costs of correcting any such defects, are inherently
more difficult to estimate. Additionally, we have a limited
operating history and our current products may not have been
deployed for an extended period of time in our customers
networks. Therefore, we have limited historical warranty
experience upon which to make our estimates, and future warranty
experience may differ from our historical experience. Should
actual product failure rates, material usage or service costs
differ from our estimates, revisions to the estimated warranty
liability would be required.

Results of Operations

Beginning in 2000, our revenue was primarily
derived from sales of our ONLINE and ONWAVE products. Prior to
2000, our revenue was primarily from research and development
contracts with the United States government. Therefore, we
believe that comparison to the years prior to 2000 is not
meaningful. In 2001, the communications equipment market
experienced a significant downturn. The associated reductions in
capital spending by communications service providers have
substantially reduced our customer order levels, shipment
volumes and revenue.

In the third and fourth quarters of 2001, we
commenced a restructuring program to re-align our business
operations with the current market conditions. We recorded
$16.1 million of lease and related expenses associated with
our exit and consolidation plans for excess facilities and the
impairment of leasehold improvements and fixed assets at vacated
facilities and $1.3 million associated with our reduction
in force. Our estimates of the costs of consolidating our
facilities included an analysis of our contractual lease
commitments, non-cancelable costs of lease arrangements, and net
book value of leasehold improvements and fixed assets at vacated
facilities, partially offset by estimated potential sublease
income based on available market information for commercial
office space. Our reduction in force included a reduction of
approximately 120 persons worldwide, across all functional
areas. The costs of our reduction in force included costs of
severance and benefits associated with terminated employees. The
majority of these severance and benefit payments were paid out
in 2001. The costs associated with the consolidation of our
facilities and the reduction in force are included in
restructuring and impairment charges for the year ended
December 31, 2001.

The sector-wide downturn and reductions in
capital spending by communication service providers have also
impaired the value of certain of our assets. During fiscal 2001,
we recorded charges of $36.9 million to write-down
inventory, $7.4 million to accrue for materials we are
obligated to purchase from suppliers and third party contract
manufacturers and $1.0 million related to impairment of
manufacturing equipment. Inventory written down includes
estimated amounts for raw materials, work-in-process and
finished goods inventory that we believe we will be unable to
sell as a result of current inventory levels, decreased shipping
volumes and planned product transitions. Our purchase
commitments consist of the minimum levels of materials that we
are obligated to purchase from our suppliers and third party
contract manufacturers based on open purchase orders within
specific lead times. The provision for purchase commitments
represents the value of those materials that we are obligated to
purchase, but believe we will be unable to sell as a result of
existing inventory levels. We expect the payments related to the
purchase of these materials will occur through the third quarter
of 2002. In connection with the reduction in manufacturing
levels, we identified certain fixed assets that we will no
longer use due to changes in the manufacturing levels. This
equipment, consisting primarily of test and tooling equipment,
are no longer in use and the associated carrying value has been
written down. The write-down of inventory, provision for
purchase commitments and impairment of manufacturing equipment
are included in cost of goods sold for 2001.

In 2001, we recorded a provision for doubtful
accounts of $10.6 million, primarily due to the impact of
the general economic and communications market downturn on the
financial condition of certain customers. We evaluate the
financial condition, credit worthiness, changes in payment
patterns and overall market conditions of our customers to
assess the impact of economic, market and other events on the
probability of collection of outstanding balances. If events
arise that we believe may cause our customers to be unable to
pay us, we evaluate the need to increase our allowance for
doubtful accounts based on an assessment of the probability of
collection. We review our allowance for doubtful accounts
against specific customer balances outstanding to determine the
adequacy of the allowance. To the extent economic and market
events cause the financial ability of customers with outstanding
balances to deteriorate, we may be required to record additional
provisions for doubtful accounts. The provision for doubtful
accounts is included in general and administrative expense.

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In 2001, we recorded $4.0 million of expense
associated with the impairment of an equity investment in a
privately-held company. This investment was recorded at cost,
and evaluated periodically for recoverability. In the third
quarter of 2001, the significant decline in market and economic
conditions caused an other-than-temporary decline in the value
of this investment below its original cost. Specifically, delays
in the expected general release by the privately-held company of
their product and declines in their estimated future revenue
streams resulted in an overall decline in the valuation of our
investment. The expense associated with the write-down of our
equity investment is included in other expense, net for 2001.

Research and development expenses consist
primarily of salaries and related personnel costs and other
costs related to the design, development, testing and
enhancement of our products. To date, we have expensed our
research and development costs as they were incurred. Several
components of our research and development effort require
significant expenditures, the timing of which can cause
significant quarterly variability in our expenses. In 2000, we
opened our Lightwave Design Centre in North Carolina to further
enhance our research and development activities in optical data
and transport technologies. In 2001, we expanded our facilities
in North Carolina and opened our Lightwave Design Centre in
Montreal, Canada.

Sales and marketing expenses consist primarily of
salaries and the related personnel costs of sales and marketing
personnel, customer service and support personnel, commissions,
marketing promotional programs, travel and other marketing
expenses and recruiting expenses. In 2001, we expanded our
presence in the United Kingdom and opened international sales
offices in France, Germany, Japan, Korea, the Netherlands and
Singapore. We market and sell our products primarily through our
direct sales force to incumbent local exchange carriers,
inter-exchange carriers, Internet service and application
service providers, cable operators, utilities and their
affiliates and competitive local exchange carriers. In some
international regions where it is difficult to maintain a direct
sales force, we may rely on resellers for distribution of our
products.

General and administrative expenses consist
primarily of salaries and related expenses for executive,
finance, legal, facilities, human resources and information
technology personnel, recruiting expenses and professional fees
for accounting, legal and consulting services.

Comparison of Years Ended December 31,
2001 and 2000

Revenue

Revenue was $195.7 million for the year
ended December 31, 2001, an increase of $136.0 million
from the year ended December 31, 2000. This increase in
revenue is attributable to higher volume of sales of our ONLINE
and ONWAVE products to existing customers, sales to new
customers and sales of new products. Our customer base increased
to 30 customers in 2001 from 16 customers in 2000. No individual
customers accounted for more than 20% of revenue for the year
ended December 31, 2001, and two customers represented
greater than 10% of revenue on an individual basis. No
individual customer accounted for more than 17% of revenue for
the year ended December 31, 2000, and four customers
represented greater than 10% of revenue on an individual basis.
One customer accounted for more than 10% of revenue in both 2001
and 2000. International customers accounted for 21% of total
revenue for the year ended December 31, 2001 and 22% of
total revenue for the year ended December 31, 2000.

In 2001, our revenue levels during the second
half of the year declined due to a substantial reduction in
spending by our current customers, as well as by prospective
customers in the communications services provider market. Our
sales volumes and ability to grow our customer base are
dependent in part upon the future spending decisions by
communications services providers, particularly the regional
bell operating companies in the United States and the postal
telephone and telegraph operators in Europe.

As a result of the continued delay and reduction
of spending by our existing and potential customers, we expect
that revenues for the first quarter of 2002 will be
significantly lower than revenues for the fourth quarter of
2001. In the current economic environment, we have very limited
visibility over revenue trends in future periods.

Cost of goods
sold, excluding amortization of deferred stock
compensation

Cost of goods sold was $166.6 million for
the year ended December 31, 2001, an increase of
$126.6 million from 2000. Cost of goods sold for 2001
included $45.3 million for the write-down of excess
inventory, provision for excess purchase commitments and
provision for impairment of manufacturing equipment.

Excluding these charges, cost of goods sold was
$121.3 million for 2001, an increase of $81.3 million
from 2000, primarily as a result of higher facilities and
personnel expenses for larger manufacturing facilities and
increased average

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headcount in our manufacturing and service
organizations, which were associated with increased
manufacturing levels for a greater number of products, and
increased shipping and installation volumes in 2001 compared to
2000. As a percentage of revenue, cost of goods sold, excluding
inventory write-downs and provisions for purchase commitments
and impairment of manufacturing equipment was 62.0% for 2001
compared to 67.0% for 2000. Cost of goods sold for 2001,
excluding the $45.3 million for the write-down of excess
inventory, provision for excess purchase commitments and
provision for impairment of manufacturing equipment, decreased
as a percentage of revenue primarily due to a reduction in
material costs and production efficiencies associated with
larger sales volumes on a year-over-year basis.


Gross margin on product sales for 2001, excluding
the $45.3 million associated with the write-down inventory,
provisions for purchase commitments and impairment of
manufacturing equipment, increased to 38.0% from 33.0% in 2000.
Gross margin on product sales is dependent upon several factors,
including the stage and configuration of our customers
network deployments, sales volume, pricing and our ability to
achieve production efficiencies, including cost reduction
initiatives. To date, we have achieved some production
efficiencies associated with larger sales volumes and, to a more
limited extent, reductions in component costs. If we are unable
to maintain our sales at a level sufficient to enable us to
achieve efficiencies in the future, our gross margins may
decline. Typically, we realize lower gross margins on initial
customer deployments, which include fewer wavelengths, than on
follow-on purchases where the customer is adding capacity to
their network. We expect to continue to add new customers and
support initial deployments for our existing customers such that
the mix of initial deployments versus follow-on purchases may
vary in future periods. In addition, we expect to develop new
products in the future, which may generate higher or lower
margins.

The expected decline in revenue in the first
quarter of 2002 will negatively impact production efficiencies
and result in lower gross margin levels.

Research and
development expense, excluding amortization of deferred stock
compensation

Research and development expense was
$78.4 million for 2001, an increase of $24.7 million,
or 46.0%, from 2000. The increase in research and development
expense was primarily due to the year-over-year increase in
personnel in our research and development organization,
particularly in the increased engineering staff supporting
product technology updates and new product introductions. The
increase in research and development expense is also
attributable to increased costs of engineering equipment,
materials used and facilities costs related to a larger staff,
our expansion of research and development facilities in
Montreal, Canada and North Carolina and increases in the number
of research and development projects. To a lesser extent, we
also had more expenditures for engineering consulting services
in 2001 compared to 2000. At December 31, 2001, we had
approximately 240 research and development employees, an
increase of 33 from 207 at December 31, 2000. Research and
development expense for 2001 also included $4.4 million of
costs associated with payments to Telcordia Technologies, Inc.
in connection with the Operation Systems Modification of
Intelligent Network Elements, or the OSMINE, certification
process. We commenced the OSMINE certification process in the
fourth quarter of 2000, for the purpose of developing our
product operating systems to be deployable and manageable within
the network environment of the regional bell operating
companies, or RBOCs. This process also includes joint efforts
with Telcordia to develop new solutions designed to be
integrated into a RBOC environment. Research and development
expense as a percentage of revenue was 40.0% for
December 31, 2001, a decrease from 89.9% for 2000.

Research and development is essential to our
future success and we expect that research and development
expense will continue to increase in absolute dollars in future
periods.

Sales and
marketing expense, excluding amortization of deferred stock
compensation

Sales and marketing expense was
$51.3 million for 2001, an increase of $26.0 million,
or 102.8%, over 2000. The increase in sales and marketing
expense was primarily due to the increase in sales, sales
operations and marketing personnel to support an increased
customer base and increased shipping volumes, increased
tradeshow and advertising activity and higher sales commissions
associated with higher revenue levels on a year-over-year basis.
Additionally, in 2001, we expanded our international sales
activities and sales personnel in the United Kingdom and opened
sales offices in Singapore, France, Germany, the Netherlands,
Japan and Korea. At December 31, 2001 we had approximately
141 sales and marketing employees, an increase of 69 from
72 employees at December 31, 2000. Sales and marketing
expense as a percentage of revenue was 26.2% for the year ended
December 31, 2001, a decrease from 42.4% for the year ended
December 31, 2000.

We expect to strategically expand our sales
efforts, including expanding our sales channels, and expect
sales and marketing expense to increase in absolute dollars in
future periods.

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General and
administrative expense, excluding amortization of deferred stock
compensation

General and administrative expense was
$37.4 million for 2001, an increase of $21.0 million
over 2000. General and administrative expense for 2001 included
$10.6 million related to a provision for doubtful accounts.
General and administrative expense, excluding the provision for
doubtful accounts, was $26.8 million for 2001, an increase
of $10.4 million, or 63.4%, from 2000. The increase in
general and administrative expense primarily reflects the
expansion in infrastructure to support our growth, including our
expansion into our new corporate facilities, an increase in
legal and accounting fees associated with our international
expansion and increased business activities and litigation
compared to 2000. Additionally, prior to our reduction in force
in the fourth quarter of 2001, general and administrative
expenses were increased by higher average number of general and
administrative personnel in 2001 compared to 2000. At
December 31, 2001, we had approximately 84 general and
administrative employees, compared to 83 employees at
December 31, 2000.

We expect that general and administrative expense
will remain relatively flat in absolute dollars in future
periods.

Amortization
of deferred stock compensation

We account for stock-based awards to employees
using the intrinsic value method consistent with the method
described in APB 25, Accounting for Stock Issued to
Employees. Amortization of deferred stock compensation was
$27.0 million in 2001, a decrease of $39.4 million from
$66.4 million in 2000. Amortization of deferred stock
compensation for 2001 is net of a decrease in stock-based
compensation of $8.4 million for stock options cancelled in
connection with employee terminations. From inception through
December 31, 2001, we have recorded total deferred stock
compensation of approximately $136.0 million in connection
with stock sales and stock options granted at prices deemed to
be below fair value on the date of sale or grant. For the year
ended December 31, 2001, we also recorded an adjustment to
deferred stock compensation of $4.6 million in connection
with cancellations of stock options previously granted at prices
below fair value. Options granted are typically subject to a
four-year vesting period. We amortize the deferred stock
compensation over the vesting periods of the applicable options
and the repurchase periods for restricted stock purchases. The
period over which deferred stock compensation is amortized is
determined in accordance with Financial Accounting Standards
Board Interpretation (FIN) No. 28. Accordingly, we
expect amortization of deferred stock compensation to continue
to decline in future periods. From inception through
December 31, 2001, we amortized a total of
$108.2 million of deferred stock compensation. As of
December 31, 2001, we had an unamortized deferred stock
compensation balance of $17.5 million to be amortized
through 2004.

Amortization
of goodwill and intangibles

Amortization of goodwill and intangibles was
$9.1 million for 2001 and $3.6 million for 2000.
Goodwill of $13.4 million and intangible assets of
$17.3 million recorded in connection with our acquisition
of Finisar Corporations customer premises equipment
business in February 2001 are being amortized over a period of
three years. Goodwill of $5.7 million and intangibles of
$1.2 million recorded in connection with our acquisition of
Object-Mart, Inc. in June 1999 were amortized over a period of
approximately two years from date of acquisition, and were fully
amortized as of December 31, 2001.

Beginning in 2002, we have adopted the provisions
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
As a result, we do not expect any future amortization expense
for goodwill associated with our acquisition of Finisar
Corporations customer premises equipment business. Rather,
the value of our goodwill will be reviewed periodically for
impairment. Whenever events or changes in circumstances indicate
that the carrying value of the goodwill may not be recoverable,
we may be required to record an impairment charge. We expect the
associated intangibles will continue to be amortized over its
three year useful life.

In-process
research and development

In-process research and development expense was
$8.2 million for 2001, in connection with our acquisition
of the business related to Finisar Corporations customer
premises equipment business in February 2001. In-process
research and development represents the value of the purchase
price allocated to purchased technology that had not yet reached
technological feasibility and no future alternative uses
existed, as described in Overview.

Interest and
other income, net

Interest and other income, net was
$11.8 million for 2001 and $13.3 million for 2000.
Interest and other income, net for 2001 included a
$4.0 million charge associated with the impairment of an
equity investment in a privately-held company, and a
$1.0 million charitable contribution of our common stock.
Excluding these amounts, interest and other

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income, net was $16.8 million for 2001, an
increase of $3.5 million from 2000. The increase was
primarily due to the interest earned on the net cash proceeds
received on higher average cash and investment balances in 2001
in connection with the completion of our initial public offering
in June 2000 and our follow-on public offering and
$300.0 million convertible debt offering in October 2000,
less interest expense associated with our $300.0 million
convertible debt offering in October 2000, and partially reduced
by the effect of decreased average interest rates in 2001
compared to 2000.


Comparison of Years Ended December 31,
2000 and 1999

Revenue

Revenue was $59.7 million for the year ended
December 31, 2000, an increase of $56.6 million, from
the year ended December 31, 1999. Revenue for the year
ended December 31, 2000 was primarily from sales of our
ONLINE and ONWAVE products to sixteen customers. No individual
customer accounted for more than 17% of revenue for the year
ended December 31, 2000, and only four customers
represented greater than 10% of the revenue on an individual
basis. International customers accounted for 22% of total
revenue for the year ended December 31, 2000. All
international sales were denominated in United States dollars.
Revenue recorded for the year ended December 31, 1999 was
from government research and development contracts, which were
completed in 1999.

Cost of goods
sold, excluding amortization of deferred stock
compensation

Cost of goods sold was $40.0 million for the
year ended December 31, 2000, an increase of
$38.9 million, from the year ended December 31, 1999.
As a percentage of revenue, cost of goods sold for the year
ended December 31, 2000 was 67%, compared to 34% for the
year ended December 31, 1999. We believe the comparison of
these two periods is not meaningful, because our revenue in
1999, and the related cost of goods sold, were from governmental
research and development contracts. At December 31, 2000,
we had approximately 125 manufacturing employees, an
increase of 91 from 34 employees at December 31, 1999.

Research and
development expense, excluding amortization of deferred stock
compensation

Research and development expense was
$53.7 million for the year ended December 31, 2000, an
increase of $28.8 million, or 116%, from the year ended
December 31, 1999. The increase in research and development
expense was primarily due to the significant expansion of our
research and development department, particularly attributable
to the increase of engineering staff. At December 31, 2000
we had approximately 207 research and development employees, an
increase of 97 from 110 at December 31, 1999.

Sales and
marketing expense, excluding amortization of deferred stock
compensation

Sales and marketing expense was
$25.3 million for the year ended December 31, 2000, an
increase of $20.7 million, or 455%, from the year ended
December 31, 1999. This increase was attributable to the
expansion of our sales force and increased marketing activities
in 2000. At December 31, 2000 we had approximately
126 sales and marketing employees, an increase of 105 from
21 employees at December 31, 1999.

General and
administrative expense, excluding amortization of deferred stock
compensation

General and administrative expense was
$16.4 million for the year ended December 31, 2000, an
increase of $12.9 million, or 374%, from the year ended
December 31, 1999. The increase in general and
administrative expense primarily reflected the expansion in
infrastructure to support our planned growth. At
December 31, 2000 we had approximately 83 general and
administrative employees, an increase of 53 from
30 employees at December 31, 1999.

Amortization
of deferred stock compensation

Amortization of deferred stock compensation was
$66.4 million for the year ended December 31, 2000, an
increase of $55 million, or 481%, from the year ended
December 31, 1999. From inception through December 31,
2000, we have amortized a total of $81.2 million of
deferred stock compensation, leaving an unamortized balance of
$56.0 million as of December 31, 2000.

Common stock
warrant expense

In February 2000, in connection with the signing
of a purchase and license agreement with FMR Corp. for the
purchase of our products by KVH Industries Inc. and MetroRED
Telecommunicaciones S.A., we issued a warrant to purchase
223,000 shares of common stock at an exercise price of $0.91 per
share. FMR, KVH Industries and MetroRED

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are not obligated to purchase any of our products
as a condition to FMR exercising the warrant. We believe that,
given our early stage of development at the time of the
negotiation and issuance of the warrant, the issuance of this
warrant was a cost of establishing a relationship with this
potential customer. The value of $3.0 million ascribed to
the warrant was estimated using the Black-Scholes option
valuation model with the following assumptions:




| |   |                                  
| | - | ---------------------------------
| |  | no expected dividend yield;      
|
| |  | risk free interest rate of 5.50%;
|
| |  | expected volatility of 70%; and  
|
| |  | contractual term of seven years. 

Given that there are no future performance
obligations to exercise this warrant, the warrant was expensed
upon issuance.

In a separate transaction in March 2000, as
consideration for professional services rendered, we issued a
warrant to purchase 200,000 shares of common stock to Fenwick
& West LLP at an exercise price of $15.00 per share. The
value of $1.5 million ascribed to the warrant was estimated
using the Black-Scholes option valuation model using the
following assumptions:



| |   |                                  
| | - | ---------------------------------
| |  | no expected dividend yield;      
|
| |  | risk free interest rate of 5.50%;
|
| |  | expected volatility of 70%; and  
|
| |  | contractual term of four years.  

The warrant was expensed upon issuance.

Amortization
of goodwill and intangibles

Amortization of goodwill and intangibles was
$3.6 million for the year ended December 31, 2000 and
$1.8 million for the year ended December 31, 1999. We
recorded goodwill of $5.7 million and intangibles of
$1.2 million in relation to the acquisition of Object-Mart,
Inc. on June 29, 1999. Goodwill and intangibles related to
the acquisition of Object-Mart were being amortized over a
period not exceeding two years from the acquisition date.

Interest
income, net

Interest income, net was $13.3 million for
the year ended December 31, 2000, an increase of
$12.7 million from the year ended December 31, 1999.
The increase was primarily due to the interest earned on the net
cash proceeds received in connection with the completion of our
initial public offering in June 2000 and our follow-on public
offering in October 2000.

Liquidity and Capital Resources

At December 31, 2001, our principal source
of liquidity was our cash and cash equivalents of
$338.5 million, short-term investments of
$26.5 million and investments of $313.8 million that
have been classified as long-term on our balance sheet based on
scheduled maturity dates of greater than 12 months from the
balance sheet date. As of December 31, 2000, we had cash
and cash equivalents of $852.4 million. We did not have any
short or long-term investments at December 31, 2000.

From inception through our initial public
offering in June 2000, we financed our operations primarily
through private sales of convertible preferred stock, for net
proceeds of approximately $145.9 million, and common stock,
for net proceeds of approximately $1.2 million. In June
2000, we completed our initial public offering of our common
stock and realized net proceeds from the offering of
approximately $226.1 million, including $14.0 million
from two private placements of common stock that closed
concurrently with our initial public offering. In October 2000,
we completed a follow-on public offering of 8,000,000 shares of
common stock. Of these shares, we sold 5,646,643 shares and
received net proceeds of approximately $401.5 million. The
remaining 2,353,357 shares were sold by our existing
stockholders. Concurrent with the completion of the follow-on
public offering of common stock, we sold $300.0 million of
5% convertible subordinated notes due October 15, 2005. We
received net proceeds of approximately $290.5 million,
after deducting underwriting discounts and other expenses.

We used $83.7 million of cash in operating
activities in the year ended December 31, 2001, a decrease
of $33.5 million from the $117.2 million used in the
year ended December 31, 2000. The decrease resulted from
net loss of

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$188.3 million, an increase in accounts
receivable of $26.0 million, an increase in inventory of
$21.0 million, an increase in prepaid and other assets of
$4.4 million and a decrease in accounts payable of
$8.6 million, offset by total non-cash charges of
$151.3 million, an increase in other accrued liabilities of
$9.4 million and an increase in deferred revenue of
$3.8 million. Non-cash charges for the year ended
December 31, 2001 consisted of $38.6 million of
depreciation and amortization, $27.0 million of
amortization of deferred stock compensation, $74.5 million
of restructuring, impairment and related charges,
$8.2 million of expensed purchased in-process research and
development, $1.9 million related to amortization of debt
financing costs and $1.0 million expense associated with a
charitable contribution. We used $117.2 million of cash in
operating activities in 2000 and $29.6 million in 1999.
Cash used in operations for the 2000 included a loss of
$136.9 million, an increase of $24.1 million in
accounts receivable, an increase in inventory of
$61.0 million and an increase in prepaid expenses and other
assets of $9.8 million, offset primarily by non-cash charges of
$13.9 million for depreciation and amortization,
$66.4 million related to amortization of deferred stock
compensation and $4.6 million related to common stock
warrant expense, and increases of $10.6 million related to
accounts payable and $16.7 million related to other accrued
expenses. Cash used in operations in 1999 included a loss of
$46.6 million and an increase in inventory of
$9.6 million, offset primarily by non-cash charges of
$2.8 million for depreciation and amortization,
$11.4 million related to amortization of deferred stock
compensation and $2.9 million related to common stock
warrant expense, and increases of $2.4 million related to
accounts payable and $5.5 million related to other accrued
liabilities.


As part of our cash management strategy we
invested some of our cash and cash equivalents in short to
long-term marketable securities. We used $447.0 million of
cash in investing activities in the year ended December 31,
2001, an increase of $394.7 million from the year ended
December 31, 2000. The increase was primarily related to
the investment of $483.9 million in marketable securities,
net of proceeds of $145.1 million from sales and maturities
of marketable securities, purchases of property and equipment of
$90.2 million and a total of $18.0 million in payments
to Finisar Corporation for the purchase of technology. We used
$52.3 million in cash in investing activities in the year
ended December 31, 2000, an increase of $45.7 million
from the $6.6 million used in the year ended
December 31, 1999. The increase was primarily related to
the increase in purchases of property and equipment, and
secondarily to minority investments we made during the year
ended December 31, 2000. We used $6.6 million in cash
in investing activities in 1999, including $4.9 million
related to the purchase of property and equipment and the net
cash portion of our acquisition of Object-Mart of
$1.7 million.

We generated $16.9 million in cash from
financing activities for the year ended December 31, 2001,
consisting of proceeds of $14.2 million from exercises of
stock options and purchases under employee stock purchase plans
and $3.4 million in proceeds from payments under
stockholder notes receivable, net of $0.2 million used to
repurchase unvested stock and $0.5 million related to
payments under capital lease obligations. We generated
$941.9 million in cash from financing activities in the
year ended December 31, 2000, an increase of
$844.7 million from the $97.1 million generated in the
year ended December 31, 1999. This increase was primarily
from the net proceeds from our initial public offering of our
common stock, our follow-on equity offering, our issuance of
convertible subordinated notes, and the private sales of
convertible preferred stock. We generated $97.1 million in
cash from financing activities in 1999 primarily from the
private sales of convertible preferred stock and issuance of
common stock.

In February 2001, we acquired technology and
other assets associated with Finisar Corporations customer
premises equipment business. At closing, we paid
$5.0 million in cash and issued 488,624 shares of common
stock to Finisar. During 2001, we made additional cash payments
related to this acquisition totaling $7.8 million These
payments related to the delivery and acceptance of mutually
agreed deliverables in accordance with the terms of the
acquisition agreement. These payments also included
$0.3 million related to the purchase of fixed assets and
$0.2 million of acquisition costs incurred. At
December 31, 2001, we have one remaining cash payment of up
to $6.0 million, contingent upon the timely delivery and
acceptance of the final mutually agreed upon deliverable, which
is expected to be completed during the first half of 2002.

We have an equipment financing facility that
allows us to draw funds of up to $1.5 million to finance
the purchase of equipment at an annual interest charge of 7.51%.
This facility does not require us to maintain any financial
covenants and will expire in December 2002. As of
December 31, 2001, there was approximately $265,000 payable
under this facility.

Concurrent with the completion of the follow-on
public offering of common stock, we sold $300.0 million of
5% convertible subordinated notes due October 15, 2005. We
make interest payments on this note on a semi-annual basis in
April and October. The convertible subordinated notes do not
require us to maintain any financial covenants.

As part of our restructuring program, we
implemented a worldwide reduction in workforce that decreased
our worldwide head count by approximately 16%, consolidated
facilities and reduced manufacturing levels and capital
expenditures. We expect that these plans will allow us to
preserve cash flows in certain business operations while
continuing to devote capital resources to continue our research
and development activities, to develop our sales, marketing

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and customer service and support organizations,
to support our information systems requirements and for other
general corporate activities. The level of our capital
requirements depend on numerous factors, including:




| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the resources we devote to developing,
	manufacturing, marketing, selling and supporting our products;
|
| |  | market acceptance of our products and the timing
	and extent of sales of our products; and            
|
| |  | the timing and extent of capital expenditures
	required to establish our international operations.    

We fund our operations partially through cash
generated from operations and partially through use of proceeds
from our public offerings of common stock. Our cash generated
from operations are dependent upon several factors, including
the timing and volume of customer orders and timing of cash
collections from customers. We believe that our current cash
balances will be sufficient to fund our operations for at least
the next 12 months.

The following is a summary of our future minimum
payments under contractual obligations as of December 31,
2001 (in thousands):

|                                             |       |                        |        |        |  |      |        |        |  |      |        |            |  |       |         |         |  |   |        |        |  |   |        |        |  |   |         |         | 
|-------------------------------------------- | ----- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ---------- |  | ----- | ------- | ------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                             |       |                       
|                                             |       | Payments due by period
|                                             |       |                       
|                                             |       | 2002                   |        | 2003   |  | 2004 |        | 2005   |  | 2006 |        | Thereafter |  | Total
|                                             |       |                        |        |        |  |      |        |        |  |      |        |            |  |      
|Convertible subordinated notes(1)            |       | $                      | 15,000 |        |  | $    | 15,000 |        |  | $    | 15,000 |            |  | $     | 311,875 |         |  | $ |       |        |  | $ |       |        |  | $ | 356,875 |        
|Capital lease obligations                    |       |                        | 227    |        |  |      | 51     |        |  |      |       |            |  |       |        |         |  |   |       |        |  |   |       |        |  |   | 278     |        
|Purchase commitments(2)                      |       |                        | 6,524  |        |  |      |       |        |  |      |       |            |  |       |        |         |  |   |       |        |  |   |       |        |  |   | 6,524   |        
|Operating leases                             |       |                        | 11,079 |        |  |      | 12,401 |        |  |      | 14,044 |            |  |       | 14,597  |         |  |   | 14,437 |        |  |   | 61,777 |        |  |   | 128,335 |        
|Contingent payment related to acquisition(3) |       |                        | 4,000  |        |  |      |       |        |  |      |       |            |  |       |        |         |  |   |       |        |  |   |       |        |  |   | 4,000   |        
|                                             |       |                        |        |        |  |      |        |        |  |      |        |            |  |       |         |         |  |   |        |        |  |   |        |        |  |   |         |        
|                                             | Total |                        | $      | 36,830 |  |      | $      | 27,452 |  |      | $      | 29,044     |  |       | $       | 326,472 |  |   | $      | 14,437 |  |   | $      | 61,777 |  |   | $       | 496,012 | 
|                                             |       |                        |        |        |  |      |        |        |  |      |        |            |  |       |         |         |  |   |        |        |  |   |        |        |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The terms of our $300.0 million convertible
	subordinated notes include interest at 5%, payable on a
	semi-annual basis on April 15 and October 15 of each
	year. The note is due on October 15, 2005, at which time we
	would be required to repay the principal if the notes are not
	converted.                                                        
|   
|(2) | Purchase commitments relate to amounts we are
	obligated to pay to our contract manufacturers and component
	suppliers for inventory.                                                                                                                                                                                                                     
|   
|(3) | We have one remaining payment based on completion
	and acceptance of a deliverable specified in the acquisition
	agreement related to the purchase of Finisar Corporations
	customer premises equipment business. This payment is expected
	to be paid in the first half of 2002 and is for up to
	$6.0 million, with a $4.0 million minimum requirement.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 141,
Business Combinations. This Statement requires all
business combinations to be accounted for using the purchase
method of accounting and redefines goodwill and other
intangibles that should be recognized separate from goodwill. We
adopted SFAS 141, which is effective for all business
combinations initiated after June 30, 2001.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This Statement
requires that goodwill and other intangibles with an indefinite
useful life not be amortized, but be tested for impairment at
least annually. SFAS 142 is effective for fiscal years
beginning after December 15, 2001; however, for new
business combinations that occur after June 30, 2001,
SFAS 142 is effective for those transactions. We adopted
SFAS 142 beginning in our fiscal year 2002. We have a
goodwill balance of $10.9 million at December 31, 2001, and
are currently evaluating the impact of the impairment analysis
under SFAS 142 on our financial statements and related
disclosures.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This
Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
This Statement applies to legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the
asset. As used in this Statement, a legal obligation results
from existing law, statute, ordinance, written or oral contract,
or by legal construction of a contract under the doctrine of
promissory estoppel. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect the
adoption of SFAS 143 to have a material impact on our
financial position or results of operations.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets

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and supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting
and reporting provisions of APB No. 30, Reporting the
Results of Operations for a Disposal of a Segment of a
Business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. We adopted SFAS 144
beginning in our fiscal year 2002. We do not expect the adoption
of SFAS 144 to have a material impact on our financial
position or results of operations.


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RISKS THAT COULD AFFECT FUTURE
RESULTS

The factors discussed below are cautionary
statements that identify important factors that could cause
actual results to differ materially from those anticipated in
the forward-looking statements in this Annual Report on
Form 10-K.

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

Through December 31, 2001, we incurred
cumulative losses of $380.8 million, and we expect to continue
to incur losses in the future. If we do not become profitable,
the value of our stock will decrease. We have large fixed
expenses associated with sales and marketing, research and
development, manufacturing, and general and administrative
activities. In February 2000, we began to ship our first
product, and our revenue to date has been limited. In order for
us to become profitable, we will need to generate and sustain
higher revenue while maintaining reasonable cost and expense
levels. A delay in generating or recognizing revenue could cause
significant variations in our operating results from quarter to
quarter and annually and could result in substantial operating
losses.

Our limited operating history, together with
current economic uncertainty, makes forecasting our future
revenue and operating results difficult.

We commenced business as an independent company
in December 1997. We announced general availability and
commenced sales of our first products in 2000. Consequently, we
have a limited history upon which we can rely in planning and
making the critical decisions that will affect our future
operating results. In addition, current economic uncertainty
adds to the difficulty of making decisions in the immediate
future regarding resource allocations for research and
development and marketing and sales over the next several
quarters. If our predictions about the best use of our resources
turn out to be inaccurate, we may not make the best use of our
resources and we may forego better opportunities.

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

For example, in the current quarter ending
March 31, 2002, we expect that, as a result of lower than
expected purchases by existing and potential customers, our
revenue will be substantially lower than anticipated. This will
have an adverse impact on our operating results.

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

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

If the proposed merger with CIENA is not
completed, our business and stock price may be adversely
affected.

On February 17, 2002, we entered into an
Agreement and Plan of Merger with CIENA Corporation. The merger
is subject to a number of contingencies, including obtaining
clearance from federal regulatory authorities under the
Hart-Scott-Rodino Antitrust Improvements Act, approval by a
majority vote of the stockholders of both companies and other
customary closing conditions. In addition, a class action
lawsuit has been filed against ONI Systems and our directors
that seeks an injunction to prevent the consummation of the
proposed merger. See Item 3  Legal
Proceedings. Therefore, there is a risk that the merger
will not be completed or that it will not be completed in the
expected time period. If the merger is not completed or the
completion is substantially delayed, we could be subject to a
number of risks that may adversely affect our business and stock
price, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we would not realize the benefits, including a
	potentially enhanced financial and competitive position, that we
	expect from being part of a combined company;                                                                                                                                                                                                                                                                              
|
| |  | the diversion of management attention from our
	day-to-day business and the unavoidable disruption to our
	relationships with customers and vendors as a result of efforts
	and uncertainties relating to the merger may detract from our
	ability to grow revenues and minimize costs, which, in turn may
	lead to a loss of market position that we could be unable to
	regain if the merger is not completed or is substantially
	delayed;

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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we could lose important personnel as a result of
	the departure of employees who decide to pursue other
	opportunities in light of the proposed merger;
|
| |  | we have and will continue to incur significant
	expenses related to the merger prior to its closing that may not
	be recovered;                        
|
| |  | depending on the circumstances, we may be
	obligated to pay CIENA a $36.7 million termination fee; and                                                 
|
| |  | we may be unable to respond effectively to
	competitive pressures, industry developments and future
	opportunities.                                    

In connection with the proposed merger, ONI
Systems and CIENA will file a joint proxy statement/prospectus
with the SEC. When the joint proxy statement/prospectus has been
declared effective by the SEC, it will be mailed to all holders
of ONI Systems common stock and will contain important
information about ONI Systems, CIENA, and the proposed merger,
risks relating to the merger and the combined company and
related matters. ONI Systems urges all of its stockholders to
read the definitive joint proxy statement/prospectus when it
becomes available.

We may not be able to achieve the benefits we
anticipate from the merger with CIENA.

If the merger closes, ONI Systems and
CIENAs businesses may not be successfully integrated, and
we may not achieve the benefits we envision from the merger.
Among the risks associated with the success of the merger, there
are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the risks that the benefits, including expected
	synergies and cost savings, sought to be achieved by the merger
	may not be realized;                                                                                                                                                                                                                                                    
|
| |  | the risks due to the uncertain current and
	prospective market environment for CIENAs and ONI
	Systems products;                                                                                                                                                                                                                                                                        
|
| |  | the risk that CIENA and ONI Systems will not be
	able to integrate their respective products, technology and
	geographically dispersed organizations and other challenges
	related to the integration of the companies;                                                                                                                                                                   
|
| |  | the risks that because the exchange ratio is
	fixed and will not be adjusted for changes in the market prices
	of either CIENA common stock or ONI Systems common stock, the
	per share value of the consideration to be received by ONI
	Systems stockholders might be less than the price per share
	implied by the exchange ratio immediately prior to the
	announcement of the merger;
|
| |  | the risk that the merger could adversely affect
	CIENAs or ONI Systems relationships with current and
	potential customers;                                                                                                                                                                                                                                                             
|
| |  | the possibility of management and employee
	disruption associated with the merger and integrating the
	operations of the companies, and the risk that, despite the
	efforts of the combined company, key personnel of ONI Systems
	might not continue with the combined company; and                                                                                                      
|
| |  | the difficulties associated with assimilating ONI
	Systems and CIENAs operations and personnel while
	maintaining uniform standards, controls, procedures and policies
	in the combined company.                                                                                                                                                                                        

The proposed merger could have an adverse
effect on our revenue and results of operations.

Prior to the closing of the proposed merger or
the termination of the Agreement and Plan of Merger, the
announcement of the proposed merger creates uncertainty about
ONI Systems future. As a result of this uncertainty,
customers may decide to delay, defer, or cancel purchases of our
products pending resolution of the proposed merger. If these
decisions represent a significant portion of our anticipated
revenue, our results of operations and quarterly revenues could
be substantially below the expectations of market analysts. This
could cause a reduction in the price of our common stock.

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

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

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

Any failure of our future products to achieve
market acceptance could harm our business and financial results.
The market in which we compete is characterized by more rapid
technological change than most, because it is newly emerging. As
a result, we expect there will be frequent new product
introductions, changes in customer requirements and evolving
industry standards. Therefore, we are currently developing new
products and features for existing products and have devoted and
expect to continue to devote significant engineering and
financial resources to the development and marketing of these
new products and features. Unexpected technical challenges could
prevent us from successfully developing new products and
features in a timely manner or at all. In addition, new products
and features could be more costly to develop and test than we
anticipate. Even if we are able to develop and introduce new
products and features, they may not achieve market acceptance if
they do not offer performance desired by customers or if
competitors develop products that customers prefer.

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

We expect that substantially all of our revenue
will depend on sales of our products to a small number of
customers and that our revenue will only grow if these customers
purchase substantial quantities of our products. As of
December 31, 2001, we had 30 customers. Most of these
customers are not contractually committed to purchase any
minimum quantities of our products. If these customers or future
customers do not purchase substantial quantities of our products
for any reason, our ability to succeed would be harmed. The
decision to purchase substantial quantities of our products will
depend, in part, on our customers and potential
customers desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will
introduce or expand commercial services utilizing our products
on a timely basis, if at all. Any delay in introducing, or
failure to introduce, these services would seriously harm our
revenue, results of operations and financial condition.

In addition, if we fail to attract new customers,
our growth will be limited. Specifically, we believe that our
long-term success depends significantly on decisions by the
regional bell operating companies in the United States and the
postal telephone and telegraph operators in Europe to purchase
substantial quantities of our products.

Our success depends on the success of the
businesses of our customers and potential customers, which we
have no ability to foresee or control.

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

Specifically, many of our customers and potential
customers are competitive local exchange carriers or other
emerging service providers which are attempting to build new
next generation networks. Building these networks requires
substantial capital and, recently, access to capital for these
service providers has been significantly restricted. As a
result, some emerging service providers are scaling back their
plans to expand their networks, filing for bankruptcy to
reorganize their businesses or going out of business. For
example, three of our customers have gone out of business or
filed for bankruptcy, and we believe that there is a risk that
additional customers and potential customers may go out of
business or file for bankruptcy in 2002. If any of our
significant customers go out of business or file for bankruptcy,
they may delay purchases of or no longer purchase our equipment,
which could harm our revenue, results of operations and
financial condition. In addition, a bankruptcy court may allow
for the resale of ONI Systems equipment by our customers and, as
a result, our existing or potential customers may purchase ONI
Systems equipment from our bankrupt customers rather than from
us. Resale of substantial amounts of equipment in this manner
could harm our revenue, results of operations and financial
condition.

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

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

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providing solutions for network and bandwidth
management in the metropolitan and regional markets. Many of
these companies have existing relationships with communication
service providers, making it more difficult for us to sell our
products to these potential customers.


Some of our current and potential competitors are
large public companies that have longer operating histories,
significantly greater financial, technical and marketing
resources, wider customer relationships and a broader product
line than we do. Consequently, these competitors are able to
devote greater resources to the development, promotion, sale and
support of their products. These large public companies are
better positioned than we are to acquire companies and new
technologies that may displace our products or make them
obsolete. Any of these acquisitions could give the acquiring
competitor a strategic advantage. In addition, a number of
start-up companies are rapidly developing competing technologies
in an attempt to market products to communication service
providers.

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

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

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

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

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



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lower margin sales, especially in Asia, resulting
	from customers making purchasing decisions based primarily on
	price rather than functionality;
|
| |  | longer accounts receivable payment cycles and
	increased efforts related to collecting accounts receivable;                                       
|
| |  | difficulties and costs of staffing and managing
	foreign operations; and                                                                          
|
| |  | certification requirements with which we may be
	unfamiliar.                                                                                      

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

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

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

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

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

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

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

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

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

We may need to rapidly expand our customer
service and support organization to support large deployments by
incumbent local exchange carriers.

In the event that we receive large orders for our
products from incumbent local exchange carriers in the United
States and Europe, which we believe is crucial for our long term
success, we will have to quickly increase our customer service
and support organization. Our products are complex and require
highly-trained customer service and support personnel. Hiring
and training customer service and support personnel can be
difficult in our industry due to the limited number of people
available with the necessary technical skills. If we are unable
to expand our customer service and support organization to meet
the needs of incumbent local exchange carriers, we may not be
able to sell our products to these customers.

If we lose key personnel, we may be unable to
manage our business.

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

If our products do not operate properly with
other equipment in our customers networks, we may suffer
product installations delays, order cancellations or increased
costs under warranty obligations, and our reputation could be
harmed.

Our products are designed to interoperate with
our customers existing networks, each of which has its own
specifications, is based on various industry standards and
contains multiple generations of products from many vendors. If
interoperability problems occur, they may cause us to incur
warranty, support and repair costs, divert the attention of our
engineering personnel from our product development efforts and
suffer customer relations problems whether or not these problems
are due to our products.

In order to sell our products to regional bell
operating companies, which we believe is crucial for our long
term success, Telcordia Technologies, Inc. must certify that
each of our products have successfully completed the OSMINE
process. This process ensures interoperability of network
solutions and operations support systems for these carriers. If
our products are not certified as having successfully completed
the OSMINE process or if certification is delayed, we will not
be able to sell our products to these carriers.

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

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

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

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

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

We regard substantial elements of our products
and services as proprietary and attempt to protect them by
relying on patent, trademark, service mark, copyright and trade
secret laws. We also rely on confidentiality procedures and
contractual provisions with our employees, consultants and
corporate partners. Any steps we take to protect our
intellectual property may be inadequate, time consuming and
expensive. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating
our intellectual property, which could harm our business.

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

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

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

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

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

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consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual
property litigation also could force us to do one or more of the
following:




| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | stop selling, incorporating or using our products
	that use the challenged intellectual property;                                                                                            
|
| |  | obtain from the owner of the infringed
	intellectual property right a license to sell or use the
	relevant technology, which license may not be available on
	reasonable terms, or at all; or
|
| |  | redesign those products that use the challenged
	technology.                                                                                                                                 

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

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

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

Acquisitions could disrupt our business and
harm our financial condition.

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



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | stock issuances that would reduce our current
	stockholders percentage ownership;                                                 
|
| |  | debt that will give rise to interest charges and
	may impose material restrictions on the manner in which we
	operate our business;
|
| |  | responsibility for unanticipated liabilities;                                                                                      
|
| |  | amortization expenses related to intangible
	assets;                                                                               
|
| |  | large and immediate write-offs;                                                                                                    
|
| |  | problems combining the purchased operations,
	technologies or products with ours;                                                  
|
| |  | unanticipated costs;                                                                                                               
|
| |  | diversion of managements attention from our
	core business;                                                                       
|
| |  | adverse effects on existing relationships with
	suppliers and customers;                                                           
|
| |  | risks associated with entering markets in which
	we have limited prior experience; and                                             
|
| |  | potential loss of key employees, particularly
	those of the acquired organizations.                                                

Our ability to conduct business could be
impacted by a variety of factors such as earthquakes, fires,
terrorist activities and other unpredictable events.

Unpredictable events that are beyond our control
could impact our ability to conduct our business operations. For
example, the aftermath of the September 11, 2001 terrorist
attacks may affect our business opportunities and our ability to
conduct our business. A decrease in business and consumer
confidence in the economy and the stability of financial
markets, resulting directly or indirectly from these attacks or
domestic and foreign responses to these attacks, could lead to
delays or reductions in capital expenditures by our customers
and potential customers. In addition, further disruptions of the
air transport system in the United States and abroad may
negatively impact our ability to deliver products to customers,
visit potential customers, provide support and service to our
existing customers and obtain components in a timely fashion.

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Insiders may be able to delay or prevent a
change in corporate control, which could prevent you from
realizing a premium over the market price of our common
stock.

As of December 31, 2001, our executive
officers, directors and entities affiliated with them
beneficially owned approximately 11.75% of our outstanding
common stock. These stockholders, if acting together, may be
able to influence matters requiring approval by our
stockholders, including the election of directors and the
approval of mergers or other business combination transactions.

This ability to exercise influence over all
matters requiring stockholder approval could prevent or
significantly delay another company or person from acquiring or
merging with us. As a result, offers to acquire ONI Systems that
represent a premium over the available market price of our
common stock may be withdrawn or otherwise fail to be realized.

In connection with our merger agreement with
CIENA, our executive officers and directors entered into voting
agreements under which they agreed to vote their shares of our
common stock, constituting approximately 11.5% of our
outstanding common stock as of February 17, 2002, in favor
of the merger with CIENA and against potential alternative
transactions.

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

We have engaged in transactions with related
parties, including loans to executive officers. The ability of
executive officers, directors and their affiliated entities to
exercise influence over all matters requiring stockholder
approval could enable insiders to approve transactions involving
each other that might otherwise not be approved and which could
reduce the market price of our common stock.

We have experienced and expect to continue to
experience volatility in our stock price which makes an
investment in our stock more risky and litigation more
likely.

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



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in financial estimates by securities
	analysts;                                                                             
|
| |  | changes in market valuations of communications
	and Internet infrastructure-related companies;                                      
|
| |  | announcements, by us or our competitors, of new
	products or of significant acquisitions, strategic partnerships
	or joint ventures;
|
| |  | volume fluctuations, which are particularly
	common among highly volatile securities of Internet-related
	companies; and            
|
| |  | volatility of stock markets, particularly the
	Nasdaq National Market on which our common stock is listed.                          

In addition, as a consequence of the announcement
of our proposed merger with CIENA, we anticipate that changes in
the price of our common stock will be substantially influenced
by changes in the price of CIENAs common stock.

Following periods of volatility in the market
price of a companys securities, securities class action
litigation has often been instituted against that company. We
are currently named in securities class action lawsuits. The
complaints in these lawsuits allege that the some of the
underwriters who participated in our initial public offering
received undisclosed fees or benefits and entered into
undisclosed arrangements to inflate the market price of our
common stock. See Item 3  Legal
Proceedings. The current lawsuits and any future
litigation, if instituted, could result in substantial costs and
a diversion of managements attention.

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

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

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

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



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | authorizing the issuance of preferred stock
	without stockholder approval;      
|
| |  | providing for a classified board of directors
	with staggered, three-year terms;
|
| |  | prohibiting cumulative voting in the election of
	directors;                    
|
| |  | prohibiting stockholders from calling
	stockholders meetings; and               
|
| |  | prohibiting stockholder actions by written
	consent.                            

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






ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK


Interest rate sensitivity

We do not currently use derivative financial
instruments for speculative trading or hedging purposes. We
maintain our cash equivalents in money market funds.

Short
and long-term investments

As of December 31, 2001, we hold our short
and long-term investments with two major financial institutions
and our exposure to market risk for changes in interest rates
relate primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio.
The primary objective of our investment activities is to
preserve principal while maximizing yields without significantly
increasing risk. This is accomplished by investing in widely
diversified investments, consisting only of investment grade
securities. We do hold investments in both fixed rate and
floating rate interest earning instruments, which carry a degree
of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than
expected if interest rates fall.

The table below presents our investments and
related weighted-average interest rates by remaining maturity at
December 31, 2001 (in thousands except for interest rates).

|                                      |                                |              |         |               |  |              |        |       |  |   |         |       |  |   |         |       | 
|------------------------------------- | ------------------------------ | ------------ | ------- | ------------- |  | ------------ | ------ | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                      |                                |              |         | Maturing      |  |              |        |      
|                                      |                                | Maturing in  |         | Between Three |  | Maturing in  |        |      
|                                      |                                | Three Months |         | Months and    |  | Greater Than |        |      
|                                      |                                | or Less      |         | One Year      |  | One Year     |        | Total
|                                      |                                |              |         |               |  |              |        |      
|Included in cash and cash equivalents |                                | $            | 338,511 |               |  | $            |       |       |  | $ |        |       |  | $ | 338,511 |      
|                                      | Weighted average interest rate |              |         | 3.74%         |  |              |        |      |  |   |         |      |  |   |         | 3.74% | 
|Included in short-term investments    |                                | $            |        |               |  | $            | 26,456 |       |  | $ |        |       |  | $ | 26,456  |      
|                                      | Weighted average interest rate |              |         |              |  |              |        | 5.06% |  |   |         |      |  |   |         | 5.06% | 
|Included in long-term investments     |                                | $            |        |               |  | $            |       |       |  | $ | 313,834 |       |  | $ | 313,834 |      
|                                      | Weighted average interest rate |              |         |              |  |              |        |      |  |   |         | 4.53% |  |   |         | 4.53% | 
|Total portfolio                       |                                | $            | 338,511 |               |  | $            | 26,456 |       |  | $ | 313,834 |       |  | $ | 678,801 |      
|                                      | Weighted average interest rate |              |         | 3.74%         |  |              |        | 5.06% |  |   |         | 4.53% |  |   |         | 4.15% | 

Other
investments

Other assets include equity investments in two
privately-held companies. These investments were accounted for
using the cost method. During the year ended December 31,
2001, we determined that one of these investments had incurred a
decline in value that was other-than-temporary, and we recorded
an impairment charge of $4.0 million to reduce this equity
investment to an estimated recoverable value. This impairment
charge is included in other income (expense), net for the year
ended December 31, 2001.

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Subordinated
convertible notes

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

Exchange rate sensitivity

Currently, the majority of our sales and expenses
are denominated in United States dollars. The expenses related
to international subsidiaries whose functional currency is the
local currency have not been significant. Therefore, we have had
no material exposure to foreign currency rate fluctuation and
have not engaged in any foreign exchange hedging activities to
date. With the expansion of our international sales and service
organization we currently have an insignificant level of
transactions denominated in other than the United States dollar,
and we expect to conduct a more significant number of
transactions in foreign currencies in the future, so we may
engage in foreign exchange hedging activities at that time. We
develop products in the United States and market our products in
the United States, Europe and Asia Pacific. As a result, our
financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions
in foreign markets. Since the majority of our sales are
currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets.

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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

ONI SYSTEMS CORP.

Annual Financial Statements

The following consolidated financial statements,
and the related notes thereto of ONI, and the Report of
KPMG LLP, independent auditors, are filed as a part of this
Annual Report on Form 10-K.

|                                                                                             |  |      |    | 
|-------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                             |  | Page
|                                                                                             |  |     
|Report of KPMG LLP, independent auditors                                                     |  |      | 42 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                |  |      | 43 | 
|Consolidated Statements of Operations for the
	three years ended December 31, 2001           |  |      | 44 | 
|Consolidated Statements of Cash Flows for the
	three years ended December 31, 2001           |  |      | 45 | 
|Consolidated Statements of Stockholders
	Equity for the three years ended December 31, 2001 |  |      | 46 | 
|Notes to Consolidated Financial Statements                                                   |  |      | 49 | 

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REPORT OF KPMG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders of ONI
Systems Corp:

We have audited the accompanying consolidated
balance sheets of ONI Systems Corp. as of December 31, 2001
and 2000, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of ONI Systems Corp. as of
December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United
States of America.



| |         
| | --------
| | KPMG LLP



| |                            
| | ---------------------------
| | Mountain View, California  
| | January 31, 2002,          
| | except Note 17, which is as
| | of February 20, 2002       

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ONI SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |          |           | 
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------- |  | ------- | -------- | --------- | 
|                                                |                                                                                                                                                                                                                  |                                           
|                                                |                                                                                                                                                                                                                  | December 31,                              
|                                                |                                                                                                                                                                                                                  |                                           
|                                                |                                                                                                                                                                                                                  | 2001                                       |         | 2000    
|                                                |                                                                                                                                                                                                                  |                                            |         |         
|ASSETS                                          |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|Current assets:                                 |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                | Cash and cash equivalents                                                                                                                                                                                        |                                            | $       | 338,511  |         |  | $       | 852,360  |          
|                                                | Short-term investments                                                                                                                                                                                           |                                            |         | 26,457   |         |  |         |         |          
|                                                | Accounts receivable, net of allowance for
	doubtful accounts of $5,745 and $0 at December 31, 2001 and
	2000, respectively                                                                                       |                                            |         | 43,945   |         |  |         | 24,309   |          
|                                                | Inventory                                                                                                                                                                                                        |                                            |         | 53,836   |         |  |         | 70,626   |          
|                                                | Prepaid expenses and other current assets                                                                                                                                                                        |                                            |         | 11,114   |         |  |         | 7,950    |          
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total current assets                       |         |          | 473,863 |  |         |          | 955,245   | 
|Property and equipment, net                     |                                                                                                                                                                                                                  |                                            | 97,286  |          |         |  | 41,581  |         
|Long-term investments                           |                                                                                                                                                                                                                  |                                            | 313,834 |          |         |  |        |         
|Other assets                                    |                                                                                                                                                                                                                  |                                            | 7,907   |          |         |  | 16,829  |         
|Goodwill and intangibles, net                   |                                                                                                                                                                                                                  |                                            | 23,465  |          |         |  | 1,813   |         
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total assets                               |         | $        | 916,355 |  |         | $        | 1,015,468 | 
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                               
|LIABILITIES AND STOCKHOLDERS
	EQUITY           |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|Current liabilities:                            |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                | Accounts payable                                                                                                                                                                                                 |                                            | $       | 8,953    |         |  | $       | 17,518   |          
|                                                | Accrued liabilities                                                                                                                                                                                              |                                            |         | 44,076   |         |  |         | 18,492   |          
|                                                | Deferred revenue                                                                                                                                                                                                 |                                            |         | 5,281    |         |  |         | 1,466    |          
|                                                | Current portion of capital lease obligations                                                                                                                                                                     |                                            |         | 217      |         |  |         | 161      |          
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total current liabilities                  |         |          | 58,527  |  |         |          | 37,637    | 
|Capital lease obligations, less current portion |                                                                                                                                                                                                                  |                                            | 48      |          |         |  | 187     |         
|Convertible subordinated notes                  |                                                                                                                                                                                                                  |                                            | 300,000 |          |         |  | 300,000 |         
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total liabilities                          |         |          | 358,575 |  |         |          | 337,824   | 
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|Commitments and contingencies                   |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|Stockholders equity:                           |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                | Preferred stock, $0.0001 par value per share,
	10,000,000 shares authorized; no shares issued and outstanding
	at December 31, 2001 and 2000, respectively                                                       |                                            |         |         |         |  |         |         |          
|                                                | Common stock, $0.0001 par value per share,
	700,000,000 shares authorized at December 31, 2001 and
	2000; 140,392,985 and 133,089,074 shares issued and outstanding
	at December 31, 2001 and 2000, respectively |                                            |         | 14       |         |  |         | 13       |          
|                                                | Additional paid-in capital                                                                                                                                                                                       |                                            |         | 958,773  |         |  |         | 933,670  |          
|                                                | Notes receivable from stockholders                                                                                                                                                                               |                                            |         | (4,124   | )       |  |         | (7,545   | )        
|                                                | Deferred stock compensation                                                                                                                                                                                      |                                            |         | (17,526  | )       |  |         | (55,984  | )        
|                                                | Accumulated other comprehensive income                                                                                                                                                                           |                                            |         | 1,419    |         |  |         |         |          
|                                                | Accumulated deficit                                                                                                                                                                                              |                                            |         | (380,776 | )       |  |         | (192,510 | )        
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total stockholders equity                 |         |          | 557,780 |  |         |          | 677,644   | 
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         
|                                                |                                                                                                                                                                                                                  | Total liabilities and stockholders equity |         | $        | 916,355 |  |         | $        | 1,015,468 | 
|                                                |                                                                                                                                                                                                                  |                                            |         |          |         |  |         |         

See accompanying notes to consolidated financial
statements.

43



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##### Table of Contents



ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except share and per share
data)


|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |        |         |  
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------ | ----------- | ------- | -------- | ---- | ----------- | ------ | -------- | - | ---------- | ------ | ------- | -
|                                                                                            |                                                                                    |                         
|                                                                                            |                                                                                    | Years ended December 31,
|                                                                                            |                                                                                    |                         
|                                                                                            |                                                                                    | 2001                     |             | 2000    |          | 1999
|                                                                                            |                                                                                    |                          |             |         |          |     
|Revenue                                                                                     |                                                                                    | $                        | 195,680     |         |          | $    | 59,662      |        |          | $ | 3,034      |       
|Cost of goods sold, excluding amortization of
	deferred stock compensation:                 |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            | Product sales                                                                      |                          |             | 121,281 |          |      |             | 39,980 |          |   |            | 1,032  |        
|                                                                                            | Inventory related charges                                                          |                          |             | 45,335  |          |      |             |       |          |   |            |       |        
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            | Gross profit                                                                       |                          |             | 29,064  |          |      |             | 19,682 |          |   |            | 2,002  |        
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Operating expenses:                                                                         |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            | Research and development, excluding amortization
	of deferred stock compensation   |                          |             | 78,355  |          |      |             | 53,654 |          |   |            | 24,858 |        
|                                                                                            | Sales and marketing, excluding amortization of
	deferred stock compensation        |                          |             | 51,322  |          |      |             | 25,304 |          |   |            | 4,557  |        
|                                                                                            | General and administrative, excluding
	amortization of deferred stock compensation |                          |             | 37,388  |          |      |             | 16,385 |          |   |            | 3,455  |        
|                                                                                            | Restructuring and impairment charges                                               |                          |             | 17,350  |          |      |             |       |          |   |            |       |        
|                                                                                            | Amortization of deferred stock compensation*                                       |                          |             | 27,009  |          |      |             | 66,413 |          |   |            | 11,422 |        
|                                                                                            | Common stock warrant expense                                                       |                          |             |        |          |      |             | 4,545  |          |   |            | 2,891  |        
|                                                                                            | Amortization of goodwill and intangibles                                           |                          |             | 9,067   |          |      |             | 3,594  |          |   |            | 1,842  |        
|                                                                                            | In-process research and development                                                |                          |             | 8,240   |          |      |             |       |          |   |            | 170    |        
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            |                                                                                    | Total operating expenses |             |         | 228,731  |      |             |        | 169,895  |   |            |        | 49,195  |  
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            |                                                                                    | Operating loss           |             |         | (199,667 | )    |             |        | (150,213 | ) |            |        | (47,193 | )
|Interest income                                                                             |                                                                                    |                          | 33,697      |         |          |      | 16,921      |        |          |   | 865        |       
|Interest expense                                                                            |                                                                                    |                          | (15,025     | )       |          |      | (3,163      | )      |          |   | (153       | )     
|Other expense, net                                                                          |                                                                                    |                          | (6,859      | )       |          |      | (425        | )      |          |   | (89        | )     
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Loss before income taxes                                                                    |                                                                                    |                          | (187,854    | )       |          |      | (136,880    | )      |          |   | (46,570    | )     
|Income taxes                                                                                |                                                                                    |                          | 412         |         |          |      | 7           |        |          |   | 2          |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Net loss                                                                                    |                                                                                    |                          | (188,266    | )       |          |      | (136,887    | )      |          |   | (46,572    | )     
|Beneficial conversion of preferred stock                                                    |                                                                                    |                          |            |         |          |      | 4,242       |        |          |   |           |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Net loss attributable to common stockholders                                                |                                                                                    | $                        | (188,266    | )       |          | $    | (141,129    | )      |          | $ | (46,572    | )     
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Basic and diluted net loss per share                                                        |                                                                                    | $                        | (1.40       | )       |          | $    | (1.22       | )      |          | $ | (2.58      | )     
|Weighted-average shares outstanding used in
	computing basic and diluted net loss per share |                                                                                    |                          | 134,756,048 |         |          |      | 115,587,139 |        |          |   | 18,043,188 |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Comprehensive loss:                                                                         |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Net loss                                                                                    |                                                                                    | $                        | (188,266    | )       |          | $    | (136,887    | )      |          | $ | (46,572    | )     
|Unrealized gain on investments                                                              |                                                                                    |                          | 1,504       |         |          |      |            |        |          |   |           |       
|Foreign currency translation adjustment                                                     |                                                                                    |                          | (85         | )       |          |      |            |        |          |   |           |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Other comprehensive income                                                                  |                                                                                    |                          | 1,419       |         |          |      |            |        |          |   |           |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|Comprehensive loss                                                                          |                                                                                    | $                        | (186,847    | )       |          | $    | (136,887    | )      |          | $ | (46,572    | )     
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                           
|*Amortization of deferred stock compensation:                                               |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            | Cost of goods sold                                                                 |                          | $           | 4,141   |          |      | $           | 8,133  |          |   | $          |       |        
|                                                                                            | Research and development                                                           |                          |             | 11,205  |          |      |             | 32,623 |          |   |            | 8,142  |        
|                                                                                            | Sales and marketing                                                                |                          |             | 7,937   |          |      |             | 15,468 |          |   |            | 1,583  |        
|                                                                                            | General and administrative                                                         |                          |             | 3,726   |          |      |             | 10,189 |          |   |            | 1,697  |        
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       
|                                                                                            |                                                                                    | $                        | 27,009      |         |          | $    | 66,413      |        |          | $ | 11,422     |       
|                                                                                            |                                                                                    |                          |             |         |          |      |             |        |          |   |            |       

See accompanying notes to consolidated financial
statements.

44



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##### Table of Contents



ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |         |        |         |  
|------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------------------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | ------ | ------- | ------ | ------- | -
|                                                  |                                                                                     |                                                            
|                                                  |                                                                                     | Years ended December 31,                                   
|                                                  |                                                                                     |                                                            
|                                                  |                                                                                     | 2001                                                        |                                                       | 2000     |         | 1999    
|                                                  |                                                                                     |                                                             |                                                       |          |         |         
|Cash flows from operating activities:             |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Net loss                                                                            |                                                             | $                                                     | (188,266 | )       |          | $       | (136,887 | )       |          | $      | (46,572 | )     
|                                                  | Adjustments to reconcile net loss to net cash
	used in operating activities:        |                                                             |                                                       |          |         |          |         |          |         |          |        |         |       
|                                                  |                                                                                     | Depreciation and amortization                               |                                                       |          | 38,639  |          |         |          | 13,948  |          |        |         | 2,806  |        
|                                                  |                                                                                     | Amortization of deferred stock compensation                 |                                                       |          | 27,009  |          |         |          | 66,413  |          |        |         | 11,422 |        
|                                                  |                                                                                     | Restructuring, impairment and related charges
	(see note 2) |                                                       |          | 74,519  |          |         |          |        |          |        |         |       |        
|                                                  |                                                                                     | Purchased in-process research and development               |                                                       |          | 8,240   |          |         |          |        |          |        |         | 170    |        
|                                                  |                                                                                     | Amortization of debt financing costs                        |                                                       |          | 1,896   |          |         |          | 392     |          |        |         | 54     |        
|                                                  |                                                                                     | Charitable contribution                                     |                                                       |          | 1,000   |          |         |          |        |          |        |         |       |        
|                                                  |                                                                                     | Loss on disposal of property and equipment                  |                                                       |          |        |          |         |          | 112     |          |        |         | 164    |        
|                                                  |                                                                                     | Common stock warrant expense                                |                                                       |          |        |          |         |          | 4,545   |          |        |         | 2,891  |        
|                                                  |                                                                                     | Stock-based compensation for non-employees                  |                                                       |          |        |          |         |          | 326     |          |        |         | 170    |        
|                                                  | Changes in operating assets and liabilities:                                        |                                                             |                                                       |          |         |          |         |          |         |          |        |         |       
|                                                  |                                                                                     | Accounts receivable                                         |                                                       |          | (26,038 | )        |         |          | (24,146 | )        |        |         | 1,570  |        
|                                                  |                                                                                     | Inventory                                                   |                                                       |          | (20,981 | )        |         |          | (60,977 | )        |        |         | (9,649 | )      
|                                                  |                                                                                     | Prepaid expenses and other assets                           |                                                       |          | (4,357  | )        |         |          | (9,755  | )        |        |         | (534   | )      
|                                                  |                                                                                     | Accounts payable                                            |                                                       |          | (8,565  | )        |         |          | 10,616  |          |        |         | 2,393  |        
|                                                  |                                                                                     | Other accrued liabilities                                   |                                                       |          | 9,375   |          |         |          | 16,712  |          |        |         | 5,528  |        
|                                                  |                                                                                     | Deferred revenue                                            |                                                       |          | 3,815   |          |         |          | 1,466   |          |        |         |       |        
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  |                                                                                     |                                                             | Net cash used in operating activities                 |          |         | (83,714  | )       |          |         | (117,235 | )      |         |        | (29,587 | )
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|Cash flows used in investing activities:          |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Purchase of property and equipment and intangibles                                  |                                                             |                                                       | (90,204  | )       |          |         | (47,314  | )       |          |        | (4,859  | )     
|                                                  | Proceeds from disposal of property and equipment                                    |                                                             |                                                       |         |         |          |         | 173      |         |          |        |        |       
|                                                  | Purchases of marketable securities                                                  |                                                             |                                                       | (483,886 | )       |          |         |         |         |          |        |        |       
|                                                  | Proceeds from sales and maturities of marketable
	securities                        |                                                             |                                                       | 145,099  |         |          |         |         |         |          |        |        |       
|                                                  | Purchases of privately-held investments                                             |                                                             |                                                       |         |         |          |         | (5,150   | )       |          |        |        |       
|                                                  | Acquisitions of businesses, net of cash acquired                                    |                                                             |                                                       | (17,963  | )       |          |         |         |         |          |        | (1,744  | )     
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  |                                                                                     |                                                             | Net cash used in investing activities                 |          |         | (446,954 | )       |          |         | (52,291  | )      |         |        | (6,603  | )
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|Cash flows from financing activities:             |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Proceeds from issuance of convertible
	subordinated notes, net of issuance costs    |                                                             |                                                       |         |         |          |         | 290,529  |         |          |        |        |       
|                                                  | Payments under capital lease obligations                                            |                                                             |                                                       | (513     | )       |          |         | (185     | )       |          |        | (52     | )     
|                                                  | Proceeds from issuances of common stock, net of
	issuance costs                     |                                                             |                                                       | 14,165   |         |          |         | 628,912  |         |          |        | 272     |       
|                                                  | Proceeds from issuance of preferred stock, net of
	issuance costs                   |                                                             |                                                       |         |         |          |         | 21,960   |         |          |        | 96,889  |       
|                                                  | Repurchases of unvested stock                                                       |                                                             |                                                       | (169     | )       |          |         |         |         |          |        |        |       
|                                                  | Payment on stockholder notes                                                        |                                                             |                                                       | 3,421    |         |          |         | 647      |         |          |        | 12      |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  |                                                                                     |                                                             | Net cash provided by financing activities             |          |         | 16,904   |         |          |         | 941,863  |        |         |        | 97,121  |  
|                                                  | Effect of exchange rate changes on cash and cash
	equivalents                       |                                                             |                                                       | (85      | )       |          |         |         |         |          |        |        |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  |                                                                                     |                                                             | Net increase (decrease) in cash and cash
	equivalents |          |         | (513,849 | )       |          |         | 772,337  |        |         |        | 60,931  |  
|Cash and cash equivalents at beginning of year    |                                                                                     |                                                             | 852,360                                               |          |         |          | 80,023  |          |         |          | 19,092 |        
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|Cash and cash equivalents at end of year          |                                                                                     | $                                                           | 338,511                                               |          |         | $        | 852,360 |          |         | $        | 80,023 |        
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|Supplemental disclosures of cash flow information |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Interest paid during year                                                           |                                                             | $                                                     | 14,525   |         |          | $       | 37       |         |          | $      | 16      |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Taxes paid during year                                                              |                                                             | $                                                     | 227      |         |          | $       | 7        |         |          | $      | 2       |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|Noncash investing and financing activities:       |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Equipment recorded under capital leases                                             |                                                             | $                                                     | 430      |         |          | $       |         |         |          | $      | 467     |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Issuance (cancellation) of common stock for
	future services, net                   |                                                             | $                                                     | (3,077   | )       |          | $       | 86,865   |         |          | $      | 41,730  |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Issuance of common stock in connection with
	business acquisitions                  |                                                             | $                                                     | 21,340   |         |          | $       |         |         |          | $      | 5,875   |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Issuance of common stock upon exercise of options
	in exchange for notes receivable |                                                             | $                                                     |         |         |          | $       | 4,652    |         |          | $      | 3,713   |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Issuance of preferred stock in exchange for
	leased facilities                      |                                                             | $                                                     |         |         |          | $       |         |         |          | $      | 182     |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        
|                                                  | Issuance of warrants in connection with debt
	financing                             |                                                             | $                                                     |         |         |          | $       |         |         |          | $      | 204     |       
|                                                  |                                                                                     |                                                             |                                                       |          |         |          |         |          |         |          |        |        

See accompanying notes to consolidated financial
statements.

45



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##### Table of Contents



ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

Years ended December 31, 2001, 2000 and
1999


(In thousands, except share data)


|                                                                        |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |         |  |  |   |        |   |  |   |      |  
|----------------------------------------------------------------------- |  | --------------- | ---------- | ------------ |  | ---------- | - | ---------- |  | ---------- | ---------- | ------------ |  | ----------- | - |  |  | - | ------- |  |  | - | ------ | - |  | - | ---- | -
|                                                                        |  |                 |            |              |  |            |   |            |  |            |            |             
|                                                                        |  | Convertible     |            |              |  |            |   | Notes      |  | Services  
|                                                                        |  | preferred stock |            | Common stock |  | Additional |   | receivable |  | receivable
|                                                                        |  |                 |            |              |  | paid-in    |   | from       |  | from      
|                                                                        |  | Shares          |            | Amount       |  | Shares     |   | Amount     |  | capital    |            | stockholders |  | stockholder
|                                                                        |  |                 |            |              |  |            |   |            |  |            |            |              |  |            
|Balances as of December 31,
	1998                                       |  |                 | 50,580,190 |              |  | $          | 5 |            |  |            | 18,001,248 |              |  | $           | 2 |  |  | $ | 34,955  |  |  | $ | (123   | ) |  | $ |     |  
|Exercise of options for cash                                            |  |                 |           |              |  |            |  |            |  |            | 3,023,220  |              |  |             |  |  |  |   | 272     |  |  |   |       |   |  |   |     |  
|Issuance of Series E preferred stock, net of
	$37 in issuance costs     |  |                 | 8,001,824  |              |  |            | 1 |            |  |            |           |              |  |             |  |  |  |   | 7,263   |  |  |   |       |   |  |   |     |  
|Issuance of Series E preferred stock in
	exchange for services          |  |                 | 200,000    |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   | 182     |  |  |   |       |   |  |   | (182 | )
|Performance of services                                                 |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   |        |  |  |   |       |   |  |   | 97   |  
|Issuance of common stock for acquisition of
	Object-Mart                |  |                 |           |              |  |            |  |            |  |            | 4,569,276  |              |  |             |  |  |  |   | 5,874   |  |  |   |       |   |  |   |     |  
|Issuance of Series F preferred stock, net of
	$21 in issuance costs     |  |                 | 8,249,468  |              |  |            | 1 |            |  |            |           |              |  |             |  |  |  |   | 14,969  |  |  |   |       |   |  |   |     |  
|Exercise of options for notes receivable                                |  |                 |           |              |  |            |  |            |  |            | 5,685,846  |              |  |             | 1 |  |  |   | 3,712   |  |  |   | (3,713 | ) |  |   |     |  
|Payment on stockholder notes                                            |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   |        |  |  |   | 12     |   |  |   |     |  
|Issuance of warrants in connection with debt
	financing                 |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   | 204     |  |  |   |       |   |  |   |     |  
|Issuance of Series G preferred stock, net of
	$45 in issuance costs     |  |                 | 11,824,418 |              |  |            | 1 |            |  |            |           |              |  |             |  |  |  |   | 74,655  |  |  |   |       |   |  |   |     |  
|Issuance of warrants in connection with purchase
	and license agreement |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   | 2,891   |  |  |   |       |   |  |   |     |  
|Stock-based compensation to non- employees                              |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   | 73      |  |  |   |       |   |  |   |     |  
|Deferred stock compensation                                             |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   | 41,731  |  |  |   |       |   |  |   |     |  
|Amortization of deferred stock compensation                             |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   |        |  |  |   |       |   |  |   |     |  
|Net loss                                                                |  |                 |           |              |  |            |  |            |  |            |           |              |  |             |  |  |  |   |        |  |  |   |       |   |  |   |     |  
|                                                                        |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |         |  |  |   |        |   |  |   |      |  
|Balances as of December 31,
	1999                                       |  |                 | 78,855,900 |              |  | $          | 8 |            |  |            | 31,279,590 |              |  | $           | 3 |  |  | $ | 186,781 |  |  | $ | (3,824 | ) |  | $ | (85  | )
|                                                                        |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |         |  |  |   |        |   |  |   |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                        |  |              |         |               |  |             |   |               |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ | ------- | ------------- |  | ----------- | - | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                        |  |              |         | Accumulated   |  |             |   |              
|                                                                        |  | Deferred     |         | other         |  |             |   | Total        
|                                                                        |  | stock        |         | comprehensive |  | Accumulated |   | stockholders
|                                                                        |  | compensation |         | income        |  | deficit     |   | equity       
|                                                                        |  |              |         |               |  |             |   |              
|Balances as of December 31,
	1998                                       |  | $            | (5,223  | )             |  | $           |  |               |  | $ | (9,051  | ) |  | $ | 20,565  |  
|Exercise of options for cash                                            |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 272     |  
|Issuance of Series E preferred stock, net of
	$37 in issuance costs     |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 7,264   |  
|Issuance of Series E preferred stock in
	exchange for services          |  |              |        |               |  |             |  |               |  |   |        |   |  |   |        |  
|Performance of services                                                 |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 97      |  
|Issuance of common stock for acquisition of
	Object-Mart                |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 5,874   |  
|Issuance of Series F preferred stock, net of
	$21 in issuance costs     |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 14,970  |  
|Exercise of options for notes receivable                                |  |              |        |               |  |             |  |               |  |   |        |   |  |   |        |  
|Payment on stockholder notes                                            |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 12      |  
|Issuance of warrants in connection with debt
	financing                 |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 204     |  
|Issuance of Series G preferred stock, net of
	$45 in issuance costs     |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 74,656  |  
|Issuance of warrants in connection with purchase
	and license agreement |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 2,891   |  
|Stock-based compensation to non- employees                              |  |              |        |               |  |             |  |               |  |   |        |   |  |   | 73      |  
|Deferred stock compensation                                             |  |              | (41,731 | )             |  |             |  |               |  |   |        |   |  |   |        |  
|Amortization of deferred stock compensation                             |  |              | 11,422  |               |  |             |  |               |  |   |        |   |  |   | 11,422  |  
|Net loss                                                                |  |              |        |               |  |             |  |               |  |   | (46,572 | ) |  |   | (46,572 | )
|                                                                        |  |              |         |               |  |             |   |               |  |   |         |   |  |   |         |  
|Balances as of December 31,
	1999                                       |  | $            | (35,532 | )             |  | $           |  |               |  | $ | (55,623 | ) |  | $ | 91,728  |  
|                                                                        |  |              |         |               |  |             |   |               |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

46



---



##### Table of Contents



ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

Years ended December 31, 2001, 2000 and
1999


(In thousands, except share data)


|                                                                        |  |                 |             |              |  |            |    |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |    | 
|----------------------------------------------------------------------- |  | --------------- | ----------- | ------------ |  | ---------- | -- | ---------- |  | ---------- | ----------- | ------------ |  | ----------- | -- |  |  | - | ------- | - |  | - | ------ | - |  | - | -- | 
|                                                                        |  |                 |             |              |  |            |    |            |  |            |             |             
|                                                                        |  | Convertible     |             |              |  |            |    | Notes      |  | Services  
|                                                                        |  | preferred stock |             | Common stock |  | Additional |    | receivable |  | receivable
|                                                                        |  |                 |             |              |  | paid-in    |    | from       |  | from      
|                                                                        |  | Shares          |             | Amount       |  | Shares     |    | Amount     |  | capital    |             | stockholders |  | stockholder
|                                                                        |  |                 |             |              |  |            |    |            |  |            |             |              |  |            
|Exercise of options for cash                                            |  |                 |            |              |  | $          |   |            |  |            | 4,106,514   |              |  | $           |   |  |  | $ | 1,286   |   |  | $ |       |   |  | $ |   | 
|Exercise of options for notes receivable                                |  |                 |            |              |  |            |   |            |  |            | 2,675,860   |              |  |             |   |  |  |   | 4,652   |   |  |   | (4,652 | ) |  |   |   | 
|Payment on stockholder notes                                            |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   | 647    |   |  |   |   | 
|Issuance of common shares in exchange for services                      |  |                 |            |              |  |            |   |            |  |            | 18,002      |              |  |             |   |  |  |   | 57      |   |  |   |       |   |  |   |   | 
|Exercise of common stock warrants                                       |  |                 |            |              |  |            |   |            |  |            | 507,483     |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |   | 
|Issuance of Series G shares, net of $8 in
	issuance costs               |  |                 | 310,000     |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 4,341   |   |  |   |       |   |  |   |   | 
|Issuance of Series G shares in exchange for
	services                   |  |                 | 29,000      |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 406     |   |  |   |       |   |  |   |   | 
|Amortization of cost of preferred stock issued
	for leased facility     |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   | 85 | 
|Issuance of warrants in connection with purchase
	and license agreement |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 3,000   |   |  |   |       |   |  |   |   | 
|Issuance of warrants in exchange for services                           |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 1,545   |   |  |   |       |   |  |   |   | 
|Deferred stock compensation                                             |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 84,262  |   |  |   |       |   |  |   |   | 
|Amortization of deferred stock compensation                             |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |   | 
|Issuance of Series H shares                                             |  |                 | 1,333,333   |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   | 20,000  |   |  |   |       |   |  |   |   | 
|Repurchase of common stock                                              |  |                 |            |              |  |            |   |            |  |            | (1,069,615  | )            |  |             |   |  |  |   | (284    | ) |  |   | 284    |   |  |   |   | 
|Issuance of common stock, net of issuance costs
	of $37,049             |  |                 |            |              |  |            |   |            |  |            | 15,406,643  |              |  |             | 2  |  |  |   | 627,624 |   |  |   |       |   |  |   |   | 
|Conversion of preferred stock to common stock                           |  |                 | (80,528,233 | )            |  |            | (8 | )          |  |            | 80,164,597  |              |  |             | 8  |  |  |   |        |   |  |   |       |   |  |   |   | 
|Net loss                                                                |  |                 |            |              |  |            |   |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |   | 
|                                                                        |  |                 |             |              |  |            |    |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |    | 
|Balances as of December 31,
	2000                                       |  |                 |            |              |  | $          |   |            |  |            | 133,089,074 |              |  | $           | 13 |  |  | $ | 933,670 |   |  | $ | (7,545 | ) |  | $ |   | 
|                                                                        |  |                 |             |              |  |            |    |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |    | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                        |  |              |         |               |  |             |   |               |  |   |          |   |  |   |          |  
|----------------------------------------------------------------------- |  | ------------ | ------- | ------------- |  | ----------- | - | ------------- |  | - | -------- | - |  | - | -------- | -
|                                                                        |  |              |         | Accumulated   |  |             |   |              
|                                                                        |  | Deferred     |         | other         |  |             |   | Total        
|                                                                        |  | stock        |         | comprehensive |  | Accumulated |   | stockholders
|                                                                        |  | compensation |         | income        |  | deficit     |   | equity       
|                                                                        |  |              |         |               |  |             |   |              
|Exercise of options for cash                                            |  | $            |        |               |  | $           |  |               |  | $ |         |   |  | $ | 1,286    |  
|Exercise of options for notes receivable                                |  |              |        |               |  |             |  |               |  |   |         |   |  |   |         |  
|Payment on stockholder notes                                            |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 647      |  
|Issuance of common shares in exchange for services                      |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 57       |  
|Exercise of common stock warrants                                       |  |              |        |               |  |             |  |               |  |   |         |   |  |   |         |  
|Issuance of Series G shares, net of $8 in
	issuance costs               |  |              | (2,381  | )             |  |             |  |               |  |   |         |   |  |   | 1,960    |  
|Issuance of Series G shares in exchange for
	services                   |  |              | (222    | )             |  |             |  |               |  |   |         |   |  |   | 184      |  
|Amortization of cost of preferred stock issued
	for leased facility     |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 85       |  
|Issuance of warrants in connection with purchase
	and license agreement |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 3,000    |  
|Issuance of warrants in exchange for services                           |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 1,545    |  
|Deferred stock compensation                                             |  |              | (84,262 | )             |  |             |  |               |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                             |  |              | 66,413  |               |  |             |  |               |  |   |         |   |  |   | 66,413   |  
|Issuance of Series H shares                                             |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 20,000   |  
|Repurchase of common stock                                              |  |              |        |               |  |             |  |               |  |   |         |   |  |   |         |  
|Issuance of common stock, net of issuance costs
	of $37,049             |  |              |        |               |  |             |  |               |  |   |         |   |  |   | 627,626  |  
|Conversion of preferred stock to common stock                           |  |              |        |               |  |             |  |               |  |   |         |   |  |   |         |  
|Net loss                                                                |  |              |        |               |  |             |  |               |  |   | (136,887 | ) |  |   | (136,887 | )
|                                                                        |  |              |         |               |  |             |   |               |  |   |          |   |  |   |          |  
|Balances as of December 31,
	2000                                       |  | $            | (55,984 | )             |  | $           |  |               |  | $ | (192,510 | ) |  | $ | 677,644  |  
|                                                                        |  |              |         |               |  |             |   |               |  |   |          |   |  |   |          |  

See accompanying notes to consolidated financial
statements.

47



---



##### Table of Contents



ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY  (Continued)

Years ended December 31, 2001, 2000 and
1999


(In thousands, except share data)


|                                                                                      |  |                 |   |              |  |            |   |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |   | 
|------------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | ---------- | - | ---------- |  | ---------- | ----------- | ------------ |  | ----------- | -- |  |  | - | ------- | - |  | - | ------ | - |  | - | - | 
|                                                                                      |  |                 |   |              |  |            |   |            |  |            |             |             
|                                                                                      |  | Convertible     |   |              |  |            |   | Notes      |  | Services  
|                                                                                      |  | preferred stock |   | Common stock |  | Additional |   | receivable |  | receivable
|                                                                                      |  |                 |   |              |  | paid-in    |   | from       |  | from      
|                                                                                      |  | Shares          |   | Amount       |  | Shares     |   | Amount     |  | capital    |             | stockholders |  | stockholder
|                                                                                      |  |                 |   |              |  |            |   |            |  |            |             |              |  |            
|Exercise of options for cash                                                          |  |                 |  |              |  | $          |  |            |  |            | 6,563,321   |              |  | $           | 1  |  |  | $ | 7,053   |   |  | $ |       |   |  | $ |  | 
|Issuance of common stock in connection with
	employee stock purchase plan             |  |                 |  |              |  |            |  |            |  |            | 374,186     |              |  |             |   |  |  |   | 7,724   |   |  |   |       |   |  |   |  | 
|Payment on stockholder notes                                                          |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   | 3,421  |   |  |   |  | 
|Stock option acceleration associated with
	reduction in force                         |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   | 217     |   |  |   |       |   |  |   |  | 
|Exercise of common stock warrants                                                     |  |                 |  |              |  |            |  |            |  |            | 41,070      |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |  | 
|Issuance of common stock in connection with
	purchase of Finisar Corporation business |  |                 |  |              |  |            |  |            |  |            | 488,624     |              |  |             |   |  |  |   | 21,340  |   |  |   |       |   |  |   |  | 
|Deferred stock compensation, net of cancellations
	related to terminated employees    |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   | (3,077  | ) |  |   |       |   |  |   |  | 
|Amortization of deferred stock compensation                                           |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   | (8,372  | ) |  |   |       |   |  |   |  | 
|Issuance costs of common stock                                                        |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   | (613    | ) |  |   |       |   |  |   |  | 
|Repurchase of common stock                                                            |  |                 |  |              |  |            |  |            |  |            | (280,250    | )            |  |             |   |  |  |   | (169    | ) |  |   |       |   |  |   |  | 
|Charitable contribution                                                               |  |                 |  |              |  |            |  |            |  |            | 116,960     |              |  |             |   |  |  |   | 1,000   |   |  |   |       |   |  |   |  | 
|Accumulated other comprehensive income                                                |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |  | 
|Net loss                                                                              |  |                 |  |              |  |            |  |            |  |            |            |              |  |             |   |  |  |   |        |   |  |   |       |   |  |   |  | 
|                                                                                      |  |                 |   |              |  |            |   |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |   | 
|Balances as of December 31,
	2001                                                     |  |                 |  |              |  | $          |  |            |  |            | 140,392,985 |              |  | $           | 14 |  |  | $ | 958,773 |   |  | $ | (4,124 | ) |  | $ |  | 
|                                                                                      |  |                 |   |              |  |            |   |            |  |            |             |              |  |             |    |  |  |   |         |   |  |   |        |   |  |   |   | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                      |  |              |         |               |  |             |       |               |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------- |  | ------------ | ------- | ------------- |  | ----------- | ----- | ------------- |  | - | -------- | - |  | - | -------- | -
|                                                                                      |  |              |         | Accumulated   |  |             |       |              
|                                                                                      |  | Deferred     |         | other         |  |             |       | Total        
|                                                                                      |  | stock        |         | comprehensive |  | Accumulated |       | stockholders
|                                                                                      |  | compensation |         | income        |  | deficit     |       | equity       
|                                                                                      |  |              |         |               |  |             |       |              
|Exercise of options for cash                                                          |  | $            |        |               |  | $           |      |               |  | $ |         |   |  | $ | 7,054    |  
|Issuance of common stock in connection with
	employee stock purchase plan             |  |              |        |               |  |             |      |               |  |   |         |   |  |   | 7,724    |  
|Payment on stockholder notes                                                          |  |              |        |               |  |             |      |               |  |   |         |   |  |   | 3,421    |  
|Stock option acceleration associated with
	reduction in force                         |  |              |        |               |  |             |      |               |  |   |         |   |  |   | 217      |  
|Exercise of common stock warrants                                                     |  |              |        |               |  |             |      |               |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
	purchase of Finisar Corporation business |  |              |        |               |  |             |      |               |  |   |         |   |  |   | 21,340   |  
|Deferred stock compensation, net of cancellations
	related to terminated employees    |  |              | 3,077   |               |  |             |      |               |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                           |  |              | 35,381  |               |  |             |      |               |  |   |         |   |  |   | 27,009   |  
|Issuance costs of common stock                                                        |  |              |        |               |  |             |      |               |  |   |         |   |  |   | (613     | )
|Repurchase of common stock                                                            |  |              |        |               |  |             |      |               |  |   |         |   |  |   | (169     | )
|Charitable contribution                                                               |  |              |        |               |  |             |      |               |  |   |         |   |  |   | 1,000    |  
|Accumulated other comprehensive income                                                |  |              |        |               |  |             | 1,419 |               |  |   |         |   |  |   | 1,419    |  
|Net loss                                                                              |  |              |        |               |  |             |      |               |  |   | (188,266 | ) |  |   | (188,266 | )
|                                                                                      |  |              |         |               |  |             |       |               |  |   |          |   |  |   |          |  
|Balances as of December 31,
	2001                                                     |  | $            | (17,526 | )             |  | $           | 1,419 |               |  | $ | (380,776 | ) |  | $ | 557,780  |  
|                                                                                      |  |              |         |               |  |             |       |               |  |   |          |   |  |   |          |  

See accompanying notes to consolidated financial
statements.

48



---



##### Table of Contents



ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except share and per share
data)


(1) Description of Business and
Significant Accounting Policies

(a) Description
of Business

ONI Systems Corp. develops, markets and sells
optical communications networking equipment specifically
designed to address the bandwidth and service limitations of
metropolitan area and regional networks.

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

(b) Principles
of Consolidation

The accompanying consolidated financial
statements include the financial statements of ONI and its
wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated on consolidation.

ONI translates the assets and liabilities of
international subsidiaries whose functional currency is the
local currency rather than the U.S. dollar, into dollars at the
current rates of exchange in effect at the balance sheet date.
ONIs international subsidiaries are located in Canada,
France, Germany, Japan, Korea, the Netherlands, Singapore, and
the United Kingdom. Revenues and expenses are translated using
average rates in effect during the period. Currency translation
gains and losses from translation adjustments are included in
stockholders equity in accumulated other comprehensive
loss on the consolidated balance sheets. Currency transaction
gains or losses, derived on monetary assets and liabilities
stated in a currency other than the functional currency, are
recognized in current operations and have not been significant
to the Companys operating results in any period.

(c) Stock
Splits

Share information for all periods has been
retroactively adjusted to reflect a two-for-three reverse split
of Series B and Series C preferred stock effected in
August 1999, a two-for-one split of common stock, Series D
and Series E preferred stock effected in August 1999 and a
two-for-one common and preferred stock split effected in
February 2000.

(d) Use of
Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires ONI to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and to disclose
contingent assets and liabilities at the date of the
consolidated financial statements and the reported results of
operations during the reporting period. Specifically, there are
significant estimates and management judgments related to the
allowance for doubtful accounts, market value of inventory and
warranty reserves. Actual results could differ from those
estimates.

(e) Cash
and Cash Equivalents

ONI considers all highly liquid investments with
original maturities of three months or less at the date of
purchase to be cash equivalents. As of December 31, 2001
and 2000, cash equivalents totaled $319,000 and $847,400,
respectively. Cash equivalents consisted primarily of money
market funds.

(f) Investments

Short and long-term investments are comprised of
marketable securities. All of ONIs short and long-term
investments are classified as available-for-sale. These
investments are carried at fair value, based on quoted market
prices, and unrealized gains and losses, net of taxes, are
included in accumulated other comprehensive income, as a separate

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


component of stockholders equity. Realized
gains or losses upon sale or maturity of these investments and
declines in value determined to be other than temporary, if any,
are included in other income and expense.

ONI has two equity investments in privately-held
companies. These investments are included in other assets on the
balance sheet and are generally carried at cost as ONI owns less
than 20% of the voting equity and does not have the ability to
exercise significant influence over these companies. As of
December 31, 2001, the carrying value of these investments
was $1,150. These investments are inherently high risk as the
market for the products being developed by these companies are
usually early stage at the time of ONIs investment, and
such markets may never be significant. ONI monitors these
investments for impairment and makes appropriate reductions in
carrying value when necessary.

(g) Inventory

Inventories are stated at the lower of average
cost or market, with cost determined on the first-in, first-out
basis. Inventory values are evaluated regularly for impairment
resulting from excess of carrying value over the estimated
market value of inventory. Estimates of market value of
inventory are based on several factors, including assumptions of
future demand of products, planned product releases and overall
market conditions.

(h) Property
and Equipment

Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated
useful lives of the related assets, ranging from one to five
years. Leasehold improvements and assets recorded under capital
leases are amortized on a straight-line basis over the lesser of
the related assets estimated useful life or the remaining
lease term.

(i) Goodwill
and Intangibles

Goodwill represents the excess of the purchase
price over the fair value of the net assets acquired in the
Object-Mart, Inc. business combination and net assets acquired
in connection with ONIs acquisition of Finisar
Corporations customer premises equipment business.
Goodwill is recorded at cost less accumulated amortization. ONI
has capitalized the cost of identifiable intangibles associated
with these acquisitions. Goodwill and intangibles are amortized
over their estimated useful lives, not exceeding three years.

(j) Research
and Development Costs

ONIs products are technical in nature and
require a significant and continuing research and development
effort. All research and development costs are expensed as
incurred. Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed, requires the
capitalization of certain software development costs incurred
subsequent to the date technological feasibility is established
and prior to the date the product is generally available for
sale. The capitalized cost is then amortized over the estimated
life of the product. To date, ONI has not capitalized any
software development costs because capitalizable costs meeting
the requirements of SFAS No. 86 have not been significant.

(k) Revenue
Recognition

Revenue is derived from sales of hardware,
software and services. Revenue is accounted for in accordance
with Staff Accounting Bulletin (SAB) No. 101, which
summarizes the SEC Staffs views in applying generally
accepted accounting principles to revenue recognition in
financial statements, Statement of Position (SOP) 97-2,
Software Revenue Recognition and SOP 98-9,
Software Revenue Recognition with Respect to Certain
Arrangements. For hardware transactions where software is
not incidental, ONI applies the provisions of SOP 97-2 and
SOP 98-9, and does not segregate the fee between hardware
and software or apply separate accounting guidance to the
hardware and software elements. For hardware transactions where
no software is involved, ONI applies the provisions of
SAB 101. The application of the provisions of SAB 101,
SOP 97-2 and SOP 98-9 requires significant judgments
and estimates by ONI in connection with the revenue recognized
in any accounting period.

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##### Table of Contents



ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


ONI recognizes revenue from product sales upon
shipment when the following provisions are met:
(a) persuasive evidence of an arrangement exists, generally
based on an executed contract and non-binding purchase order;
(b) the product has been delivered, typically to a common
carrier; (c) the fee is fixed and determinable; and
(d) collection of the resulting receivable is probable.
When the arrangement with the customer includes future
obligations or obtaining customer acceptance, revenue is
recognized when those obligations have been met or customer
acceptance has been received. ONI assesses collection based on a
number of factors, including customers payment patterns
and the credit-worthiness of the customer. If collection of a
fee is not probable, the fee is deferred and revenue is
recognized at the time collection becomes probable, which is
generally upon receipt of cash.

Services revenue consists primarily of
installation services and, to a lesser extent, of service
contracts for maintenance. Revenues from installation services
are recognized upon completion of the installation. Revenues
from service contracts are recognized over the life of the
service contract, generally twelve months.

For arrangements with multiple elements the fair
value of each element is allocated based on separate sales or
renewals to other customers or upon renewal rates quoted in the
contracts. Fair value of services, such as training, is based
upon separate sales of these services to other customers. For
transactions that include hardware, software and installation
services within one arrangement, installation services are not
considered essential to the functionality of the products sold.
Installation services do not significantly change the function
of the products sold, have in the past generally been completed
within expected timelines and have at times been performed by
other vendors. Revenue associated with the hardware and software
in these arrangements is generally recognized upon shipment.

Deferred revenue represents amounts billed in
excess of revenue recognized. Deferred revenue includes service
contract revenue to be recognized over future periods, as well
as fair value of future obligations under multiple element
arrangements.

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

(l) Warranty
Reserves

ONI provides a limited warranty for its products.
Estimated costs of product warranty obligations are recorded at
the time revenue is recognized. Costs accrued are based on
estimates of product failure rates, material usage and expected
service costs incurred in correcting any product failure
reported under warranty coverage.

At December 31, 2001 and 2000, the warranty
reserve totaled $5,937 and $1,879, respectively.

(m) Income
Taxes

ONI utilizes the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities
are recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.

(n) Fair
Value of Financial Instruments

The fair value of ONIs cash and cash
equivalents, investments, accounts receivable, prepaid expenses
and other current assets, accounts payable and accrued
liabilities approximates their carrying values due to the
short-term nature of those instruments.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


The fair value of short-term and long-term
capital lease obligations is estimated based on current interest
rates available to ONI for debt instruments with similar terms,
degrees of risk and remaining maturities. The carrying values of
these obligations approximate their respective fair values. The
carrying amount and fair value of the subordinated convertible
notes was $300,000 and $265,570, respectively at
December 31, 2001. The fair value of subordinated
convertible notes is based upon quoted market rates. Although
the fair value of the subordinated convertible notes is less
than the carrying amount, settlement at the reported fair value
may not be possible or may not be a prudent management decision
for various reasons.

(o) Concentrations
of Risk

Financial instruments, that potentially subject
ONI to concentrations of credit risk, consist primarily of cash
and cash equivalents, short and long-term investments and
accounts receivable. ONIs cash and cash equivalents and
short and long-term investments are maintained with highly
accredited financial institutions.

For the year ended December 31, 2001, there
were two customers that represented 16% and 13% of total revenue
and four customers that represented 23%, 15%, 12% and 11% of
accounts receivables at December 31, 2001. For the year
ended December 31, 2000, there were four customers that
represented 17%, 15%, 12% and 10% of total revenue and 21%, 32%,
11% and 9% of accounts receivable, respectively. One customer
represented more than 10% of total revenues both in the year
ended December 31, 2001 and in the year ended
December 31, 2000. ONI performs ongoing credit evaluations
of customer financial condition. ONI maintains an allowance for
doubtful accounts on a specific identification basis due to the
limited number of customers.

ONI receives certain components of its products
from sole or limited source suppliers. Additionally, ONI relies
on a single contract manufacturer to complete most of the
manufacturing of optical assemblies for its products.

(p) Stock-Based
Compensation

ONI accounts for stock-based awards to employees
using the intrinsic value method consistent with the method
described in Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees and Financial Accounting Standards Board
Interpretation (FIN) No. 44, Accounting for
Certain Transactions involving Stock Compensation  an
Interpretation of APB Opinion No. 25. Expense
associated with stock-based compensation is being amortized on
an accelerated basis over the vesting period of the individual
award consistent with the method described in FIN 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plan. Pursuant to SFAS
No. 123, Accounting for Stock-Based
Compensation, ONI discloses the pro-forma effect of using
the fair value method of accounting for employee stock-based
compensation arrangements.

For non-employees, ONI computes the fair value of
stock-based compensation in accordance with SFAS No. 123
and Emerging Issues Task Force (EITF) 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.

(q) Impairment
of Long-Lived Assets

ONI evaluates its long-lived assets, including
goodwill and intangibles, for impairment whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows (undiscounted and without
interest charges) expected to be generated by the asset. If
these assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

(r) Other
Comprehensive Income

Other comprehensive income refers to revenues,
expenses, gains and losses that are not included in net income,
but rather are recorded directly in stockholders equity.
As of December 31, 2001, accumulated other comprehensive
income includes unrealized gains and losses on
available-for-sale investments and cumulative translation
adjustments related to the translation of non-US dollar
denominated financial statements of ONIs wholly-owned
subsidiaries.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


(s) Net
Loss Per Share

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

|                                                                                       |  |                          |             |      |  |      |             |   |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                                                                       |  |                         
|                                                                                       |  | Years ended December 31,
|                                                                                       |  |                         
|                                                                                       |  | 2001                     |             | 2000 |  | 1999
|                                                                                       |  |                          |             |      |  |     
|Net loss attributable to common stockholders                                           |  | $                        | (188,266    | )    |  | $    | (141,129    | ) |  | $ | (46,572    | )
|Basic and diluted:                                                                     |  |                          |             |      |  |      |             |   |  |   |            |  
|Weighted-average shares of stock outstanding                                           |  |                          | 137,688,872 |      |  |      | 121,745,982 |   |  |   | 21,873,721 |  
|Less: weighted-average shares subject to
	repurchase                                   |  |                          | 2,932,824   |      |  |      | 6,158,843   |   |  |   | 3,830,533  |  
|Weighted-average shares used in computing basic
	and diluted net loss per common share |  |                          | 134,756,048 |      |  |      | 115,587,139 |   |  |   | 18,043,188 |  
|Basic and diluted net loss per common share                                            |  | $                        | (1.40       | )    |  | $    | (1.22       | ) |  | $ | (2.58      | )

Diluted net loss per share does not include the
effects of the following potential common shares:

|                                                                                      |  |                          |            |      |  |      |            |  |  |  |            | 
|------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                                                                      |  |                         
|                                                                                      |  | Years ended December 31,
|                                                                                      |  |                         
|                                                                                      |  | 2001                     |            | 2000 |  | 1999
|                                                                                      |  |                          |            |      |  |     
|Shares issuable under stock options                                                   |  |                          | 12,521,185 |      |  |      | 19,640,187 |  |  |  | 17,548,724 | 
|Shares of unvested stock subject to repurchase                                        |  |                          | 2,932,824  |      |  |      | 6,435,277  |  |  |  | 8,587,699  | 
|Shares issuable pursuant to stock warrants to
	purchase common stock                  |  |                          | 861,850    |      |  |      | 923,000    |  |  |  | 733,468    | 
|Shares issuable pursuant to warrants to purchase
	convertible preferred stock         |  |                          |           |      |  |      |           |  |  |  | 277,926    | 
|Shares issuable related to convertible preferred
	stock on an as-if-converted basis |  |                          |           |      |  |      |           |  |  |  | 78,855,900 | 

The weighted-average exercise price of stock
options outstanding was $13.49, $8.55 and $0.29 as of
December 31, 2001, 2000 and 1999, respectively. The
weighted-average purchase price of shares of common stock
subject to ONIs right of repurchase was $1.34, $0.99 and
$0.44 as of December 31, 2001, 2000 and 1999, respectively.
The weighted-average exercise price of warrants to purchase
shares of common stock was $3.36, $3.96 and $0.62 as of
December 31, 2001, 2000 and 1999, respectively. The
exercise price of warrants to purchase shares of convertible
preferred stock was $0.88 as of December 31, 1999.

(t) Segment
Reporting

SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information
establishes standards for the manner in which public companies
report information about operating segments in annual and
interim financial statements. It also establishes standards for
related disclosures about products and services, geographic
areas and major customers. The method for determining what
information to report is based on the way management organizes
the operating segments within a company for making operating
decisions and assessing financial performances. ONI has
determined that it operates in a single operating segment:
development and sale of optical networking equipment to
communications service providers in the metropolitan and
regional area markets.

Beginning January 1, 2000, ONIs
revenue has been derived from sales of its ONLINE and ONWAVE
products to external customers. ONI expects to continue selling
these products in the future, and also to develop other lines of

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


products for sale. ONIs geographic
distribution of revenues is based on the location of the
customers business and is as follows:

|              |  |              |    |      |  |  |    |  
|------------- |  | ------------ | -- | ---- |  |  | -- | -
|              |  |             
|              |  | Years ended 
|              |  | December 31,
|              |  |             
|              |  | 2001         |    | 2000
|              |  |              |    |     
|North America |  |              | 79 | %    |  |  | 78 | %
|Asia          |  |              | 10 | %    |  |  | 15 | %
|Europe        |  |              | 11 | %    |  |  | 7  | %

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

For the years ended December 31, 2001, 2000
and 1999, substantially all of the ONIs sales were
denominated in United States dollars. Substantially all of
ONIs assets are located in the United States.

(u) Advertising
Costs

Advertising costs are expensed as incurred and
have been insignificant to date.

(v) Reclassification

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



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(2) | Summary of Restructuring and Impairment
	Charges, Inventory Related Charges, Provision for Doubtful
	Accounts and Asset Impairment

In 2001, ONI commenced a restructuring program to
re-align business operations with current market conditions,
specifically the downturn in the communications equipment sector
that has negatively impacted customer order levels and
ONIs shipment volumes. This program included a worldwide
reduction in force, consolidation of facilities and resizing of
manufacturing levels. As a result of the decline in shipping
volumes and the restructuring program, ONI recorded
restructuring and impairment charges of $17,350. In addition,
ONI recorded charges related to inventory write-downs, provision
for purchase commitments of excess raw materials, impairment of
certain manufacturing equipment, a provision for doubtful
accounts and an impairment of an equity investment. The
following paragraphs provide detailed information relating to
these charges.

(a) Restructuring
and Impairment Charges

Restructuring and impairment charges of $17,350
included $16,092 of lease and related expenses associated with
exit and consolidation plans for excess facilities and the
impairment of leasehold improvements and fixed assets at vacated
facilities. The estimates of the costs of consolidating
facilities included an analysis of ONIs contractual lease
commitments, non-cancelable costs of lease arrangements, and net
book value of leasehold improvements for vacated facilities,
partially offset by estimated potential sublease income based on
available market information for commercial office space. These
contractual lease commitments extend through 2006. In addition,
ONI recorded restructuring charges of $1,258 related to a
worldwide reduction  in force, including $217 related
to the acceleration of unvested stock options. The restructuring
and impairment charges are included in operating expense for the
year ended December 31, 2001.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


A summary of the restructuring and impairment
charges for the year ended December 31, 2001 is as follows:

|                       |                                                                              |               |   |          |        |      |   |              |        |   |   |        |        |   |   |       |       | 
|---------------------- | ---------------------------------------------------------------------------- | ------------- | - | -------- | ------ | ---- | - | ------------ | ------ | - | - | ------ | ------ | - | - | ----- | ----- | 
|                       |                                                                              |               |   |          |        |      |   | Accrued at  
|                       |                                                                              | Total         |   | Non-Cash |        | Cash |   | December 31,
|                       |                                                                              | Charge        |   | Charges  |        | Paid |   | 2001        
|                       |                                                                              |               |   |          |        |      |   |             
|Description of charge: |                                                                              |               |   |          |        |      |   |              |        |   |   |        |        |   |   |      
|                       | Costs of consolidating facilities                                            |               | $ | 11,431   |        |      | $ |             |        |   | $ | (1,512 | )      |   | $ | 9,919 |      
|                       | Impairment of leasehold improvements and fixed
	assets at vacated facilities |               |   | 4,661    |        |      |   | (4,661       | )      |   |   |       |        |   |   |      |      
|                       | Reduction in force                                                           |               |   | 1,258    |        |      |   | (217         | )      |   |   | (1,041 | )      |   |   |      |      
|                       |                                                                              |               |   |          |        |      |   |              |        |   |   |        |        |   |   |      
|                       |                                                                              | Total charges |   | $        | 17,350 |      |   | $            | (4,878 | ) |   | $      | (2,553 | ) |   | $     | 9,919 | 
|                       |                                                                              |               |   |          |        |      |   |              |        |   |   |        |        |   |   |      



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | (b) Inventory Related Charges, Provision
	for Doubtful Accounts and Asset Impairment

During the year ended December 31, 2001, ONI
recorded a $36,870 write-down of inventory determined to be
excess and obsolete, a charge of $7,425 related to materials
that will be purchased from third-party contract manufacturers
and suppliers under purchase commitments, but which are in
excess of required quantities and a reserve of $1,040 associated
with impairment of manufacturing equipment. These provisions are
included in cost of goods sold for the year ended
December 31, 2001. The write-down of inventory on hand and
accrual for excess materials associated with purchase
commitments represent inventory ONI estimates it will be unable
to sell based on current inventory levels and significant
declines in customer capital spending. The impairment in
manufacturing equipment represents the net book value of
equipment that will no longer be utilized due to resizing of
manufacturing levels.

ONI recorded a $4,000 write-down in the carrying
value of an equity investment in a privately-held company that
was determined to be permanently impaired based on information
on a recent funding round of the privately-held company and
estimates of future cash flows. The investment write-down was
included in other expense for the year ended December 31,
2001. In addition, ONI recorded a provision for doubtful
accounts of $10,621 to reserve for trade and other receivables
that were determined to have a low probability of collection,
primarily due to the impact of the market downturn on certain
customers. The provision for doubtful accounts has been included
in general and administrative expense for the year ended
December 31, 2001.

A summary of these charges for the year ended
December 31, 2001 is as follows:

|                       |                                            |               |   |        |        | 
|---------------------- | ------------------------------------------ | ------------- | - | ------ | ------ | 
|                       |                                            | Total Charge 
|                       |                                            |              
|Description of charge: |                                            |               |   |       
|                       | Impairment of equity investment            |               | $ | 4,000  |       
|                       | Write-down of inventory                    |               |   | 36,870 |       
|                       | Provisions related to purchase commitments |               |   | 7,425  |       
|                       | Impairment of manufacturing equipment      |               |   | 1,040  |       
|                       | Allowance for doubtful accounts            |               |   | 10,621 |       
|                       |                                            |               |   |       
|                       |                                            | Total charges |   | $      | 59,956 | 
|                       |                                            |               |   |       

ONI had no such charges considered significant in
2000 and 1999.

(3) Business Combinations

(a) Object-Mart,
Inc.

On June 29, 1999, ONI acquired all of the
outstanding common shares of Object-Mart, Inc. in exchange for
4,569,276 shares of ONIs common stock and approximately
$3,222 in cash for a total purchase price of approximately
$9,097. Object-Mart was located in San Jose, California, and
provided software products and services to software development
companies, software providers and equipment manufacturers in the
telecommunications industry. The combination was accounted for
using the purchase method and, accordingly, the results of
operations of Object-Mart have

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##### Table of Contents



ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


been included in ONIs consolidated
financial statements only since June 29, 1999. The excess
of the purchase price over the fair value of the net
identifiable assets acquired of $5,680 has been recorded as
goodwill and is being amortized on a straight-line basis over
two years. Identifiable intangibles are amortized on a
straight-line basis over periods not exceeding two years.

The amount of $170 allocated to purchased
in-process research and development was determined through
established valuation techniques in the high-technology
communications industry and was expensed upon acquisition
because technological feasibility had not been established and
no future alternative uses existed.

The results of operations of Object-Mart have
been included in the results of operations of ONI for the years
ended December 31, 2001 and 2000. The following unaudited
pro forma financial information presents the combined results of
operations of ONI and Object-Mart for the year ended
December 31, 1999 as if the acquisition had occurred as of
the beginning of 1999, after giving effect to certain
adjustments, including amortization of goodwill and other
intangibles, additional depreciation expense and related income
tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have
occurred had ONI and Object-Mart constituted a single entity
during this period.

|                                     |  |              |         |  
|------------------------------------ |  | ------------ | ------- | -
|                                     |  | Year ended  
|                                     |  | December 31,
|                                     |  | 1999        
|                                     |  |             
|Revenue                              |  | $            | 4,626   |  
|Net loss                             |  | $            | (47,780 | )
|Basic and diluted net loss per share |  | $            | (2.65   | )

(b) Finisar
Corporation Customer Premises Equipment Business

In February 2001, ONI acquired technology and
other assets associated with Finisar Corporations customer
premises equipment business for up to $51,340, comprised of up
to $30,000 in cash and $21,340 of ONIs common stock. At
closing, ONI paid $5,000 in cash and issued 488,624 shares
of common stock to Finisar Corporation. At acquisition date, the
remaining cash payments of up to $25,000 were contingent upon
the timely delivery of certain mutually agreed deliverables. The
additional deliverables represent the completion of various
feature sets of one of the purchased products. In accordance
with the terms of the acquisition agreement the number of common
shares issued to Finisar Corporation was determined based on the
average closing price of ONIs common stock for the ten
days prior to closing of the transaction on February 28,
2001. For accounting purposes the value of the shares issued was
determined in accordance with EITF 99-12,
Determination of the Measurement Date for the Market Price
of Acquirer Securities Issued in a Purchase Business
Combination and APB 16, Business
Combinations. Accordingly, the 488,624 shares issued
to Finisar Corporation were valued based on the market price of
ONIs shares over a reasonable period of time before and
after the announcement date of the transaction, which was
February 13, 2001.

Certain core and developed technology, determined
to have future use, were classified as identifiable intangible
assets at acquisition. At acquisition, a value of $17,290 was
determined for the core and developed technology based on a
valuation analysis which contemplated the value of the products
purchased, including the feature sets included in the additional
deliverables. Accordingly, ONI capitalized $17,290 of identified
intangibles at the acquisition date.

Purchased in-process research and development was
determined through established valuation techniques in the
high-technology communications industry. At the acquisition
date, Finisar Corporation was in the process of conducting
research and development on a compact optical transport platform
designed for the network edge. Technological feasibility had not
been established for this product and no alternative future use
existed at the date of acquisition. Accordingly, ONI expensed
$8,240 of purchased in-process research and development in the
first quarter of 2001. The purchased in-process research and
development was valued using a discounted cash flow method with
a risk adjusted discount rate of 30%. Management believes that
the assumptions used in the in process research and development
analysis were reasonable at the time of the acquisition.
Although the assumptions used were based on market information
for competitive products and costed bills of materials, no
assurance can be given that the underlying assumptions used to
estimate expected revenues, operating costs or profitability, or
the events associated with the product, will transpire as
estimated. The primary risks and uncertainties associated with
this project relate to new feature sets and functionality, such
as allowing

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


for adding or dropping of optical channels and
supporting a ring based network topology. Under the terms of the
acquisition agreement, there are contingent payments based upon
delivery by Finisar Corporation and acceptance by ONI of certain
additional deliverables within a specified timeframe. The
product associated with these deliverables became generally
available in June of 2001.

During the year ended December 31, 2001, ONI
made additional purchase price payments based on delivery and
acceptance of the mutually agreed deliverables specified in the
purchase agreement. Under the agreement, the additional payments
totaled up to $25,000. The actual amounts of the additional
payments were subject to the timing of deliverables. In June
2001, ONI paid an additional $5,000 upon delivery and acceptance
of a first mutually agreed deliverable. This payment included
$344 related to the purchase of fixed assets, which has been
capitalized as property and equipment. The remaining amount of
this payment was capitalized as additional goodwill. In July
2001, ONI paid $4,250 upon delivery and acceptance of a second
mutually agreed deliverable, which was capitalized as additional
goodwill. In October 2001, ONI paid $3,500 to Finisar
Corporation upon delivery and acceptance of a third mutually
agreed deliverable and capitalized this amount as additional
goodwill. As of December 31, 2001, the remaining cash
payments of up to $6,000 are contingent upon the timely delivery
and acceptance of mutually agreed deliverables. Total purchase
consideration also includes acquisition expense incurred, which
were not significant.

A summary of the allocation of the purchase
consideration through December 31, 2001 was as follows:

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Property and equipment              |  | $ | 344    | 
|Identifiable intangible assets      |  |   | 17,290 | 
|In-process research and development |  |   | 8,240  | 
|Goodwill                            |  |   | 13,429 | 
|                                    |  |   |        | 
|Total                               |  | $ | 39,303 | 
|                                    |  |   |        | 

(4) Goodwill and Intangibles

A summary of goodwill and intangibles is as
follows:

|                              |  |              |        |      |  |   |       | 
|----------------------------- |  | ------------ | ------ | ---- |  | - | ----- | 
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2001         |        | 2000
|                              |  |              |        |     
|Goodwill                      |  | $            | 13,429 |      |  | $ | 5,680 | 
|Core and developed technology |  |              | 17,290 |      |  |   |      | 
|Other intangibles             |  |              | 250    |      |  |   | 1,410 | 
|                              |  |              |        |      |  |   |       | 
|                              |  | $            | 30,969 |      |  | $ | 7,090 | 
|Less accumulated amortization |  |              | 7,504  |      |  |   | 5,277 | 
|                              |  |              |        |      |  |   |       | 
|                              |  | $            | 23,465 |      |  | $ | 1,813 | 
|                              |  |              |        |      |  |   |       | 

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


(5) Cash, Cash Equivalents and
Investments

The following is a summary of cash, cash
equivalents and available-for-sale securities as of
December 31, 2001 (in thousands):

|                                      |  |                   |         |                  |  |                  |       |            |  |   |   |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------- | ---------------- |  | ---------------- | ----- | ---------- |  | - | - |  |  | - | ------- | 
|                                      |  |                  
|                                      |  | December 31, 2001
|                                      |  |                  
|                                      |  | Amortized         |         | Gross Unrealized |  | Gross Unrealized |       |           
|                                      |  | Cost              |         | Gains            |  | Losses           |       | Fair Value
|                                      |  |                   |         |                  |  |                  |       |           
|Money market funds                    |  | $                 | 328,302 |                  |  | $                |      |            |  | $ |  |  |  | $ | 328,302 | 
|Certificate of deposit                |  |                   | 589     |                  |  |                  |      |            |  |   |  |  |  |   | 589     | 
|Government notes and bonds            |  |                   | 265,255 |                  |  |                  | 1,359 |            |  |   |  |  |  |   | 266,614 | 
|Corporate notes and bonds             |  |                   | 73,502  |                  |  |                  | 145   |            |  |   |  |  |  |   | 73,647  | 
|Auction rate preferred stock          |  |                   | 9,650   |                  |  |                  |      |            |  |   |  |  |  |   | 9,650   | 
|                                      |  |                   |         |                  |  |                  |       |            |  |   |   |  |  |   |         | 
|                                      |  | $                 | 677,298 |                  |  | $                | 1,504 |            |  | $ |  |  |  | $ | 678,802 | 
|                                      |  |                   |         |                  |  |                  |       |            |  |   |   |  |  |   |         | 
|Included in short-term investments    |  |                   | 26,438  |                  |  |                  | 19    |            |  |   |  |  |  |   | 26,457  | 
|Included in long-term investments     |  |                   | 312,349 |                  |  |                  | 1,485 |            |  |   |  |  |  |   | 313,834 | 
|Included in cash and cash equivalents |  |                   | 338,511 |                  |  |                  |      |            |  |   |  |  |  |   | 338,511 | 
|                                      |  |                   |         |                  |  |                  |       |            |  |   |   |  |  |   |         | 
|                                      |  | $                 | 677,298 |                  |  | $                | 1,504 |            |  | $ |  |  |  | $ | 678,802 | 
|                                      |  |                   |         |                  |  |                  |       |            |  |   |   |  |  |   |         | 

There were no investments in available for sale
securities at December 31, 2000.

Following is a table of the original maturities
of ONIs available-for-sale securities as of
December 31, 2001:

|                                        |       |   |         |         | 
|--------------------------------------- | ----- | - | ------- | ------- | 
|Due in one year or less                 |       | $ | 26,457  |        
|Due after one year through two years    |       |   | 126,097 |        
|Due after two years through three years |       |   | 187,737 |        
|                                        |       |   |         |        
|                                        | Total |   | $       | 340,291 | 
|                                        |       |   |         |        

(6) Accounts Receivable

Accounts receivable consists of:

|                         |                                  |                        |        |      |       |   |        |  |   | 
|------------------------ | -------------------------------- | ---------------------- | ------ | ---- | ----- | - | ------ |  | - | 
|                         |                                  |                       
|                         |                                  | December 31,          
|                         |                                  |                       
|                         |                                  | 2001                   |        | 2000
|                         |                                  |                        |        |     
|Accounts receivable      |                                  | $                      | 49,690 |      |       | $ | 24,309 | 
|                         | Allowance for doubtful accounts: |                        |        |      |       |   |        |  |  
|                         |                                  | At beginning of period |        |      |      |   |        |  |  | 
|                         |                                  | Provisions             |        |      | 6,402 |   |        |  |  | 
|                         |                                  | Deductions             |        |      | 657   |   |        |  |  | 
|                         |                                  |                        |        |      |       |   |        | 
|                         |                                  | At end of period       |        |      | 5,745 |   |        |  |  | 
|                         |                                  |                        |        |      |       |   |        | 
|Accounts receivable, net |                                  | $                      | 43,945 |      |       | $ | 24,309 | 
|                         |                                  |                        |        |      |       |   |        | 

The provision for doubtful accounts was $10,621
for the year ended December 31, 2001, consisting of $6,402
related to trade accounts receivable and $4,219 related to a
long-term receivable included in other assets. See Note 2.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


(7) Inventory

Inventory consists of:

|                      |  |              |        |      |  |   |        | 
|--------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2001         |        | 2000
|                      |  |              |        |     
|Raw materials         |  | $            | 7,064  |      |  | $ | 27,821 | 
|Work in progress      |  |              | 16,582 |      |  |   | 15,414 | 
|Finished goods        |  |              | 17,969 |      |  |   | 16,763 | 
|Consignment inventory |  |              | 12,221 |      |  |   | 10,628 | 
|                      |  |              |        |      |  |   |        | 
|                      |  | $            | 53,836 |      |  | $ | 70,626 | 
|                      |  |              |        |      |  |   |        | 

During the year ended December 31, 2001, ONI
recorded a $36,870 write-down of inventory on hand determined to
be in excess of planned requirements. This write-down relates to
inventory ONI estimates it will be unable to sell based on
current inventory levels and significant declines in customer
capital spending. See Note 2.

(8) Property and Equipment

Property and equipment is as follows:

|                                               |  |              |         |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |         | 2000
|                                               |  |              |         |     
|Computers and equipment                        |  | $            | 91,831  |      |  | $ | 44,801 | 
|Furniture and fixtures                         |  |              | 7,189   |      |  |   | 2,660  | 
|Leasehold improvements                         |  |              | 39,368  |      |  |   | 5,647  | 
|                                               |  |              |         |      |  |   |        | 
|                                               |  |              | 138,388 |      |  |   | 53,108 | 
|Less accumulated depreciation and amortization |  |              | 41,102  |      |  |   | 11,527 | 
|                                               |  |              |         |      |  |   |        | 
|                                               |  | $            | 97,286  |      |  | $ | 41,581 | 
|                                               |  |              |         |      |  |   |        | 

Equipment recorded under capital leases was $794
and $364 as of December 31, 2001 and 2000, respectively,
and the related accumulated amortization was $491 and $236 as of
December 31, 2001 and 2000, respectively.

During the year ended December 31, 2001, ONI
recorded a charge of $4,661 to write down the value of leasehold
improvements and furniture associated with facilities no longer
utilized by the Company and $1,040 to write down the value of
certain manufacturing equipment impaired by the Companys
resizing of manufacturing levels. See Note 2.

(9) Accrued Liabilities

Accrued liabilities are comprised of the
following:

|                                               |  |              |        |      |  |   |        | 
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |        | 2000
|                                               |  |              |        |     
|Restructuring and accrued purchase commitments |  | $            | 16,209 |      |  | $ |       | 
|Accrued employee benefits                      |  |              | 9,504  |      |  |   | 8,442  | 
|Warranty accrual                               |  |              | 5,937  |      |  |   | 1,879  | 
|Interest payable                               |  |              | 3,625  |      |  |   | 3,125  | 
|Sales and use tax payable                      |  |              | 3,823  |      |  |   | 2,328  | 
|Legal accrual                                  |  |              | 903    |      |  |   | 1,984  | 
|Other                                          |  |              | 4,075  |      |  |   | 734    | 
|                                               |  |              |        |      |  |   |        | 
|                                               |  | $            | 44,076 |      |  | $ | 18,492 | 
|                                               |  |              |        |      |  |   |        | 

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


(10) Accumulated Other Comprehensive
Income

There was no other comprehensive income for the
year ended December 31, 2000. Accumulated other
comprehensive income consists of unrealized gains or losses on
available-for-sale securities, which are included in short and
long-term investments in the consolidated balance sheets, and
cumulative translation adjustments. The components of
accumulated other comprehensive income at December 31, 2001
are stated net of the effect of taxes, which were not
significant.

(11) Notes Receivable from
Stockholders

During 2001, 2000 and 1999, ONI received $0,
$4,652 and $3,713, respectively, in promissory notes from
certain officers in exchange for common stock. As of
December 31, 2001, $4,080 had been repaid by the
stockholders. The notes are repayable over a period of five to
ten years and bear interest at rates ranging from 4.46% to
6.80%. The notes are secured by the underlying common shares.
During 2000, ONI repurchased 1,069,615 shares of restricted
common stock and cancelled $284 in related notes receivable from
stockholders. During 2001, ONI did not repurchase any common
stock that had been issued under promissory notes.

(12) Financing Arrangements

In connection with a loan and security agreement
and subordinated loan and security agreement entered into in
1999 with a financing company, ONI issued warrants to purchase
90,750 and 119,116 shares of common stock, respectively, at
$0.88 per share. The fair value of the warrants was determined
to be $66 and $87, respectively, calculated using the
Black-Scholes option pricing model, using the following
assumptions: no dividends; contractual term of ten years;
risk-free interest rate of 5.5%; and expected volatility of 70%.
The fair value of the warrants has been recorded as additional
paid-in capital and was amortized to interest expense over the
term of the loan agreements, which expired unutilized on
February 10, 2000.

In December 2000, the financing company exercised
the warrants on a net basis and ONI issued 206,912
shares of common stock to the financing company.

In October 2000, concurrent with the completion
of a follow-on public offering of common stock, ONI sold
$300,000 of 5% Convertible Subordinated Notes due
October 15, 2005. The net proceeds to ONI, after deducting
underwriting discounts and other offering expenses, were
approximately $290,500. The conversion rate is 10.9129 shares
for each $1,000 principal amount of notes, subject to adjustment
in certain circumstances. This is equivalent to a conversion
price of approximately $91.64 per share. ONI pays interest on
the notes on April 15 and October 15 of each year,
with the first interest payment being made on April 15,
2001. The offering costs of approximately $9,500 are included in
other assets and are being amortized, on a straight line basis,
which approximates the effective interest method, over the term
of the debt. As of December 31, 2001, ONI has amortized
$2,249 of debt issuance costs associated with the convertible
subordinated notes.

(13) Stockholders Equity

(a) Preferred
Stock

As of December 31, 2001 and 2000, ONI had
10,000,000 shares of preferred stock authorized, all of which
are undesignated. There were no shares of preferred stock
outstanding as of December 31, 2001 and 2000.

In September 1999, ONI raised $14,970, net of
issuance costs of $21, from the sale of 8,249,468 shares of
Series F preferred stock for cash of $1.82 per share.

In December 1999, ONI completed another round of
private financing, raising $74,656, net of issuance costs of
$45, from the sale of 11,824,418 shares of Series G
preferred stock for cash of $6.32 per share. In March 2000, ONI
raised an additional $1,960, net of issuance costs of $8, from
the sale of 310,000 shares of Series G preferred stock for
cash of $6.32 per share. In addition 29,000 shares of
Series G preferred stock were issued in exchange for
services. The value of $184 ascribed to these services was
expensed upon issuance of the shares in accordance with
EITF 96-18. The Series G preferred stock issued in
March was issued to an employee, a director and consultants as
consideration for both services previously rendered as well as
for services to be rendered in the future. ONI recorded deferred
stock compensation of

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


$2,603, for the difference between the purchase
price of the shares and the fair market value of the shares of
$14.00 per share. This amount is being amortized on an
accelerated basis over the vesting period, or the period in
which the services were rendered if shorter, consistent with the
method described in FASB Interpretation No. 28.
Amortization of deferred stock compensation associated with
these shares was $1,544 for the year ended December 31,
2000.

In May 2000, ONI sold 1,333,333 shares of
Series H preferred stock to Sun Microsystems, Inc., at a
price per share of $15.00. In June 2000, concurrent with the
completion of ONIs initial public offering, or IPO, these
shares of preferred stock automatically converted into 969,697
shares of common stock and ONI recorded a non-cash charge of
$4,242 to accrete the value of the preferred stock to its fair
value. This non-cash charge was recorded in additional paid-in
capital.

Upon the completion of the IPO, all outstanding
shares of Series B, C, D, E, F and G preferred stock
converted into an aggregate of 79,194,900 shares of common stock.

(b) Common
Stock

As of December 31, 2001 and 2000, ONI had
700,000,000 shares of common stock authorized.

In 1999, ONI issued an additional 513,332 shares
of restricted common stock at prices ranging from $0.09 to
$0.91, 20,000 of which were issued in exchange for notes
receivable of $18. In 2000, ONI issued 2,675,860 shares of
restricted common stock at prices ranging from $0.09 to $3.20,
all of which were issued in exchange for notes receivable of
$4,652. The restricted shares of common stock vest 25% within
12 months of issuance with the remainder vesting in 36
equal monthly amounts. On the occurrence of a change in control
event, up to 50% of certain of the unvested shares of common
stock will vest. Upon termination of employment, ONI may
repurchase all unvested shares at an amount equal to the
original purchase price. In 2000, ONI repurchased 1,069,615
shares of common stock in exchange for the cancellation of
related notes receivable of $284.

In December 1999, in connection with the signing
of a Purchase and License Agreement with a customer to provide
certain ONI products in the future, ONI issued a warrant to
purchase 500,000 shares of common stock at an exercise price of
$0.91 per share. The value of $2,891 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with
the following assumptions: no expected dividend yield; risk free
interest rate of 5.50%; expected volatility of 70%; and
contractual term of six years. The warrant was nonforfeitable
when issued, and becomes exercisable on the ratio of the dollar
volume of purchases of ONIs products by the customer under
the agreement to $30 million. Notwithstanding the above
formula, the warrant becomes fully exercisable on
December 7, 2005, the date of expiration of the warrant.
The customer is not obligated to purchase any of ONIs
products as a condition to exercising the warrant. Accordingly,
the warrant was expensed in 1999.

In February 2000, in connection with the signing
of a Purchase and License Agreement with a customer to provide
certain ONI products in the future, ONI issued a warrant to
purchase 223,000 shares of common stock at an exercise price of
$0.91 per share. The value of $3,000 ascribed to the
warrant was estimated using the Black-Scholes option valuation
model with the following assumptions: no expected dividend
yield; risk free interest rate of 5.50%; expected volatility of
70%; and contractual term of seven years. The warrant was
nonforfeitable when issued, and becomes exercisable on the ratio
of the dollar volume of purchases of ONIs products by the
customer under the agreement to $20 million.
Notwithstanding the above formula, the warrant becomes fully
exercisable on February 14, 2007, the date of expiration of
the warrant. Under the terms of the Purchase and License
Agreement, the customer has the ability to terminate the
agreement upon 120 days written notice, provided that the
customer purchased $1 million of product from ONI in fiscal
2000. The customer is not obligated to purchase any of
ONIs products as a condition to exercising the warrant.
Accordingly, the warrant was expensed upon issuance in 2000.

In March 2000, as consideration for professional
services rendered, ONI issued a warrant to purchase 200,000
shares of common stock at an exercise price of $15.00 per share.
The value of $1,545 ascribed to the warrant was estimated using
the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate
of 5.50%; expected volatility of 70%; and a contractual term of
four years. The warrant was expensed upon issuance.

In June 2000, ONI completed its IPO in which it
sold 9,200,000 shares of common stock, including 1,200,000
shares in connection with the exercise of the underwriters
over-allotment option, at $25 per share. Concurrently with the

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


completion of the IPO, ONI sold in two private
placements an aggregate of 560,000 shares of common stock to
Internet Initiative Japan Inc. and CCT Telecom Holdings
Limited for $25 per share. The net proceeds of the IPO and
private placements, after deducting underwriters discount
and other offering expenses, were approximately $226,100.

In October 2000, ONI completed a follow-on public
offering of 8,000,000 shares of common stock at $74.50 per
share. Of the 8,000,000 share offered, 5,646,643 shares were
sold by ONI and 2,353,357 shares were sold by existing
stockholders of ONI. The net proceeds of this offering to ONI,
after deducting underwriting discounts and other offering
expenses, were approximately $401,500.

In February 2001, ONI issued 488,624 shares of
common stock to Finisar Corporation in connection with
ONIs acquisition of Finisar Corporations customer
premises equipment business. See Note 3.

In December 2001, ONI issued 116,960 shares of
common stock as a charitable donation to the Citizens
Scholarship Foundation of America  Families of
Freedom Scholarship Fund, a charitable fund that seeks to
aid family members of victims of the September 11, 2001
terrorist attacks with post-secondary education expenses. This
donation is donor-specified to unaffiliated beneficiaries and is
considered a contribution under SFAS No. 136,
Transfers of Assets to a Not-for-Profit Organization or
Charitable Trust That Raises or Holds Contributions for
Others. The value of the contribution of approximately
$1,000, determined based on the fair market value of ONI common
stock on the date of the contribution, was expensed at the time
of the contribution. The $1,000 charge has been included in
other expense, net for the year ended December 31, 2001.

(c) Stock
Option Plans

1998
Equity Incentive Plan

In 1998, the Board of Directors of ONI adopted
the 1998 Equity Incentive Plan (the 1998 Plan) and reserved a
total of 23,407,604 shares of ONIs common stock for
issuance thereunder.

Under the 1998 Plan, the Board of Directors may
grant incentive stock options, nonqualified stock options and
restricted stock awards. Options granted under the 1998 Plan
generally vest 25% on the first anniversary of the vesting start
date and then monthly over the next three years. Options granted
under the 1998 Plan expire ten years from the date of grant.

1999
Equity Incentive Plan

In 1999, the Board of Directors of ONI adopted
the 1999 Equity Incentive Plan (the 1999 Plan) and reserved a
total of 6,200,000 shares of ONIs common stock for
issuance thereunder. The terms of the 1999 Plan are
substantially similar to those of the 1998 Plan.

2000
Equity Incentive Plan

On May 31, 2000, ONIs 2000 Equity
Incentive Plan became effective. Under the Plan, 7,048,905
shares of ONIs common stock were reserved exclusively for
issuance under the plan. The terms of the 2000 Equity Incentive
Plan are substantially similar to those under the 1999 Plan. On
each January 1, the aggregate number of shares reserved for
issuance under the 2000 Equity Incentive Plan will increase
automatically by a number of shares equal to 5% of the
outstanding shares on December 31 of the preceding year.

2000
Employee Stock Purchase Plan

ONIs 2000 Employee Stock Purchase Plan
became effective on June 1, 2000, the first day on which
price quotations were available for ONI common stock on the
Nasdaq National Market. ONI initially reserved 1,000,000 shares
of common stock under this plan. On each January 1, the
aggregate number of shares reserved for issuance under the 2000
Employee Stock Purchase Plan will increase automatically by a
number of shares equal to 1% of the outstanding shares on
December 31 of the preceding year.

Except for the first offering period, each
offering period under the 2000 Employee Stock Purchase Plan will
be for two years and consist of four six-month purchase periods.
Offering periods and purchase periods will begin on
February 1

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


and August 1 of each year. Because the first
day on which price quotation for ONIs common stock was
available on the Nasdaq National Market was June 1, 2000,
the length of the first offering period is more than two years,
and the length of the first purchase period is more than six
months.

The 2000 Employee Stock Purchase Plan permits
eligible employees to purchase common stock through payroll
deductions, which may not exceed 15% of an employees
compensation, and is subject to maximum purchase limitations.
The purchase price for common stock purchased under this plan
will be 85% of the lesser of the fair market value of ONIs
common stock on (i) the first day of the applicable
offering period or (ii) the last day of the applicable
purchase period.

A summary of the status of ONIs option
plans is as follows:

|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |       | 
|------------------------------- | ----------- | ------------- | ---------- | ----------- | - | ------------------- | ---------- | ---------------- | - | - | ----- | ----- |  |  | - | ----- | 
|                                |             |               |            |             |   |                    
|                                |             |               |            |             |   | Outstanding options
|                                |             |               |            |             |   |                    
|                                |             |               |            |             |   | Weighted            |            |                 
|                                |             | Shares        |            |             |   | average             |            | Weighted average
|                                |             | available for |            | Number of   |   | exercise            |            | grant date      
|                                |             | grant         |            | shares      |   | price               |            | fair value      
|                                |             |               |            |             |   |                     |            |                 
|Balance as of December 31, 1998 |             |               | 19,310,660 |             |   |                     | 8,789,776  |                  |   | $ | 0.08  |       |  |  |   |      
|                                | Granted     |               |            | (20,178,438 | ) |                     |            | 20,178,438       |   |   |       | 0.42  |  |  | $ | 1.90  | 
|                                | Exercised   |               |            |            |   |                     |            | (8,709,066       | ) |   |       | 0.46  |  |  |   |       | 
|                                | Cancelled   |               |            | 2,710,424   |   |                     |            | (2,710,424       | ) |   |       | 0.08  |  |  |   |       | 
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      
|Balance as of December 31, 1999 |             |               | 1,842,646  |             |   |                     | 17,548,724 |                  |   | $ | 0.29  |       |  |  |   |      
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      
|                                | Authorized  |               |            | 12,760,676  |   |                     |            |                 |   |   |       |      |  |  |   |       | 
|                                | Granted     |               |            | (10,630,889 | ) |                     |            | 10,630,889       |   |   | $     | 16.59 |  |  | $ | 22.35 | 
|                                | Exercised   |               |            |            |   |                     |            | (6,800,376       | ) |   |       | 0.88  |  |  |   |       | 
|                                | Cancelled   |               |            | 1,739,050   |   |                     |            | (1,739,050       | ) |   |       | 4.34  |  |  |   |       | 
|                                | Repurchased |               |            | 1,069,615   |   |                     |            |                 |   |   |       | 0.27  |  |  |   |       | 
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      
|Balance as of December, 2000    |             |               | 6,781,098  |             |   |                     | 19,640,187 |                  |   | $ | 8.55  |       |  |  |   |      
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      
|                                | Authorized  |               |            | 6,654,453   |   |                     |            |                 |   |   |       |      |  |  |   |       | 
|                                | Granted     |               |            | (10,373,640 | ) |                     |            | 10,373,640       |   |   | $     | 40.63 |  |  | $ | 40.63 | 
|                                | Exercised   |               |            |            |   |                     |            | (6,563,321       | ) |   |       | 1.06  |  |  |   |       | 
|                                | Cancelled   |               |            | 10,241,821  |   |                     |            | (10,241,821      | ) |   |       | 37.84 |  |  |   |       | 
|                                | Expired     |               |            |            |   |                     |            | (687,500         | ) |   |       | 4.00  |  |  |   |       | 
|                                | Repurchased |               |            | 280,250     |   |                     |            |                 |   |   |       | 0.60  |  |  |   |       | 
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      
|Balance as of December, 2001    |             |               | 13,583,982 |             |   |                     | 12,521,185 |                  |   | $ | 13.49 |       |  |  |   |      
|                                |             |               |            |             |   |                     |            |                  |   |   |       |       |  |  |   |      

All options granted in 2001 were at exercise
prices equal to fair value at date of grant. In 2000, ONI
granted 8,166,002 options with exercise prices less than fair
value at date of grant with a weighted average fair value of
$14.00 per share. In addition, ONI granted 2,464,887 options
with exercise prices equal to fair value on date of grant with a
weighted average fair value of $50.00 per share. ONI granted
20,178,438 options with exercise prices less than fair value at
date of grant for the year ended December 31, 1999.

63



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##### Table of Contents



ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


The following table summarizes information with
respect to stock options outstanding as of December 31,
2001:

|                |  |             |            |                  |  |              |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|--------------- |  | ----------- | ---------- | ---------------- |  | ------------ | ----- | --------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                |  |             |            |                 
|                |  | Outstanding |            | Exercisable     
|                |  |             |            |                 
|Range of        |  | Number of   |            | Weighted-average |  | Contractual  |       | Number of |  | Weighted-average
|exercise prices |  | options     |            | exercise price   |  | life (years) |       | options   |  | exercise price  
|                |  |             |            |                  |  |              |       |           |  |                 
|$0.005  0.46   |  |             | 3,927,350  |                  |  | $            | 0.09  |           |  |                  | 7.23 |  |  |  | 955,852   |  |  | $ | 0.09  | 
|0.91  3.20     |  |             | 3,526,259  |                  |  |              | 1.32  |           |  |                  | 7.95 |  |  |  | 715,277   |  |  |   | 1.31  | 
|4.95  10.00    |  |             | 1,760,250  |                  |  |              | 8.65  |           |  |                  | 8.79 |  |  |  | 425,684   |  |  |   | 9.51  | 
|11.18  60.00   |  |             | 2,892,958  |                  |  |              | 39.05 |           |  |                  | 9.07 |  |  |  | 199,631   |  |  |   | 33.02 | 
|76.00  102.88  |  |             | 414,368    |                  |  |              | 86.17 |           |  |                  | 8.56 |  |  |  | 170,410   |  |  |   | 86.97 | 
|                |  |             |            |                  |  |              |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|$0.005  102.88 |  |             | 12,521,185 |                  |  | $            | 13.49 |           |  |                  | 8.12 |  |  |  | 2,466,854 |  |  | $ | 10.74 | 
|                |  |             |            |                  |  |              |       |           |  |                  |      |  |  |  |           |  |  |   |       | 

Accounting for
Stock-Based Compensation

ONI uses the intrinsic value method prescribed by
APB 25 and FIN 44 in accounting for its stock-based compensation
arrangements for employees whereby compensation cost is
recognized to the extent the fair value of the underlying common
stock exceeds the exercise price of the stock options at the
date of grant. Deferred stock compensation of $84,262 and
$41,730, for the years ended December 31, 2000 and 1999,
respectively, has been recorded for the excess of the fair value
of the common stock underlying the options at the grant date
over the exercise price of the options and for the valuation
under SFAS No. 123 of common stock issuances for service.
These amounts are being amortized on an accelerated basis over
the vesting period, generally four years, consistent with the
method described in FIN 28. In 2001, deferred stock
compensation was reduced by $4,641 as a result of stock options
cancelled in connection with terminations, net of additional
deferred stock compensation of $1,564 in relation to common
stock issued for an employee stock bonus and to non-employees in
exchange for services. Amortization of deferred compensation was
$27,009 in 2001, $66,413 in 2000 and $11,422 in 1999.

In 1998, ONIs Chief Executive Officer
purchased 717,624 shares of common stock that were subject to
repurchase pending the achievement of certain milestones in 1998
and 1999. The shares were remeasured at each date the milestones
were achieved based on the fair value of the common stock at
that date, pursuant to the variable plan treatment ascribed
under APB 25. All the milestones stipulated in the
employment agreement were met as of December 31, 1999.
Accordingly, additional compensation expense of $837 was
recorded in 1999.

Had compensation cost for ONIs stock-based
compensation plan been determined consistent with the fair value
approach set forth in SFAS No. 123, ONIs net losses
would have been as follows:

|                                                    |  |                          |         |      |  |      |         |  |  |   |        | 
|--------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------ | 
|                                                    |  |                         
|                                                    |  | Years ended December 31,
|                                                    |  |                         
|                                                    |  | 2001                     |         | 2000 |  | 1999
|                                                    |  |                          |         |      |  |     
|Net loss  as reported                              |  | $                        | 188,266 |      |  | $    | 136,887 |  |  | $ | 46,572 | 
|Net loss  pro forma                                |  | $                        | 249,090 |      |  | $    | 159,589 |  |  | $ | 46,918 | 
|Basic and diluted net loss per share 
	as reported |  | $                        | 1.40    |      |  | $    | 1.22    |  |  | $ | 2.58   | 
|Basic and diluted net loss per share 
	pro forma   |  | $                        | 1.85    |      |  | $    | 1.42    |  |  | $ | 2.60   | 

In 1999, the fair value of options granted is
estimated on the date of grant using the minimum value method
with the following weighted-average assumptions: no dividend
yield; risk-free interest rates of 5.50%; and an expected life
of five years. From January 1, 2000 to May 31, 2000,
ONI estimated the fair value of options granted using the
minimum value method with the following weighted-average
assumptions: no dividend yield, risk-free interest rate of 5.50%
and an expected life of 5 years. From June 1, 2000 to
December 31, 2000, ONI estimated the fair value of options
granted using the Black-Scholes option pricing model, with the
following assumptions: no dividends, risk-free interest rate of
5.50%, volatility of 110% and expected life of 5 years. For
the year ended December 31, 2001, ONI estimated the fair
value of options granted using the Black-Scholes option pricing
model, with the following assumptions: no dividends, risk-free
interest rate of 4.56%, volatility of 120% and expected life of
5 years.

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##### Table of Contents



ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


To comply with the pro forma reporting
requirements of SFAS No. 123, compensation cost is also
estimated for the fair value of employee stock purchase plan
issuances, which is included in the pro forma totals above. ONI
has estimated the compensation cost for its 2000 Employee Stock
Purchase Plan issuances in July 2001 and for the six month
purchase period ending January 2002. The fair value of purchase
rights granted under the 2000 Employee Stock Purchase Plan is
estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions
for the year ended December 31, 2001: no dividends,
risk-free interest rate of 3.73%, volatility of 120% and
expected life of six months. The weighted-average per share fair
value of the purchase rights granted under the Purchase Plan
during fiscal 2001 was $12.99.

(14) Commitments and
Contingencies

(a) Leases

In February 1999, ONI entered into a leasing
agreement with a financing company which allows ONI to draw up
to $1,050 for the lease of certain equipment and $450 for the
lease of software and tenant improvements. The leases are
accounted for as capital leases. The lease obligations under
this agreement are repayable in 42 equal monthly
installments of principal plus interest commencing on the
individual lease inception dates and are secured by the leased
assets.

In connection with the equipment leasing
agreement, ONI issued to the financing company warrants to
purchase 68,062 shares of common stock at a price of $0.88 per
share. The warrants expire on February 10, 2009, or five
years from the effectiveness of the ONIs initial public
offering, if earlier. The fair value of the warrants was
determined to be $50, calculated using the Black-Scholes option
pricing model, using the following assumptions: no dividends;
contractual term of ten years; risk-free interest rate of 5.5%;
and expected volatility of 70%. The fair value of the warrants
has been recorded as additional paid-in capital and is being
amortized as interest expense over the term of the lease
agreement.

In December 2000, the financing company exercised
on a net basis the warrants and ONI issued 67,103
shares of common stock to the financing company.

In July 2001, ONI entered into a facility lease
agreement for approximately 444,500 square feet to be
constructed in five office buildings in San Jose, California as
ONIs headquarters. The operating lease term ends on July
2011. Minimum monthly lease payments at lease commencement are
approximately $659 per month, and will escalate on an annual
basis. Total minimum lease payments over the lease term will be
approximately $114,200. As of December 31, 2001,
construction on three of the five buildings have been completed
and occupied. In 2001, ONI recorded restructuring expenses
associated with consolidation of excess facilities. The
restructuring expense included future lease and related expenses
of one of these unoccupied buildings. See Note 2.

ONI also has a facility lease agreement for
approximately 58,000 square feet in San Jose, California that
has been vacated due to excess facilities. The minimum monthly
lease payments for this lease are approximately $131 per month,
and the lease will expire in 2006. In 2001, ONI recorded
restructuring expenses associated with future lease and related
expenses for this vacated facility. See Note 2.

ONI has also entered into several facility lease
agreements for sales offices in the U.S., Europe, and Asia, and
research and development facilities in North Carolina and in
Canada. These non-cancelable operating leases expire on various
dates through 2006.

65



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##### Table of Contents



ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


ONI leases its headquarters facility and certain
office facilities worldwide under noncancelable operating leases
expiring through 2011, and has acquired furniture and other
equipment through capital leases. Future minimum payments for
both operating and capital leases as of December 31, 2001
are as follows:

|                                               |  |         |     |           |  |   |         | 
|---------------------------------------------- |  | ------- | --- | --------- |  | - | ------- | 
|                                               |  | Capital |     | Operating
|Year Ending December 31,                       |  | leases  |     | leases   
|                                               |  |         |     |          
|2002                                           |  | $       | 227 |           |  | $ | 11,079  | 
|2003                                           |  |         | 51  |           |  |   | 12,401  | 
|2004                                           |  |         |    |           |  |   | 14,044  | 
|2005                                           |  |         |    |           |  |   | 14,597  | 
|2006                                           |  |         |    |           |  |   | 14,437  | 
|Thereafter                                     |  |         |    |           |  |   | 61,777  | 
|                                               |  |         |     |           |  |   |         | 
|Future minimum lease payments                  |  |         | 278 |           |  | $ | 128,335 | 
|                                               |  |         |     |           |  |   |         | 
|Less amount representing interest              |  |         | (13 | )         |  |   |         | 
|                                               |  |         |     |           |  |   |         | 
|Present value of future minimum lease payments |  |         | 265 |           |  |   |         | 
|Less current portion                           |  |         | 217 |           |  |   |         | 
|                                               |  |         |     |           |  |   |         | 
|Long-term portion                              |  | $       | 48  |           |  |   |         | 
|                                               |  |         |     |           |  |   |         | 

Total rent expense under the operating leases was
$7,017, $3,902 and $908 for the years ended December 31,
2001, 2000 and 1999, respectively.

(b) Contingencies

In March 2000, Nortel Networks filed suit against
ONI in the United States District Court for the Northern
District of California. The suit involves allegations that
ONIs products infringe five patents held by Nortel
Networks, and sets forth allegations of misappropriation of
trade secrets, unlawful business practices and common law unfair
competition. Nortel Networks seeks preliminary and permanent
injunctions and damages against ONI in connection with these
claims. In April 2000, ONI filed a motion to dismiss Nortel
Networks claims for misappropriation of trade secrets,
unlawful business practices and common law unfair competition.
ONI also filed an answer and counterclaims asserting unfair
business practices, tortious interference, breach of contract
and seeking declarations of invalidity, unenforceability and
non-infringement of the patents against Nortel Networks. On
June 23, 2000, the court dismissed one of Nortel
Networks unfair competition claims. In December 2001,
Nortel Networks filed a motion seeking a summary judgment on its
claim that ONIs products infringe one of its patents. At
that time, ONI also filed a motion seeking a summary judgment
that the patent at issue was invalid. In February 2002, the
court denied both motions.

ONI expects to incur substantial legal and other
expenses in connection with the Nortel Networks litigation. In
the event of an adverse ruling, ONI also could be required to
pay damages to Nortel Networks. The accompanying consolidated
financial statements do not include any costs for damages, if
any, that might result from this uncertainty.

Beginning in August 2001, a number of
substantially identical class action complaints alleging
violations of the federal securities laws were filed in the
United States District Court for the Southern District of New
York. These complaints name ONI, Hugh C. Martin, ONIs
chairman, president and chief executive officer; Chris A.
Davis, ONIs former executive vice president, chief
financial and administrative officer; and certain underwriters
of the Companys initial public offering as defendants. The
complaints have since been consolidated into a single action.
The complaints allege, among other things, that the underwriter
defendants violated the securities laws by failing to disclose
alleged compensation arrangements (such as undisclosed
commissions or stock stabilization practices) in the initial
public offerings registration statement. The Company and
these officers are named in the complaints pursuant to
Section 11 of the Securities Act of 1933, and one of the
complaints includes a claim against the Company and these
officers under Section 10(b) of the Securities Exchange Act
of 1934. No specific amount of damages has been claimed. Similar
complaints have been filed against more than 300 other issuers
that have had initial public offerings since 1998, and all of
these actions have been included in a single coordinated
proceeding. ONI intends to defend these actions vigorously.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


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

(15) Income Taxes

Income tax expense for the years ended
December 31, 2001, 2000 and 1999 consists of:

|                           |         |                         |     |      |  |      |   |   |  |   |   |   | 
|-------------------------- | ------- | ----------------------- | --- | ---- |  | ---- | - | - |  | - | - | - | 
|                           |         |                        
|                           |         | Year ended December 31,
|                           |         |                        
|                           |         | 2001                    |     | 2000 |  | 1999
|                           |         |                         |     |      |  |     
|Current tax expense        |         |                         |     |      |  |      |   |   |  |   |   |  
|                           | Federal |                         | $   |     |  |      | $ |  |  |   | $ |  | 
|                           | State   |                         |     | 227  |  |      |   | 7 |  |   |   | 2 | 
|                           | Foreign |                         |     | 185  |  |      |   |  |  |   |   |  | 
|                           |         |                         |     |      |  |      |   |   |  |   |   |  
|Total current tax expense  |         | $                       | 412 |      |  | $    | 7 |   |  | $ | 2 |  
|                           |         |                         |     |      |  |      |   |   |  |   |   |  
|Deferred tax expense       |         |                         |    |      |  |      |  |   |  |   |  |  
|                           |         |                         |     |      |  |      |   |   |  |   |   |  
|Total deferred tax expense |         | $                       |    |      |  | $    |  |   |  | $ |  |  
|                           |         |                         |     |      |  |      |   |   |  |   |   |  

The reconciliation between the amounts computed
by applying the U.S. federal statutory tax rate of 34% to loss
before income tax and the actual provision for income taxes is
as follows:

|                                                                                              |  |                         |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                              |  |                        
|                                                                                              |  | Year ended December 31,
|                                                                                              |  |                        
|                                                                                              |  | 2001                    |         | 2000 |  | 1999
|                                                                                              |  |                         |         |      |  |     
|Income tax (benefit) at statutory rate                                                        |  |                         | (63,870 | )    |  | $    | (46,539 | ) |  | $ | (15,834 | )
|State taxes net of federal income tax benefit                                                 |  |                         | 227     |      |  |      | 7       |   |  |   | 2       |  
|Foreign taxes differentiation                                                                 |  |                         | (23     | )    |  |      |        |   |  |   |        |  
|Permanent differences                                                                         |  |                         | 479     |      |  |      | 115     |   |  |   | 24      |  
|Stock compensation                                                                            |  |                         |        |      |  |      | 15,857  |   |  |   | 3,162   |  
|Goodwill amortization                                                                         |  |                         | 510     |      |  |      | 966     |   |  |   | 483     |  
|Current year net operating loss and temporary
	differences for which no benefit is recognized |  |                         | 63,089  |      |  |      | 29,601  |   |  |   | 12,165  |  
|                                                                                              |  |                         |         |      |  |      |         |   |  |   |         |  
|Total income tax expense                                                                      |  | $                       | 412     |      |  | $    | 7       |   |  | $ | 2       |  
|                                                                                              |  |                         |         |      |  |      |         |   |  |   |         |  

67



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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


The effects of temporary differences that give
rise to significant portions of deferred tax assets and
liabilities are as follows:

|                          |                                                           |                                 |          |         |         |  |         |        |        |  
|------------------------- | --------------------------------------------------------- | ------------------------------- | -------- | ------- | ------- |  | ------- | ------ | ------ | -
|                          |                                                           |                                
|                          |                                                           | December 31,                   
|                          |                                                           |                                
|                          |                                                           | 2001                            |          | 2000   
|                          |                                                           |                                 |          |        
|Deferred tax assets:      |                                                           |                                 |          |         |         |  |         |       
|                          | Deferred state taxes                                      |                                 | $        | 1       |         |  | $       | 5      |       
|                          | Fixed assets                                              |                                 |          | 3,129   |         |  |         |       |       
|                          | Intangibles                                               |                                 |          | 5,229   |         |  |         |       |       
|                          | Inventory reserves                                        |                                 |          | 13,674  |         |  |         |       |       
|                          | Capitalized start-up and organizational expense           |                                 |          | 90      |         |  |         | 155    |       
|                          | Net operating loss carryforwards                          |                                 |          | 137,753 |         |  |         | 60,122 |       
|                          | Deferred stock compensation                               |                                 |          | 7,739   |         |  |         | 11,742 |       
|                          | Research and other credit carryforwards                   |                                 |          | 15,818  |         |  |         | 9,996  |       
|                          | Restructuring adjustments                                 |                                 |          | 10,155  |         |  |         |       |       
|                          | Accrual amounts                                           |                                 |          | 10,477  |         |  |         | 3,059  |       
|                          |                                                           |                                 |          |         |         |  |         |       
|                          |                                                           | Total gross deferred tax assets |          |         | 204,065 |  |         |        | 85,079 |  
|Valuation allowance       |                                                           |                                 | (204,065 | )       |         |  | (84,901 | )     
|                          |                                                           |                                 |          |         |         |  |         |       
|                          |                                                           | Total deferred tax assets       |          |         |        |  |         |        | 178    |  
|Deferred tax liabilities: |                                                           |                                 |          |         |         |  |         |       
|                          | Intangibles                                               |                                 |          |        |         |  |         | (62    | )     
|                          | Fixed assets                                              |                                 |          |        |         |  |         | (116   | )     
|                          |                                                           |                                 |          |         |         |  |         |       
|                          |                                                           | Total deferred tax liabilities  |          |         |        |  |         |        | (178   | )
|                          | Net deferred tax assets, net of deferred tax
	liabilities |                                 | $        |        |         |  | $       |       |       
|                          |                                                           |                                 |          |         |         |  |         |       

ONI has established a valuation allowance of
$204,065 as of December 31, 2001, and the valuation
allowance increased by $119,164 from $84,901 as of
December 31, 2000. Included in the valuation allowance are
tax benefits attributable to noncompensatory stock options of
$57,095 which, when realized, will be a credit to additional
paid-in-capital. The valuation allowance for deferred tax assets
increased by $64.2 million and $16.7 million in 2000
and 1999, respectively.

Deferred tax liabilities have not been recognized
for undistributed earnings of foreign subsidiaries because ONI
intends to reinvest such undistributed earnings outside the U.S.

As of December 31, 2001, ONI has net
operating loss carryforwards for federal and California income
tax purposes of approximately $368,575 and $149,247,
respectively, available to reduce future income subject to
income taxes. The net operating loss carryforwards for federal
income tax purposes will expire in various years beginning in
2017 through 2021. The net operating loss carryforwards for
California income tax purposes expire beginning in 2005 through
2011.

ONI has research credit carryforwards as of
December 31, 2001, for federal and California income tax
return purposes of approximately $8,936 and $9,463,
respectively, available to reduce future income taxes. The
federal research credit carryforward will expire in various
years beginning in 2012 through 2021. The California research
credit can be carried forward indefinitely until utilized. ONI
also has a California manufacturing investment credit
carryforward of approximately $964 which will expire in various
years beginning in 2007 through 2010.

ONIs ability to use net operating loss and
credit carryforwards may be subject to limitations pursuant to
the ownership change rules of the Internal Revenue Code
Section 382 and corresponding state tax law.

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ONI SYSTEMS CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except share and per share
data)


(16) Employee Benefit Plan

ONI has an Employee Savings and Retirement Plan
(the Benefit Plan) under Section 401(k) of the Internal
Revenue Code for its eligible employees. The Benefit Plan is
available to all of ONIs employees who meet minimum age
and service requirements, and provides employees with tax
deferred salary deductions and alternative investment options.
Employees may contribute up to 15% of their eligible earnings,
subject to certain limitations. There are no matching
contributions under the Benefit Plan.

(17) Subsequent Events

On February 17, 2002, ONI entered into an
Agreement and Plan of Merger with CIENA Corporation, a Delaware
corporation. According to the Agreement and Plan of Merger,
effective on and as of the closing date, which has not yet been
determined, ONI will merge with and into CIENA, with CIENA
surviving the merger. The proposed transaction remains subject
to a number of contingencies, including approval of the
stockholders of both ONI and CIENA, receipt of regulatory
approvals and other customary closing conditions. The proposed
merger will be accounted for under the purchase method of
accounting.

Upon consummation of the merger, CIENA will issue
0.7104 shares of its common stock for each outstanding share of
ONI common stock and will convert all outstanding ONI options
and warrants into options and warrants to purchase shares of
CIENA common stock. CIENA will assume ONIs outstanding 5%
subordinated convertible notes due 2005.

On February 20, 2002, a complaint was filed
on behalf of a purported class of ONI security holders in
Superior Court of the State of California, County of San Mateo,
against ONI, Matthew Bross, Kevin Compton, Jonathan Feiber,
Gregory Maffei and Hugh Martin seeking an injunction to prevent
the consummation of the proposed merger with CIENA. The
complaint alleges that the defendants, in connection with the
approval of the proposed merger with CIENA, breached their
fiduciary duties, including duties of loyalty and good faith, to
ONI stockholders by, among other things, allegedly failing to
obtain the highest value for ONI stockholders, engaging in
self-dealing and unjustly enriching themselves and other
insiders or affiliates of ONI. ONI believes that the lawsuit is
without merit and intends to defend this action vigorously.

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Selected Unaudited Quarterly Results of
Operations

The following selected unaudited quarterly data
should be read in conjunction with the Consolidated Financial
Statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Annual Report on
Form 10-K. This information has been derived from our
unaudited consolidated financial statements that, in our
opinion, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present this
information when read in conjunction with our Consolidated
Financial Statements and related notes appearing in the section
titled Financial Statements. The results of
operations for any quarter are not necessarily indicative of the
results to be expected for any future period.

|                                                                         |  |                                      |         |         |  |         |         |         |  |             |          |   |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------ |  | ------------------------------------ | ------- | ------- |  | ------- | ------- | ------- |  | ----------- | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                                         |  | First                                |         | Second  |  | Third   |         | Fourth  |  |            
|                                                                         |  | Quarter                              |         | Quarter |  | Quarter |         | Quarter |  | Fiscal Year
|                                                                         |  |                                      |         |         |  |         |         |         |  |            
|                                                                         |  |                                     
|                                                                         |  | (In thousand, except per share data)
|Fiscal 2001                                                              |  |                                      |         |         |  |         |         |         |  |             |          |   |  |   |         |   |  |   |          |  
|Revenue                                                                  |  | $                                    | 45,102  |         |  | $       | 68,229  |         |  | $           | 40,186   |   |  | $ | 42,163  |   |  | $ | 195,680  |  
|Gross profit (loss)                                                      |  |                                      | 17,346  |         |  |         | 26,520  |         |  |             | (21,987  | ) |  |   | 7,185   |   |  |   | 29,064   |  
|Loss before income taxes                                                 |  |                                      | (31,090 | )       |  |         | (18,564 | )       |  |             | (103,717 | ) |  |   | (34,483 | ) |  |   | (187,854 | )
|Net loss                                                                 |  |                                      | (31,091 | )       |  |         | (18,564 | )       |  |             | (103,873 | ) |  |   | (34,738 | ) |  |   | (188,266 | )
|Basic and diluted net loss per share                                     |  | $                                    | (0.24   | )       |  | $       | (0.14   | )       |  | $           | (0.77    | ) |  | $ | (0.25   | ) |  | $ | (1.40    | )
|Number of shares used in computing basic and
	diluted net loss per share |  |                                      | 129,173 |         |  |         | 132,612 |         |  |             | 134,778  |   |  |   | 136,970 |   |  |   | 134,756  |  
|Fiscal 2000                                                              |  |                                      |         |         |  |         |         |         |  |             |          |   |  |   |         |   |  |   |          |  
|Revenue                                                                  |  | $                                    | 3,633   |         |  | $       | 9,485   |         |  | $           | 16,381   |   |  | $ | 30,163  |   |  | $ | 59,662   |  
|Gross profit                                                             |  |                                      | 783     |         |  |         | 2,616   |         |  |             | 5,255    |   |  |   | 11,028  |   |  |   | 19,682   |  
|Loss before income taxes                                                 |  |                                      | (34,165 | )       |  |         | (39,377 | )       |  |             | (35,087  | ) |  |   | (28,251 | ) |  |   | (136,880 | )
|Net loss                                                                 |  |                                      | (34,167 | )       |  |         | (39,377 | )       |  |             | (35,087  | ) |  |   | (28,256 | ) |  |   | (136,887 | )
|Basic and diluted net loss per share                                     |  | $                                    | (1.41   | )       |  | $       | (0.40   | )       |  | $           | (0.30    | ) |  | $ | (0.23   | ) |  | $ | (1.22    | )
|Number of shares used in computing basic and
	diluted net loss per share |  |                                      | 103,154 |         |  |         | 109,558 |         |  |             | 118,774  |   |  |   | 124,344 |   |  |   | 115,587  |  

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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
	ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.




PART III






|         |                                                    
|-------- | ---------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
	REGISTRANT

Information about executive officers and
directors that is required by this Item can be found in
Item 4A  Directors and Executive Officers
of the Registrant.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires our directors, executive officers
and holders of more than 10% of our common stock, to file with
the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of our common
stock. We believe that during the fiscal year ended
December 31, 2001, our directors and executive officers
complied with all of these filing requirements. To our
knowledge, Massachusetts Financial Services Co., beneficial
owner of more than 10% of our common stock as of
December 31, 2001, has not filed a Form 3 or any
subsequent Section 16 reports with the SEC. In making these
statements, we have relied solely on a review of copies of
reports filed under Section 16(a) furnished to us and on
the written representations of our directors and executive
officers.

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ITEM
11.     EXECUTIVE
COMPENSATION

The following table presents compensation
information for 1999, 2000 and 2001 paid or accrued to our named
executive officers, who are:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our Chief Executive Officer;                                                                                                                                                                                  
|
| |  | our four other most highly compensated executive
	officers who were serving as executive officers at the end of
	2001 whose salary and bonus for the year ended December 31,
	2001 was more than $100,000; and
|
| |  | our Vice President, Business Development, who
	ceased to be an executive officer effective in October 2001 due
	to a change in reporting structure.                                                           

We have not granted stock appreciation rights.

The table includes compensation for Ken
Burckhardt, our former Vice President, Finance and Interim Chief
Financial Officer, who resigned in February 2002. The table does
not include compensation information for George Reyes who was
appointed Interim Chief Financial Officer in February 2002.
Under Mr. Reyes Services Agreement, his compensation
on a annualized basis for 2002 is $240,000.

Summary Compensation Table for 2001

|                                 |                                        |      |      |                     |  |                  |         |                     |  |         |         |         |     |   |   |   |  |  |         |           | 
|-------------------------------- | -------------------------------------- | ---- | ---- | ------------------- |  | ---------------- | ------- | ------------------- |  | ------- | ------- | ------- | --- | - | - | - |  |  | ------- | --------- | 
|                                 |                                        |      |      |                     |  |                  |         |                    
|                                 |                                        |      |      |                     |  |                  |         | Long-Term          
|                                 |                                        |      |      |                     |  |                  |         | Compensation Awards
|                                 |                                        |      |      |                     |  |                 
|                                 |                                        |      |      | Annual Compensation |  |                  |         | Securities         
|                                 |                                        |      |      |                     |  | Restricted Stock |         | Underlying         
|Name and FY01 Principal Position |                                        | Year |      | Salary              |  | Bonus            |         | Award(s)            |  | Options
|                                 |                                        |      |      |                     |  |                  |         |                     |  |        
|Hugh C. Martin                   |                                        |      | 2001 |                     |  | $                | 275,625 |                     |  | $       |        |         |     | $ |  |   |  |  | 550,000 |          
|                                 | President, Chief Executive Officer and |      |      | 2000                |  |                  |         | 280,000             |  |         |         |        |     |   |   |  |  |  |         |          | 
|                                 | Chairman of the Board of Directors     |      |      | 1999                |  |                  |         | 270,001             |  |         |         |        |     |   |   |  |  |  |         | 1,215,834 | 
|Ken Burckhardt                   |                                        |      | 2001 |                     |  |                  | 245,192 |                     |  |         |        |         |     |   |  |   |  |  | 100,000 | (2)      
|                                 | Vice President, Finance and Interim    |      |      | 2000                |  |                  |         | 166,667             |  |         |         | 75,000  |     |   |   |  |  |  |         | 275,000   | 
|                                 | Chief Financial Officer(1)             |      |      | 1999                |  |                  |         |                    |  |         |         |        |     |   |   |  |  |  |         |          | 
|William R. Cumpston              |                                        |      | 2001 |                     |  |                  | 293,269 |                     |  |         | 50,000  |         |     |   |  |   |  |  | 400,000 |          
|                                 | Executive Vice President and           |      |      | 2000                |  |                  |         | 262,500             |  |         |         | 25,000  |     |   |   |  |  |  |         | 50,000    | 
|                                 | Chief Operating Officer                |      |      | 1999                |  |                  |         | 191,666             |  |         |         | 85,000  |     |   |   |  |  |  |         | 800,000   | 
|Robert J. Jandro                 |                                        |      | 2001 |                     |  |                  | 289,327 |                     |  |         | 166,500 | (4)     |     |   |  |   |  |  | 100,000 |          
|                                 | Executive Vice President,              |      |      | 2000                |  |                  |         | 245,833             |  |         |         | 249,250 | (5) |   |   |  |  |  |         | 900,000   | 
|                                 | Global Sales and Services(3)           |      |      | 1999                |  |                  |         |                    |  |         |         |        |     |   |   |  |  |  |         |          | 
|Andrew W. Page                   |                                        |      | 2001 |                     |  |                  | 294,230 |                     |  |         |        |         |     |   |  |   |  |  | 100,000 | (6)      
|                                 | Vice President, Business Development   |      |      | 2000                |  |                  |         | 250,000             |  |         |         | 30,000  |     |   |   |  |  |  |         | 350,000   | 
|                                 |                                        |      | 1999 |                     |  |                  |        |                     |  |         |        |         |     |   |  |   |  |  |        |          
|Rohit Sharma                     |                                        |      | 2001 |                     |  |                  | 294,230 |                     |  |         |        |         |     |   |  |   |  |  | 200,000 |          
|                                 | Executive Vice President and           |      |      | 2000                |  |                  |         | 271,307             |  |         |         |        |     |   |   |  |  |  |         | 200,000   | 
|                                 | Chief Technology Officer               |      |      | 1999                |  |                  |         | 147,981             |  |         |         |        |     |   |   |  |  |  |         | 256,668   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Burckhardt commenced employment with ONI
	Systems in May 2000. Mr. Burckhardts salary on an
	annualized basis for 2000 was $250,000. Mr. Burckhardt became
	our Interim Chief Financial Officer in August 2001.                                                                                                                                                                                                                                                                       
|   
|(2) | In addition to the option to purchase 100,000
	shares of ONI Systems common stock granted to
	Mr. Burckhardt in 2001, in August 2001, we entered into an
	agreement with Mr. Burckhardt to award him a stock bonus of
	100,000 shares of ONI Systems common stock subject to his
	continuing to provide services to ONI Systems as an employee
	until February 9, 2002. The stock bonus award was issued to
	Mr. Burckhardt in February 2002.                                              
|   
|(3) | Mr. Jandro commenced employment with ONI
	Systems in March 2000. Mr. Jandros salary on an annualized
	basis for 2000 was $295,000.                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | Includes Mr. Jandros commissions
	earned in 2001 which were paid in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | Includes Mr. Jandros commissions
	earned in 2000 which were paid in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | Mr. Page elected to cancel his option to
	purchase 100,000 shares of ONI Systems common stock in
	connection with our stock option exchange program. The option
	was cancelled on November 19, 2001. Mr. Page was
	eligible to participate in the stock option exchange program
	because he ceased to be an executive officer effective October
	2001 due to a change in reporting structure. Our other executive
	officers and directors were not eligible to participate in the
	program.

72



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Option Grants in 2001

The following table presents the year 2001 grants
of stock options to our named executive officers.

All options generally vest over four years,
either:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | at the rate of 25% of the shares subject to the
	option on the first anniversary of the date of grant and 2.083%
	each month thereafter; or
|
| |  | at the rate 2.083% of the shares subject to the
	option each month.                                                                        

Options expire ten years from the date of grant.
Options were granted at an exercise price equal to the fair
market value of our common stock, as determined by the board of
directors as of the date of grant.

Potential realizable values are computed by:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | multiplying the number of shares of common stock
	subject to a given option by the market price per share of our
	common stock on the date of grant;                                         
|
| |  | assuming that the aggregate option exercise price
	derived from that calculation compounds at the annual 5% or 10%
	rates shown in the table for the entire ten-year term of the
	option; and
|
| |  | subtracting from that result the aggregate option
	exercise price.                                                                                                                           

The 5% and 10% assumed annual rates of stock
price appreciation are required by the rules of the Securities
and Exchange Commission and do not represent our estimate or
projection of future common stock prices. The percentage of
total options granted to employees in 2001 is based on options
to purchase a total of 10,373,640 shares of our common stock
granted to employees during 2001.

|                    |  |            |         |            |  |           |     |            |  |                                    |       |     |  |  |         |  |  |   |            |  |  |   |            | 
|------------------- |  | ---------- | ------- | ---------- |  | --------- | --- | ---------- |  | ---------------------------------- | ----- | --- |  |  | ------- |  |  | - | ---------- |  |  | - | ---------- | 
|                    |  |            |         | Percentage |  |           |     |            |  |                                   
|                    |  | Number of  |         | of Total   |  |           |     |            |  | Potential Realizable Value at     
|                    |  | Securities |         | Options    |  |           |     |            |  | Assumed Annual Rates of Stock     
|                    |  | Underlying |         | Granted to |  | Exercise  |     |            |  | Price Appreciation for Option Term
|                    |  | Options    |         | Employees  |  | Price Per |     | Expiration |  |                                   
|Name                |  | Granted    |         | In 2001    |  | Shares    |     | Date       |  | 5%                                 |       | 10%
|                    |  |            |         |            |  |           |     |            |  |                                    |       |    
|Hugh C. Martin      |  |            | 550,000 |            |  |           | 5.3 | %          |  | $                                  | 49.31 |     |  |  | 1/29/11 |  |  | $ | 17,055,937 |  |  | $ | 43,223,092 | 
|Ken Burckhardt(1)   |  |            | 100,000 |            |  |           | 1.0 | %          |  |                                    | 49.31 |     |  |  | 1/29/11 |  |  |   | 3,101,079  |  |  |   | 7,858,744  | 
|William R. Cumpston |  |            | 400,000 |            |  |           | 3.9 | %          |  |                                    | 49.31 |     |  |  | 1/29/11 |  |  |   | 12,404,318 |  |  |   | 31,434,976 | 
|Robert J. Jandro    |  |            | 100,000 |            |  |           | 1.0 | %          |  |                                    | 49.31 |     |  |  | 1/29/11 |  |  |   | 3,101,079  |  |  |   | 7,858,744  | 
|Andrew W. Page      |  |            | 100,000 | (2)        |  |           | 1.0 | %          |  |                                    | 49.31 |     |  |  | 1/29/11 |  |  |   | 3,101,079  |  |  |   | 7,858,744  | 
|Rohit Sharma        |  |            | 200,000 |            |  |           | 1.9 | %          |  |                                    | 49.31 |     |  |  | 1/29/11 |  |  |   | 6,202,159  |  |  |   | 15,717,488 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In addition to the option to purchase 100,000
	shares of ONI Systems common stock granted to
	Mr. Burckhardt in 2001, in August 2001, we entered into an
	agreement with Mr. Burckhardt to award him a stock bonus of
	100,000 shares of ONI Systems common stock subject to his
	continuing to provide services to ONI Systems as an employee
	until February 9, 2002. The stock bonus award was issued to
	Mr. Burckhardt in February 2002.                                              
|   
|(2) | Mr. Page elected to cancel his option to
	purchase 100,000 shares of ONI Systems common stock in
	connection with our stock option exchange program. The option
	was cancelled on November 19, 2001. Mr. Page was
	eligible to participate in the stock option exchange program
	because he ceased to be an executive officer effective
	October 2001 due to a change in reporting structure. Our
	other executive officers and directors were not eligible to
	participate in the program.

Option Grants in 2002

The following table sets forth grants of stock
options to our named executive officers and our new executive
officers since December 31, 2001.

|                    |  |            |         |           |  |            |      |                               |  |     |         |  |  |   |           |  |  |   |           | 
|------------------- |  | ---------- | ------- | --------- |  | ---------- | ---- | ----------------------------- |  | --- | ------- |  |  | - | --------- |  |  | - | --------- | 
|                    |  |            |         |           |  |            |      |                              
|                    |  |            |         |           |  |            |      | Potential Realizable Value at
|                    |  | Number of  |         |           |  |            |      | Assumed Annual Rates of Stock
|                    |  | Securities |         |           |  |            |      | Price Appreciation for Option
|                    |  | Underlying |         | Exercise  |  |            |      | Term                         
|                    |  | Options    |         | Price Per |  | Expiration |      |                              
|Name                |  | Granted    |         | Shares    |  | Date       |      | 5%                            |  | 10%
|                    |  |            |         |           |  |            |      |                               |  |    
|William R. Cumpston |  |            | 750,000 |           |  | $          | 5.21 |                               |  |     | 2/21/12 |  |  | $ | 2,457,406 |  |  | $ | 6,227,549 | 
|Rohit Sharma        |  |            | 550,000 |           |  |            | 5.21 |                               |  |     | 2/21/12 |  |  |   | 1,802,098 |  |  |   | 4,566,869 | 
|George Reyes        |  |            | 24,000  | (1)       |  |            | 4.75 |                               |  |     | 1/24/12 |  |  |   | 71,694    |  |  |   | 181,687   | 



---



|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Reyes option to purchase 24,000
	shares of common stock vests and becomes exercisable as to 8,000
	shares on a monthly basis. The option is also exercisable for
	twelve months after Mr. Reyes ceases to provide services to
	ONI Systems.

73



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##### Table of Contents



Option Exercises and Year-End Values

The following table presents the number of shares
acquired and the value realized upon exercise of stock options
during 2001 by our named executive officers. The value realized
equals the fair market value of the purchased shares on the
option exercise date, less the exercise price paid for those
shares. The table also presents the number of shares of common
stock subject to vested and unvested
stock options held as of December 31, 2001. It also shows
the value of in-the-money options as of
December 31, 2001, which represents the positive difference
between the aggregate exercise price of the outstanding stock
option and the aggregate fair market value of the option based
on $6.27, the closing price per share of our common stock on
December 31, 2001, the last trading day of fiscal 2001, as
reported on the Nasdaq National Market.

Aggregated Option Exercises in 2001 and
December 31, 2001 Option Values

|                    |  |             |        |          |  |                       |           |                      |  |        |         |          |  |  |         |  |  |   |   |  |  |   |   | 
|------------------- |  | ----------- | ------ | -------- |  | --------------------- | --------- | -------------------- |  | ------ | ------- | -------- |  |  | ------- |  |  | - | - |  |  | - | - | 
|                    |  |             |        |          |  |                       |           |                      |  |       
|                    |  |             |        |          |  |                       |           | Value of Unexercised
|                    |  |             |        |          |  | Number of Unexercised |           | In-the-Money Options
|                    |  | Shares      |        |          |  | Options at Year-End   |           | at Year-End         
|                    |  | Acquired    |        | Value    |  |                       |           |                     
|Name                |  | On Exercise |        | Realized |  | Vested                |           | Unvested             |  | Vested |         | Unvested
|                    |  |             |        |          |  |                       |           |                      |  |        |         |         
|Hugh C. Martin      |  |             |       |          |  | $                     |          |                      |  |        |        |          |  |  | 550,000 |  |  | $ |  |  |  | $ |  | 
|Ken Burckhardt      |  |             | 37,500 |          |  |                       | 1,461,754 |                      |  |        | 102,084 |          |  |  | 272,916 |  |  |   |  |  |  |   |  | 
|William R. Cumpston |  |             |       |          |  |                       |          |                      |  |        | 19,792  |          |  |  | 430,208 |  |  |   |  |  |  |   |  | 
|Robert J. Jandro    |  |             |       |          |  |                       |          |                      |  |        |        |          |  |  | 100,000 |  |  |   |  |  |  |   |  | 
|Andrew W. Page      |  |             |       |          |  |                       |          |                      |  |        | 19,792  |          |  |  | 30,208  |  |  |   |  |  |  |   |  | 
|Rohit Sharma        |  |             |       |          |  |                       |          |                      |  |        | 51,042  |          |  |  | 298,958 |  |  |   |  |  |  |   |  | 

Employee Benefit Plans



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | 1997 Stock Option Plan, 1998 Equity Incentive
	Plan and 1999 Equity Incentive Plan

Our 1997 stock option plan, 1998 equity incentive
plan and 1999 equity incentive plan terminated on or prior to
our initial public offering on May 31, 2000, at which time
our 2000 equity incentive plan become effective. Since that
time, no additional options have been granted or in the future
will be granted under these plans. However, the terminations did
not affect any options outstanding under these plans, all of
which will remain outstanding until exercised or until they
terminate or expire by their terms. Options granted under these
plans are subject to terms substantially similar to those
described below with respect to options granted under our 2000
equity incentive plan.



| |                           
| | --------------------------
| | 2000 Equity Incentive Plan

As of December 31, 2001, options to purchase
3,561,008 shares of common stock were outstanding under our 2000
equity incentive plan, with a weighted average exercise price of
$41.43 per share. Our 2000 equity incentive plan became
effective on May 31, 2000 and serves as the successor to
our 1998 equity incentive plan and our 1999 equity incentive
plan.

We initially reserved 7,048,905 shares of common
stock to be issued under this plan. In addition, any shares
issued under our 1997 stock option plan, 1998 equity incentive
plan and 1999 equity incentive plan that are forfeited or
repurchased by us or that are issuable upon exercise of options
that become unexercisable for any reason without having been
exercised in full, are available for grant and issuance under
our 2000 equity incentive plan. Shares will again be available
for grant and issuance under our 2000 equity incentive plan that:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | are subject to issuance upon exercise of an
	option that cease to be subject to the option for any reason
	other than option exercise;                            
|
| |  | have been issued upon exercise of an option that
	are subsequently forfeited or repurchased by us at the original
	purchase price;                                
|
| |  | are subject to an award granted under a
	restricted stock purchase agreement that are subsequently
	forfeited or repurchased by us at the original issue price; or
|
| |  | are subject to a stock bonus granted under our
	2000 equity incentive plan that terminates without shares being
	issued.                                          

In addition, on January 1 of each year, the
aggregate number of shares reserved for issuance under our 2000
equity incentive plan automatically increases by a number of
shares equal to 5% of our outstanding shares on December 31
of

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the preceding year. Our board of directors or
compensation committee may reduce the amount of the increase in
any particular year. The aggregate number of shares reserved for
issuance under our 2000 equity incentive plan automatically
increased by 6,654,453 on January 1, 2001 and by 7,019,649
on January 1, 2002.


In October 2001, we offered some of our employees
the right to exchange their existing options for new options
with a new exercise price. Upon expiration of the offering
period for this stock option exchange program in November 2001,
we accepted 7,262,858 shares for cancellation and, subject to
the terms of the exchange offer, are obligated to issue new
options to purchase the same number of shares on or after
May 20, 2002. As described above, the 7,262,858 shares
subject to the canceled options are now available for grant and
issuance under the 2000 equity incentive plan.

As of January 1, 2002, following the
automatic increase and the cancellation of options in connection
with our stock option exchange program, options to purchase
3,561,008 shares were outstanding, and we had 20,628,329 shares
of common stock available for issuance under the 2000 equity
incentive plan.

Our 2000 equity incentive plan will terminate
after ten years from the date our board of directors approved
the plan, unless it is terminated earlier by our board of
directors. The plan authorizes the award of options, restricted
stock awards and stock bonuses. No person is eligible to receive
more than 1,000,000 shares in any calendar year under the plan
other than a new employee of ONI Systems, who will be eligible
to receive no more than 2,000,000 shares in the calendar year in
which the employee commences employment.

Our 2000 equity incentive plan is administered by
our compensation committee, all of the members of which are
non-employee directors under applicable federal securities laws
and outside directors as defined under applicable federal tax
laws. The compensation committee is authorized to construe and
interpret the plan, grant awards and make all other
determinations necessary or advisable for the administration of
the plan. Also, our non-employee directors are entitled to
receive annual grants of options to purchase shares of our
common stock, as described under Director
Compensation.

Our 2000 equity incentive plan provides for the
grant of both incentive stock options and nonqualified stock
options. Incentive stock options may be granted only to
employees of ONI Systems or of a parent or subsidiary of ONI
Systems. All other awards other than incentive stock options may
be granted to employees, officers, directors and consultants of
ONI Systems or any parent or subsidiary of ONI Systems, provided
the consultants render bona fide services not in connection with
the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must
be at least equal to the fair market value of our common stock
on the date of grant. The exercise price of incentive stock
options granted to 10% stockholders must be at least equal to
110% of that value. The exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value
of our common stock on the date of grant.

Options may be exercised only as they vest or may
be immediately exercisable with the shares issued subject to our
right of repurchase that lapses as the shares vest. In general,
options will vest over a four-year period. The maximum term of
options granted under our 2000 equity incentive plan is ten
years.

Awards granted under our 2000 equity incentive
plan generally may not be transferred in any manner other than
by will or by the laws of descent and distribution. They may be
exercised during the lifetime of the optionee only by the
optionee. The compensation committee may determine otherwise and
provide for these provisions in the award agreement, but only
with respect to awards that are not incentive stock options.
Options granted under our 2000 equity incentive plan generally
may be exercised for a period of three months after the
termination of the optionees service to ONI Systems or a
parent or subsidiary of ONI Systems. Options will generally
terminate immediately upon termination of employment for cause.

The purchase price for restricted stock will be
determined by our compensation committee. Stock bonuses may be
issued for past services or may be awarded upon the completion
of stated services or performance goals.



| |                                  
| | ---------------------------------
| | 2000 Employee Stock Purchase Plan

Our 2000 employee stock purchase plan became
effective on June 1, 2000. We initially reserved 1,000,000
shares of common stock under this plan. On January 1 of each
year, the aggregate number of shares reserved for issuance under
our 2000 employee stock purchase plan automatically increases by
a number of shares equal to 1% of our outstanding shares on
December 31 of the preceding year. Our board of directors
or compensation committee may reduce the amount of the increase
in any particular year. The aggregate number of shares reserved
for issuance under our 2000 employee stock purchase plan
increased by 1,330,890 on January 1, 2001 and by 1,403,929
on January 1, 2002. Following the automatic increase on
January 1, 2002, we had 3,360,633 shares of common stock
available for issuance under the 2000

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employee stock purchase plan. The aggregate
number of shares reserved for issuance under our 2000 employee
stock purchase plan may not exceed 10,000,000 shares.


Our 2000 employee stock purchase plan is
administered by our compensation committee. Our compensation
committee will have the authority to construe and interpret the
plan, and its decisions will be final and binding.

Employees generally are eligible to participate
in our 2000 employee stock purchase plan if they are employed
before the beginning of the applicable offering period and they
are customarily employed by us, or our parent or any
subsidiaries that we designate, for more than 20 hours per week
and more than five months in a calendar year and are not, and
would not become as a result of being granted an option under
the plan, 5% stockholders of us or our designated parent or
subsidiaries. Participation in our 2000 employee stock purchase
plan ends automatically upon termination of employment for any
reason.

Under our 2000 employee stock purchase plan,
eligible employees are permitted to acquire shares of our common
stock through payroll deductions. Eligible employees may select
a rate of payroll deduction between 1% and 15% of their
compensation and are subject to maximum purchase limitations.

Except for the first offering period, each
offering period under our 2000 employee stock purchase plan will
be for two years and consist of four six-month purchase periods.
Offering periods and purchase periods begin on February 1
and August 1 of each year.

Our 2000 employee stock purchase plan provides
that, in the event of our proposed dissolution or liquidation,
each offering period that commenced prior to the closing of the
proposed event will continue for the duration of the offering
period, provided that the compensation committee may fix a
different date for termination of the plan. The purchase price
for common stock purchased under the plan is 85% of the lesser
of the fair market value of our common stock on the first day of
the applicable offering period or the last day of the applicable
purchase period. The compensation committee has the power to
change the offering dates, purchase dates and duration of
offering periods without stockholder approval, if the change is
announced prior to the beginning of the affected date or
offering period.

Our 2000 employee stock purchase plan is intended
to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code. The plan will
terminate ten years from the date the plan was adopted by our
board of directors, unless it is terminated earlier under the
terms of the plan. The board of directors has the authority to
amend, terminate or extend the term of the plan, except that no
action may adversely affect any outstanding options previously
granted under the plan.

Except for the automatic annual increase of
shares described above, stockholder approval is required to
increase the number of shares that may be issued or to change
the terms of eligibility under our 2000 employee stock purchase
plan. The board of directors is able to make amendments to the
plan as it determines to be advisable if the financial
accounting treatment for the plan is different from the
financial accounting treatment in effect on the date the plan
was adopted by the board of directors.

Director Compensation

Directors are not paid for their services as
members of our board of directors or any committee (other than
reimbursement for expenses), except that non-employee directors
are eligible to participate in our 2000 equity incentive plan.
Under the terms of the 2000 equity incentive plan, each
non-employee director who becomes a member of the board of
directors will be granted an option to purchase 80,000 shares of
common stock on the date on which the individual first becomes a
non-employee director. Immediately following each annual meeting
of stockholders, each non-employee director will be granted an
additional option to purchase 40,000 shares of common stock if
the director has served continuously as a member of the board of
directors since the date of the prior annual meeting. The board
of directors may make discretionary supplemental grants to a
non-employee director who has served for less than one year from
the date of that directors initial grant. The options have
ten-year terms. They will terminate three months following the
date the director ceases to be a director or a consultant or
12 months following termination due to death or disability.
All options granted under the 2000 equity incentive plan will
become exercisable over a four year period at a rate of 25%
after one year and 2.083% per month thereafter so long as he or
she continues as a member of the board of directors or as a
consultant. In the event of our dissolution or liquidation or a
change in control transaction, options granted to directors
under the 2000 equity incentive plan will become 100% vested and
exercisable in full.

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Compensation Arrangements with Named Executive
Officers.

Ken Burckhardt.In
August 2001, we entered into an agreement with
Mr. Burckhardt to award Mr. Burckhardt a stock bonus
of 100,000 shares of common stock subject to Mr. Burckhardt
continuing to provide services to ONI Systems as an employee
until February 9, 2002. We also agreed to acceleration of
vesting with respect to 18,750 shares subject to options granted
to Mr. Burckhardt on May 3, 2000 subject to
Mr. Burckhardt continuing to provide services to ONI
Systems as an employee until February 9, 2002.

Robert J. Jandro.In
February 2000, we entered into an at-will employment agreement
with Mr. Jandro. Mr. Jandro initially received a base
salary of $295,000 per year. Mr. Jandro was also eligible
to earn a commission with a target of $200,000.
Mr. Jandros current salary is $250,000 per year and
he is eligible to receive an annual performance bonus of up to
$200,000. We also granted him an option to purchase 900,000
shares of common stock, subject to vesting requirements. In the
event of a change in control of ONI Systems, 25% of the
then-unvested shares subject to Mr. Jandros stock
option and 25% of the then-unvested shares of any other
securities granted to Mr. Jandro by us will become fully
vested.

Andrew W. Page.In
February 2000, we entered into an at-will employment agreement
with Mr. Page. Mr. Page initially received a base
salary of $300,000 per year. Mr. Pages current salary
is $300,000 per year. Mr. Page also received a signing
bonus of $30,000, and we granted him an option to purchase
300,000 shares of common stock, subject to vesting requirements.
In the event of a change of control of ONI Systems, 50% of the
then-unvested shares of any other securities granted to
Mr. Page by us will become fully vested.

George Reyes.In
January 2002, we entered into a services agreement with
Mr. Reyes. Under the terms of this agreement,
Mr. Reyes agreed to provide financial consulting services
and serve as our Interim Chief Financial Officer. Mr. Reyes
provides these services to ONI Systems as an independent
contractor for a monthly fee of $20,000. We agreed to grant
Mr. Reyes an option to purchase 24,000 shares of common
stock, subject to vesting requirements. The services agreement
expires in April 2002.

Compensation Committee Interlocks and Insider
Participation

None of the members of the compensation committee
(consisting of Messrs. Compton and Feiber) has at any time since
our formation been an officer or employee of ours. None of our
executive officers currently serves or in the past has served as
a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving on
our board of directors or compensation committee. Prior to the
creation of our compensation committee in March 2000, all
compensation decisions were made by our full board of directors.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT



| |                                               
| | ----------------------------------------------
| | Security Ownership of Significant
	Stockholder

The following table presents information as to
the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our
common stock as of December 31, 2001:

|                                        |  |            |            |          |  |  |      |  
|--------------------------------------- |  | ---------- | ---------- | -------- |  |  | ---- | -
|                                        |  | Amount and |            |         
|                                        |  | Nature of  |            | Percent 
|                                        |  | Beneficial |            | of      
|Name and Address of Beneficial Owner    |  | Ownership  |            | Class(1)
|                                        |  |            |            |         
|Massachusetts Financial Services Co.(2) |  |            | 18,477,264 |          |  |  | 13.2 | %
|500 Boylston Street, 15th Floor         |  |            |            |          |  |  |      |  
|Boston, MA 02116                        |  |            |            |          |  |  |      |  



---



|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on 140,392,985 shares outstanding as
	of December 31, 2001.                                                               
|   
|(2) | Based on information provided pursuant to
	Schedule 13G filed with the Securities and Exchange
	Commission on February 14, 2002.

Security
Ownership of Management

The following table presents information as to
the beneficial ownership of our common stock as of March 1,
2002:



| |   |                                             
| | - | --------------------------------------------
| |  | each of our directors;                      
|
| |  | our named executive officers; and           
|
| |  | directors and executive officers as a group.

The percentage ownership is based on
141,554,944 shares of common stock outstanding as of
March 1, 2002. Shares of common stock that are subject to
options currently exercisable or exercisable within 60 days
of March 1, 2002, are deemed outstanding for the purposes
of computing the percentage ownership of the person holding
these options but are not deemed outstanding for computing the
percentage ownership of any other person. Beneficial ownership
is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power
with respect to securities.

|                                                                  |  |            |            |         |  |  |      |  
|----------------------------------------------------------------- |  | ---------- | ---------- | ------- |  |  | ---- | -
|                                                                  |  | Amount and |            |        
|                                                                  |  | Nature of  |            | Percent
|                                                                  |  | Beneficial |            | of     
|Name of Beneficial Owner                                          |  | Ownership  |            | Class  
|                                                                  |  |            |            |        
|Jonathan D. Feiber(1)                                             |  |            | 5,326,322  |         |  |  | 3.8  | %
|Hugh C. Martin(2)                                                 |  |            | 5,278,086  |         |  |  | 3.7  |  
|Kevin R. Compton(3)                                               |  |            | 1,936,798  |         |  |  | 1.4  |  
|James F. Jordan(4)                                                |  |            | 1,502,581  |         |  |  | 1.1  |  
|William R. Cumpston(5)                                            |  |            | 930,655    |         |  |  | *    |  
|Robert J. Jandro(6)                                               |  |            | 706,079    |         |  |  | *    |  
|Rohit Sharma(7)                                                   |  |            | 458,434    |         |  |  | *    |  
|Andrew W. Page(8)                                                 |  |            | 314,977    |         |  |  | *    |  
|Gregory B. Maffei(9)                                              |  |            | 237,050    |         |  |  | *    |  
|Ken Burckhardt                                                    |  |            | 218,393    |         |  |  | *    |  
|Matthew W. Bross(10)                                              |  |            | 192,460    |         |  |  | *    |  
|All executive officers and directors as a group
	(13 persons)(11) |  |            | 17,420,404 |         |  |  | 12.3 |  



---



| |   |                                                
| | - | -----------------------------------------------
| | * | Represents beneficial ownership of less than 1%



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Represents 4,593 shares held by Mr. Feiber,
	201,368 shares held by the Feiber-Buhr Trust, and
	5,083694 shares held by Mohr, Davidow Ventures V, L.P.
	Jonathan D. Feiber, a director of ONI Systems, is also a general
	partner of Mohr, Davidow Ventures. Mr. Feiber disclaims
	beneficial ownership of shares held by Mohr, Davidow Ventures
	and affiliates except to the extent of his interest in Mohr,
	Davidow Ventures and affiliates. The address of Mohr, Davidow
	Ventures and Mr. Feiber is 2775 Sand Hill Road,
	Suite 240, Menlo Park, California 94025.

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Represents 5,849 shares held by
	Mr. Martin, 3,200,226 shares held by the HMCM Trust,
	880,000 shares held by Wild Crest Ventures, LLC,
	1,000,000 shares held by Cherrystone Partners, LP,
	20,000 shares held by The Martin Family 2000 Irrevocable
	Trust under agreement dated March 23, 2000 and
	3,000 shares held by the Martin Childrens Trust.
	Includes 557,257 shares subject to a repurchase right that
	lapses at a rate of 25,329 shares per month until December
	2003.                                                                                                                                                                                                                                                                          
|
| | (3) | Represents 533,547 shares held by
	Mr. Compton, 1,262,087 shares held by Kleiner Perkins
	Caufield & Byers VIII, L.P., 73,081 shares held by
	KPCB VIII Founders Fund and 31,416 shares held by KPCB
	Information Sciences Zaibatsu Fund II. Kevin R. Compton, a
	director of ONI Systems, is also a general partner of Kleiner
	Perkins Caufield & Byers. Mr. Compton disclaims
	beneficial ownership of shares held by KPCB and affiliates
	except to the extent of his interest in KPCB and affiliates. The
	address of Kleiner Perkins Caulfield & Byers and
	Mr. Compton is 2750 Sand Hill Road, Menlo Park,
	California 94025.                                                                                                                             
|
| | (4) | Includes 7,500 shares held by
	Mr. Jordan subject to a repurchase right that lapses at a
	rate of 7,500 shares per month until March 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (5) | Represents 761,779 shares held by the
	Cumpston Family Trust and 22,000 shares held by The
	Cumpston Childrens 2000 Trust under agreement dated
	February 21, 2000. Includes 72,917 shares subject to a
	repurchase right that lapses at a rate of 10,416 shares per
	month until September 2002. Includes 68,750 shares subject
	to a repurchase right that lapses at a rate of 6,250 shares
	per month until January 2003. Includes 79,167 shares
	subject to a repurchase right that lapses at a rate of
	4,166 shares per month until September 2003. Includes
	137,500 shares subject to a repurchase right that lapses at
	a rate of 6,250 shares per month until December 2003.                                                                          
|
| | (6) | Includes 385,715 shares held by
	Mr. Jandro subject to a repurchase right that lapses at a
	rate of 16,071 shares per month until March 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (7) | Represents 140,152 shares held by
	Mr. Sharma, 65,541 shares held by the rohit Trust and
	127,742 shares held by the Mimesis Trust. Includes
	8,333 shares subject to a repurchase right that lapses at a
	rate of 4,167 shares per month until April 2002. Includes
	1,389 shares subject to a repurchase right that lapses at a
	rate of 1,389 shares per month until April 2002. Includes
	24,445 shares subject to a repurchase right that lapses at
	a rate of 2,222 shares per month until March 2003. Includes
	68,750 shares subject to a repurchase right that lapses at
	a rate of 3,125 shares per month until December 2003.
	Includes 25,000 shares subject to a repurchase right that
	lapses at a rate of 1,042 shares per month until March 2004.
|
| | (8) | Represents 275,282 shares held by
	Mr. Page, 7,368 shares held by the Andrew W. Page
	Annuity Trust, 7,368 shares held by the Diane Forese
	Annuity Trust, and 1,000 shares held by the George and
	Ellen Page Trust. Includes 106,696 shares subject to a
	repurchase right that lapses 7,143 shares per month until
	March 2004.                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (9) | Includes 40,200 shares held by
	Mr. Maffei subject to a repurchase right that lapses at a
	rate of 3,333 shares per month until March 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|     |                                                                                                                                                                                                                                       
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents 192,460 shares held by Matthew W.
	Bross Revocable Trust. Includes 78,750 shares subject to a
	repurchase right that lapses at a rate of 3,750 shares per
	month until November 2003.                                      
|    
|(11) | Includes shares held by individuals and entities
	affiliated with executive officers and directors including those
	described in notes 1-10 and shares issuable upon exercise
	of options exercisable within 60 days of March 1, 2002.

Change of
Control

On February 17, 2002, we entered into an
Agreement and Plan of Merger with CIENA. According to the
Agreement and Plan of Merger, effective on and as of the closing
date, which has not yet been determined, ONI Systems will merge
with and into CIENA, with CIENA surviving the merger. The
proposed transaction remains subject to a number of
contingencies, including approval of the stockholders of both
ONI Systems and CIENA, receipt of regulatory approvals and other
customary closing conditions. Upon consummation of the merger,
CIENA will issue 0.7104 shares of its common stock for each
outstanding share of ONI Systems common stock and will also
convert all outstanding ONI Systems options and warrants into
options and warrants to purchase shares of CIENA common stock.
CIENA will assume ONI Systems outstanding 5% subordinated
convertible notes due 2005. See Item 1
Business  Recent Events.

On February 17, 2002, in conjunction with
the execution of the Agreement and Plan of Merger, various ONI
Systems executive officers, directors and their affiliates who
hold our common stock executed Stockholder Agreements under
which they agreed to vote their shares of ONI Systems common
stock, collectively constituting approximately 11.5% of ONI
Systems outstanding common stock as of February 17,
2002, in favor of the merger and against any proposal made in
opposition to or in competition with the merger. In addition,
they agreed, if requested by CIENA, to grant CIENA a written
proxy to vote their shares in favor of the proposed merger.

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ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

Other than compensation agreements and other
arrangements, which are described as required in Director
Compensation and Executive Compensation, and
the transactions described below, since January 1, 2001,
there has not been, nor is there currently proposed, any related
party transaction or series of similar transactions to which we
were or will be a party:



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | in which the amount involved exceeded or will
	exceed $60,000; and                                                                                                                                               
|
| |  | in which any director, executive officer, holder
	of more than 5% of our common stock on an as-converted basis or
	any member of their immediate family had or will have a direct
	or indirect material interest.

Loans to
Executive Officers

In connection with option exercises, the
following executive officers delivered promissory notes, each
with a five-year term, in the amounts and bearing interest as
indicated below:

In December 1999, we made a loan to Hugh C.
Martin, our Chairman, President and Chief Executive Officer, in
connection with his exercise of an option to acquire
1,215,834 shares of common stock, for an aggregate purchase
price of $1,519,793. The loan is evidenced by a promissory note
in the principal amount of $1,519,793, with interest compounded
annually on the unpaid balance at a rate of 6.20% per year.
During 2001, the largest amount of indebtedness incurred under
this loan was $1,711,086. As of March 1, 2002, the
outstanding principal and interest balance of this loan was
$1,726,576.

In November 1999, we made three loans to William
R. Cumpston, our Executive Vice President and Chief Operating
Officer, Engineering and Operations, in connection with his
exercise of options to acquire 1,000,000 shares of common
stock, for an aggregate purchase of $254,000. The loans are
evidenced by a promissory note in the principal amount of
$45,000, with interest compounded annually on the unpaid balance
at a rate of 6.08% per year, a promissory note in the principal
amount of $182,000, with interest compounded annually on the
unpaid balance at a rate of 6.08% per year and a promissory note
in the principal amount of $27,000, with interest compounded
annually on the unpaid balance at a rate of 6.08% per year. In
December 1999, we made another loan to Mr. Cumpston, in
connection with his exercise of an option to acquire 300,000
shares of common stock, for an aggregate purchase price of
$375,000. The loan is evidenced by a promissory note in the
principal amount of $375,000, with interest compounded annually
on the unpaid balance at a rate of 6.20% per year. During 2001,
the largest amount of indebtedness incurred under these loans
was $611,225. As of March 1, 2002, the outstanding
principal balance of these loans was $0.

In November 1999, we made a loan to
Michael A. Dillon, our Vice President and General Counsel,
in connection with his exercise of an option to acquire 300,000
shares of common stock, for a purchase price of $273,000. The
loan is evidenced by a promissory note in the principal amount
of $273,000, with interest compounded annually on the unpaid
balance at a rate of 6.08% per year. In December 1999, we made a
loan to Mr. Dillon in connection with the purchase of
20,000 shares of common stock pursuant to a restricted stock
purchase agreement for a purchase price of $18,200. The loan is
evidenced by a promissory note in the principal amount of
$18,200, with interest compounded annually on the unpaid balance
at a rate of 6.20% per year. In February 2000, we made another
loan to Mr. Dillon in connection with his exercise of an
option to acquire 70,000 shares of common stock. The loan is
evidenced by a promissory note in the principal amount of
$87,500, with interest compounded annually at a rate of 6.56%
per year. During 2001, the largest amount of indebtedness
incurred under these loans was $394,590. As of March 1,
2002, the outstanding principal and interest balance of these
loans was $102,407.

In March 2000, we made a loan to Robert J.
Jandro in connection with his exercise of an option to acquire
900,000 shares of common stock for a purchase price of
$2,880,000. The loan is evidenced by a promissory note in the
principal amount of $2,880,000, with interest compounded
annually on the unpaid balance at a rate of 6.80% per year.
During 2001, the largest amount of indebtedness incurred under
this loan was $2,427,045. As of March 1, 2002, the
outstanding principal and interest balance of this loan was
$2,451,164. We have agreed to allow Mr. Jandro to repay the
loan on a pro rata basis upon the sale of vested shares issued
upon exercise of the option.

In March 2000, we made a loan to Andrew W.
Page, our Vice President, Business Development, in connection
with his exercise of an option to acquire 300,000 shares of
common stock for a purchase price of $960,000. The loan is
evidenced by a promissory note in the principal amount of
$960,000, with interest compounded annually on the unpaid
balance at a rate of 6.80% per year. During 2001, the largest
amount of indebtedness incurred under this loan was $727,903.78.
As of March 1, 2002, the outstanding principal and interest
balance of this loan was $735,137. We have

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agreed to allow Mr. Page to repay the loan
on a pro rata basis upon the sale of vested shares issued upon
exercise of the option.


In November and December 1999, we made four loans
to Rohit Sharma, our Executive Vice President and Chief
Technology Officer, in connection with his exercise of options
to acquire 141,668 shares, 45,836 shares, 106,668 shares and
150,000 shares of common stock, respectively, for an aggregate
purchase price of $213,975. The loans are evidenced by a
promissory note in the principal amount of $12,750, with
interest compounded annually on the unpaid balance at a rate of
6.08% per year, a promissory note in the principal amount of
$4,125, with interest compounded annually on the unpaid balance
at a rate of 6.08% per year, a promissory note in the principal
amount of $9,600, with interest compounded annually on the
unpaid balance at a rate of 6.08% per year, and a promissory
note in the principal amount of $187,500, with interest
compounded annually on the unpaid balance at a rate of 6.20% per
year. In March 2000, we made another loan to Mr. Sharma in
connection with his exercise of an option to acquire 50,000
shares of common stock for a purchase price of $160,000. The
loan is evidenced by a promissory note in the principal amount
of $160,000, with interest compounded annually at a rate of
6.80% per year. During 2001, the largest amount of indebtedness
incurred under these loans was $418,470. As of March 1,
2002, the outstanding principal balance of these loans
was $0.

Persons or Entities Related to Our Officers
and Directors

We have entered into agreements with affiliates
of our officers and directors.

Martin Aviation LLC, which is owned by Hugh
Martin, our chief executive officer, makes private aircraft
available for use by Mr. Martin, other ONI Systems
executives and ONI Systems customers for travel in connection
with ONI Systems business. ONI Systems compensates Martin
Aviation at a per person rate equal to the cost of a ticket on a
commercial airline for an equivalent flight, provided that the
aggregate payment for any single flight does not exceed the
Martin Aviations variable costs for the flight. During
2001, ONI Systems paid the Martin Aviation an aggregate of
approximately $154,000.

Matthew W. Bross, one of our directors,
serves as Senior Vice President and Chief Technology Officer of
Williams Communications, Inc. In March 2000, we entered into a
purchase and license agreement with Williams Communications, in
which Williams Communications may, but is not obligated to,
purchase $30.0 million of our products. The agreement also
provided that Williams Communications purchase $1,215,506 of our
products during the first quarter of calendar year 2000. The
termination date of the agreement was extended by amendment, and
the agreement now expires June 30, 2002, unless terminated
earlier by the parties. In December 1999, we also executed a
redemption and repurchase agreement with Williams
Communications, which provides us with the right to repurchase,
if Williams Communications fails to purchase $30.0 million
of our products and services by June 30, 2001, at
$6.32 per share, the shares of Series G preferred
stock owned by Williams Communications, which were converted
into 1,582,904 shares of common stock.

Independent Auditor Fees

The following table presents fees for
professional audit services rendered by KPMG LLP for the audit
of the ONI Systems annual financial statements for 2001,
and fees billed for other services rendered by KPMG LLP.

|                                                          |                         |          |        
|--------------------------------------------------------- | ----------------------- | -------- | -------
|Audit and quarterly review fees, excluding
	audit-related |                         | $300,000
|                                                          |                         |         
|All other fees:                                           |                         |         
|                                                          | Audit-related fees(1)   |          | 162,000
|                                                          | Other non-audit fees(2) |          | 126,000
|                                                          |                         |         
|Total all other fees                                      |                         | $288,000
|                                                          |                         |         




|    |                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit-related fees consisted principally of
	consultation and review related to technical accounting matters,
	audits of financial statements of ONI Systems employee
	benefit plan, review of registration statements and issuance of
	consents.
|   
|(2) | Other non-audit fees consisted of tax compliance
	services.                                                                                                                                                                                       

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PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
	REPORTS ON FORM 8-K

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



| |    |                                  
| | -- | ---------------------------------
| | 1. | Consolidated Financial Statements

Refer to Item 8 of this Annual Report on
Form 10-K.

2. Exhibits

|       |      |               |  |                                                                                                                                                                                                                                                                                                                                                                                      
|------ | ---- | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      | Exhibit Title
|       |      |              
|       | 2.01 |               |  | Agreement and Plan of Merger, dated
	February 17, 2002, by and between CIENA Corporation and ONI
	Systems. Incorporated herein by reference to Exhibit 2.01
	filed with ONI Systems Report on Form 8-K, filed with
	the Commission on February 25, 2002.                                                                                                                            
|       | 3.01 |               |  | ONI Systems Amended and Restated
	Certificate of Incorporation. Incorporated herein by reference
	to Exhibit 3.02 filed with ONI Systems Amendment to
	its Registration Statement on Form S-1, filed with the
	Commission on April 26, 2000 (Commission File
	No. 333-32104).                                                                                                      
|       | 3.02 |               |  | ONI Systems Amended and Restated Bylaws.
	Incorporated herein by reference to Exhibit 3.03 filed with
	ONI Systems Amendment to its Registration Statement on
	Form S-1, filed with the Commission on May 3, 2000
	(Commission File No. 333-32104).                                                                                                                                
|       | 4.01 |               |  | Form of Restated and Amended Investors
	Rights Agreement, dated May 1, 2000, by and between certain
	investors and ONI Systems. Incorporated herein by reference to
	Exhibit 4.02 filed with ONI Systems Amendment to its
	Registration Statement on Form S-1, filed with the
	Commission on May 3, 2000 (Commission File
	No. 333-32104).                                         
|       | 4.02 |               |  | Registration Rights Agreement with Finisar
	Corporation, dated February 12, 2001. Incorporated herein
	by reference to Exhibit 4.02 filed with ONI Systems
	Annual Report on Form 10-K, filed with the Commission on
	April 2, 2001.                                                                                                                                                
|       | 4.03 |               |  | Indenture, dated October 27, 2000, between
	ONI Systems Corp. and State Street Bank and Trust Company of
	California, N.A. as Trustee. Incorporated herein by reference to
	Exhibit 4.1 filed with ONI Systems Form 10-Q for
	the quarter ended September 30, 2000.                                                                                                                 
|       | 4.04 |               |  | Note (included in Exhibit 4.04).                                                                                                                                                                                                                                                                                                                                                     
|       | 4.05 |               |  | Warrant Agreement to Purchase Common Stock held
	by COLT Telecom Group plc. Incorporated herein by reference to
	Exhibit 4.09 filed with ONI Systems Registration
	Statement on Form S-1, filed with the Commission on
	March 10, 2000 (Commission File No. 333-32104).                                                                                                             
|       | 4.06 |               |  | Warrant Agreement to Purchase Common Stock held
	by FMR Corp. Incorporated herein by reference to
	Exhibit 4.10 filed with ONI Systems Registration
	Statement on Form S-1, filed with the Commission on
	March 10, 2000 (Commission File No. 333-32104).                                                                                                                           
|       | 4.07 |               |  | Letter to FMR Corp. regarding Warrant to Purchase
	Common Stock. Incorporated herein by reference to
	Exhibit 4.15 filed with ONI Systems Amendment to its
	Registration Statement on Form S-1, filed with the
	Commission on May 31, 2000 (Commission File
	No. 333-32104).                                                                                                        
|       | 4.08 |               |  | Warrant to Purchase Common Stock held by Fenwick
	& West LLP. Incorporated herein by reference to
	Exhibit 4.12 filed with ONI Systems Amendment to its
	Registration Statement on Form S-1, filed with the
	Commission on April 26, 2000 (Commission File
	No. 333-32104).                                                                                                         
|       | 4.09 |               |  | Redemption and Repurchase Agreement, dated
	December 22, 1999, by and between Williams Communications,
	Inc. and ONI Systems. Incorporated herein by reference to
	Exhibit 4.11 filed with ONI Systems Registration
	Statement on Form S-1, filed with the Commission on
	March 10, 2000 (Commission File No. 333-32104).                                                           
|       | 4.10 |               |  | Subscription Agreement, dated March 27,
	2000, by and between Internet Initiative Japan Inc. and ONI
	Systems and related Regulation S Investor Representation
	Letter. Incorporated herein by reference to Exhibit 4.13
	filed with ONI Systems Amendment to its Registration
	Statement on Form S-1, filed with the Commission on
	April 26, 2000 (Commission File No. 333-32104).
|       | 4.11 |               |  | Subscription Agreement, dated April 27,
	2000, by and between CCT Telecom Holdings Limited and ONI
	Systems and related Regulation S Investor Representation
	Letter. Incorporated herein by reference to Exhibit 4.14
	filed with ONI Systems Amendment to its Registration
	Statement on Form S-1, filed with the Commission on
	May 3, 2000 (Commission File No. 333-32104).     
|       | 4.12 |               |  | Form of Stockholder Agreement, dated as of
	February 17, 2002, entered into between CIENA Corporation
	and each of ONI Systems directors, executive officers and
	their affiliates. Incorporated herein by reference to
	Exhibit 99.1, filed with CIENA Corporations
	Schedule 13D, filed with the Commission on
	February 20, 2002.                                               

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|       |        |               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------ | ------ | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |        | Exhibit Title
|       |        |              
|       | 10.01+ |               |  | Form of Indemnification Agreement entered into
	between ONI Systems and each of its directors and executive
	officers. Incorporated herein by reference to Exhibit 10.01
	filed with ONI Systems Amendment to its Registration
	Statement on Form S-1, filed with the Commission on
	April 26, 2000 (Commission File No. 333-32104).                                                                                                              
|       | 10.02+ |               |  | 1997 Stock Option Plan, as amended. Incorporated
	herein by reference to Exhibit 10.02 filed with ONI
	Systems Registration Statement on Form S-1, filed
	with the Commission on March 10, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                                                                 
|       | 10.03+ |               |  | 1998 Equity Incentive Plan, as amended.
	Incorporated herein by reference to Exhibit 10.03 filed
	with ONI Systems Registration Statement on Form S-1,
	filed with the Commission on March 10, 2000 (Commission
	File No. 333-32104).                                                                                                                                                                                                             
|       | 10.04+ |               |  | 1999 Equity Incentive Plan, as amended.
	Incorporated herein by reference to Exhibit 10.04 filed
	with ONI Systems Registration Statement on Form S-1,
	filed with the Commission on March 10, 2000 (Commission
	File No. 333-32104).                                                                                                                                                                                                             
|       | 10.05+ |               |  | 2000 Equity Incentive Plan. Incorporated herein
	by reference to Exhibit 10.05 filed with ONI Systems
	Amendment to its Registration Statement on Form S-1, filed
	with the Commission on April 26, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                                                        
|       | 10.06+ |               |  | 2000 Employee Stock Purchase Plan. Incorporated
	herein by reference to Exhibit 10.06 filed with ONI
	Systems Amendment to its Registration Statement on
	Form S-1, filed with the Commission on April 26, 2000
	(Commission File No. 333-32104).                                                                                                                                                                                                 
|       | 10.07  |               |  | Lease Agreement, dated September 29, 1999,
	by and between John Arrillaga, Trustee, or his Successor
	Trustee, UTA dated 7/20/77 as amended and Richard T. Peery,
	Trustee, or his Successor Trustee, UTA dated 7/20/77 as amended,
	and ONI Systems. Incorporated herein by reference to
	Exhibit 10.10 filed with ONI Systems Registration
	Statement on Form S-1, filed with the Commission on
	March 10, 2000 (Commission File No. 333-32104).
|       | 10.08  |               |  | Lease Agreement, dated May 18, 2000, by and
	between Mission West Properties, L.P. and ONI Systems.
	Incorporated herein by reference to Exhibit 10.27 filed
	with ONI Systems Amendment to its Registration Statement
	on Form S-1, filed with the Commission on May 24, 2000
	(Commission File No. 333-32104).                                                                                                                                  
|       | 10.09  |               |  | Lease Agreement, dated December 7, 2000, by
	and between Petula Associates, Ltd. and ONI Systems.
	Incorporated herein by reference to Exhibit 10.15 filed
	with ONI Systems Annual Report on Form 10-K, filed
	with the Commission on April 2, 2001.                                                                                                                                                                                             
|       | 10.10+ |               |  | Offer Letter, dated September 10, 1999, from
	ONI Systems to Michael A. Dillon. Incorporated herein by
	reference to Exhibit 10.16 filed with ONI Systems
	Registration Statement on Form S-1, filed with the
	Commission on March 10, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                     
|       | 10.11+ |               |  | Offer Letter, dated February 29, 2000, from
	ONI Systems to Robert J. Jandro. Incorporated herein by
	reference to Exhibit 10.17 filed with ONI Systems
	Registration Statement on Form S-1, filed with the
	Commission on March 10, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                       
|       | 10.12+ |               |  | Offer Letter, dated February 9, 2000, from
	ONI Systems to Andrew W. Page. Incorporated herein by
	reference to Exhibit 10.18 filed with ONI Systems
	Registration Statement on Form S-1, filed with the
	Commission on March 10, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                          
|       | 10.13  |               |  | Series H Preferred Stock Purchase Agreement
	dated as of May 1, 2000. Incorporated herein by reference
	to Exhibit 10.25 filed with ONI Systems Amendment to
	its Registration Statement on Form S-1, filed with the
	Commission on May 3, 2000 (Commission File
	No. 333-32104).                                                                                                                                                                 
|       | 10.14+ |               |  | Stock Bonus Agreement, dated as of
	August 22, 2001, by and between ONI Systems and Ken
	Burckhardt. Incorporated herein by reference to ONI
	Systems Quarterly Report on Form 10-Q, filed with the
	Commission on November 13, 2001.                                                                                                                                                                                                             
|       | 10.15+ | *             |  | Services Agreement, dated January 24, 2002,
	by and between ONI Systems and George Reyes.                                                                                                                                                                                                                                                                                                                                                          
|       | 21.01* |               |  | List of ONI Systems Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 23.01* |               |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 24.01* |               |  | Power of Attorney (See Part IV of this report).                                                                                                                                                                                                                                                                                                                                                                                                    



---



|  |  |                                                                     
|- |  | --------------------------------------------------------------------
|+ |  | Indicates a management contract or compensatory
	plan or arrangement
| 
|* |  | Filed with this Form 10-K                                           

(b) Reports on Form 8-K

On February 8, 2002, we filed a report on
Form 8-K dated February 7, 2002, to report under
Item 5 that Ken Burckhardt, Vice President, Finance and
Interim Chief Financial Officer, was leaving ONI Systems and
that George Reyes had been hired to serve as Interim Chief
Financial Officer until a permanent Chief Financial Officer is
hired.

83



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##### Table of Contents



On February 19, 2002, we filed a report on
Form 8-K dated February 18, 2002, to report under
Item 5 that ONI Systems had signed a definitive Agreement
and Plan of Merger with CIENA Corporation.

On February 25, 2002, we filed a report on
Form 8-K, under Items 5 and 7, attaching the
Agreement and Plan of Merger, dated as of February 17,
2002, by and between CIENA Corporation and ONI Systems as an
exhibit.

(c) Exhibits

See Item 14(a)(2) above.

(d) Financial Statement Schedules

Financial statement schedules are omitted because
the information called for is not required or is shown either in
the Consolidated Financial Statements or the related notes.

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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 Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.



| |                  
| | -----------------
| | ONI SYSTEMS CORP.



| |     |                 
| | --- | ----------------
| | By: | /s/ GEORGE REYES

| |                                             
| | --------------------------------------------
| |                                             
| | George Reyes                                
| | Interim Chief Financial Officer             
| | (Principal Financial and Accounting Officer)

Dated: March 19, 2002

POWER OF ATTORNEY

By signing this Form 10-K below, I hereby
appoint each of Hugh C. Martin and George Reyes as my
attorney-in-fact to sign all amendments to this Form 10-K
on my behalf, and to file this Form 10-K (including all
exhibits, amendments and other documents related to the
Form 10-K) with the Securities and Exchange Commission. I
authorize each of my attorneys-in-fact to (1) appoint a
substitute attorney-in-fact for himself and (2) perform any
actions that he believes are necessary or appropriate to carry
out the intention and purpose of this Power of Attorney. I
ratify and confirm all lawful actions taken directly or
indirectly by my attorneys-in-fact and by any properly appointed
substitute attorneys-in-fact.

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

|                                                               |  |                                                                            |  |                |  | 
|-------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | -------------- |  | 
|                                                               |  |                                                                            |  |               
|Signature                                                      |  | Title                                                                      |  | Date          
|                                                               |  |                                                                            |  |               
|Principal Executive Officer:                                   |  |                                                                            |  |               
|                                                              
|/s/ HUGH C. MARTINHugh C. Martin                               |  | President, Chief Executive Officer and
	Chairman of the Board of Directors |  | March 19, 2002
|                                                              
|Principal Financial Officer and
	Principal Accounting Officer: |  |                                                                            |  |               
|                                                              
|/s/ GEORGE REYESGeorge Reyes                                   |  | Interim Chief Financial Officer                                            |  | March 19, 2002
|                                                              
|Additional Directors:                                          |  |                                                                            |  |               
|                                                              
|/s/ MATTHEW W. BROSSMatthew W. Bross                           |  | Director                                                                   |  | March 19, 2002
|                                                              
|/s/ KEVIN R. COMPTONKevin R. Compton                           |  | Director                                                                   |  | March 19, 2002
|                                                              
|/s/ JONATHAN D. FEIBERJonathan D. Feiber                       |  | Director                                                                   |  | March 19, 2002
|                                                              
|/s/ JAMES F. JORDANJames F. Jordan                             |  | Director                                                                   |  | March 19, 2002
|                                                              
|/s/ GREGORY B. MAFFEIGregory B. Maffei                         |  | Director                                                                   |  | March 19, 2002

85



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EXHIBIT INDEX

|       |       |               |  |                                                                                          
|------ | ----- | ------------- |  | -----------------------------------------------------------------------------------------
|Number |       | Exhibit Title
|       |       |              
|       | 10.15 |               |  | Services Agreement, dated January 24, 2002,
	by and between ONI Systems and George Reyes.
|       | 21.01 |               |  | List of Registrants Subsidiaries.                                                       
|       | 23.01 |               |  | Independent Auditors Consent.                                                           
|       | 24.01 |               |  | Power of Attorney. (See Part IV of this report)