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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   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, 2000 or

[_] 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)

<TABLE>
<S>                       <C>
        Delaware                            77046-9657
(State of Incorporation)        (IRS Employer Identification No.)
</TABLE>

                166 Baypointe Parkway, San Jose, CA 95134-1621
         (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 [_]

   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. [X]

   As of February 1, 2001, 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 $5,389,784,034.

   As of March 19, 2001, there were 136,298,595 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

   Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be held in May 2001 are incorporated by reference
into Part III of this report on Form 10-K.

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                             FISCAL 2000 FORM 10-K

                               ONI SYSTEMS CORP.

                                     INDEX

<TABLE>
<CAPTION>
                                                                           Page
    ITEM                                                                   ----
 <C>        <S>                                                            <C>
                                       PART I

 ITEM 1:    Business....................................................     3

 ITEM 2:    Properties..................................................    13

 ITEM 3:    Legal Proceedings...........................................    13

 ITEM 4:    Submission of Matters to a Vote of Security Holders.........    15

 ITEM 4A:   Director and Executive Officers of the Registrant...........    15

                                       PART II

                       Market for Registrant's Common Equity and Related
 ITEM 5:    Stockholder Matters.........................................    17

 ITEM 6:    Selected Financial Data.....................................    19

             Management's Discussion and Analysis of Financial Condition
 ITEM 7:    and Results of Operations...................................    20

 ITEM 7A:   Quantitative and Qualitative Disclosures About Market Risk..    37

 ITEM 8:    Financial Statements and Supplementary Data.................    38

             Changes in and Disagreements with Accountants on Accounting
 ITEM 9:    and Financial Disclosure....................................    64

                                      PART III

 ITEM 10:   Directors and Executive Officers of the Registrant..........    64

 ITEM 11:   Executive Compensation......................................    64

                     Security Ownership of Certain Beneficial Owners and
 ITEM 12:   Management .................................................    64

 ITEM 13:   Certain Relationships and Related Transactions..............    64

                                       PART IV

             Exhibits, Financial Statement Schedules and Reports on Form
 ITEM 14:   8-K.........................................................    64

 Signatures ............................................................    68
</TABLE>


                                       2
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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. 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 growing traffic bottleneck
in these networks and offer new revenue-generating data and voice services. By
installing 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.

   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(TM) Corp. In June 2000, we completed our initial public
offering. Our principal executive offices are located at 166 Baypointe Parkway,
San Jose, California 95134-1621. Our telephone number is (408) 965-2600. When
we refer to "we", "ONI(TM)" or "ONI Systems" in this Form 10-K, we mean the
current Delaware corporation (ONI Systems Corp.), its California predecessor
and all of our subsidiaries.

Industry Background

 Increased demand for network capacity

   Rapid growth in the popularity of the Internet and in the number of
Internet-based applications and services has fueled dramatic growth in the
volume of data traffic. This growth will increase 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. Bandwidth improvements make
it possible for communication service providers to offer new revenue-generating
services such as remote data storage and local area network extensions to their
customers. As these new bandwidth-intensive services are introduced and gain
commercial acceptance, additional network bandwidth and optical infrastructure
will be required.

                                       3
<PAGE>

 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. The rapid adoption of the Internet and the resulting
growth of data traffic are driving 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 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 2000 kilometers. The focus
of companies designing long-haul equipment has historically been to provide as
much bandwidth as possible between any two points.

   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.

   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 bottleneck

   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. Over time, enterprise networks have also benefited from the
deployment of new optical technology, including high-speed data communication
services such as gigabit ethernet and fibre channel.

   Optical solutions specifically designed to address the challenges faced by
metro core and metro access networks have only recently become available.
Therefore, until recently, growth of bandwidth in these networks has been slow.

                                       4
<PAGE>

   We believe that the transmission capacity and speed in the metro portion of
the network over the last several years has grown at a small fraction of the
growth rate seen in long-haul and enterprise networks. This has created a
bottleneck in metro networks impeding service delivery.

   This bottleneck creates significant challenges to communication service
providers seeking to develop and introduce next generation services to their
customers. Early attempts to solve the problems faced by service providers
focused on increasing bandwidth by using equipment based on the synchronous
optical network standard, deploying additional fiber, and adapting long-haul
solutions such as existing point-to-point implementations of current optical
technology to the metro network. When applied to metro networks, these efforts
are costly, time-consuming, difficult to scale or difficult to manage. For
example, the synchronous optical network standard architecture was originally
designed for voice traffic and is not easily scalable and therefore hinders
introduction of today's emerging high-speed data services. In addition,
synchronous optical networking requires that at least 50% of network capacity
be reserved for carrying duplicated traffic to provide restoration capability
in the event of a network outage. Similarly, deploying additional fiber in
metropolitan areas is expensive and time-consuming because it requires permits,
rights-of-way and physical installation of fiber. Optical technology was
originally designed for long-haul applications in a synchronous optical network
environment. As designed for long-haul networks, optical technology is
inefficient and expensive to deploy in metro networks. To be applied in the
metro network, many currently available optical networking implementations
require additional electrical equipment to add and drop traffic and to provide
rapid service restoration.

   In addition, today's networks are not entirely optical. Transmitted signals
in these networks undergo multiple optical-to-electrical-to-optical conversions
in order for networks to move information to its proper destination. These
conversions are costly because they require deployment of additional equipment
and are inefficient because they are limited by the capacity constraints and
inflexibility of existing electronics embedded in today's networks.

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 with the
synchronous optical network standard, 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 the synchronous optical network standard, gigabit ethernet
and fibre channel, 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 bandwidth allocation as needed, where needed and
    when needed;

  . real-time surveillance of network performance;

  . interoperability with third-party management software and data routing
    and switching equipment; and

  . point-and-click activation of services.

                                       5
<PAGE>

   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.

   Rapid and efficient service restoration. Survivability is a key factor for
all networking services. Our products provide for restoration of service within
the synchronous optical network standard of 50 milliseconds, without the need
to dedicate bandwidth for restoration by carrying duplicated traffic, as is
required by typical synchronous optical network standard-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 channels for network management and monitoring of network
    performance.

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 rapidly 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.

 Extend technology leadership

   Our 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
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.

                                       6
<PAGE>

 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 to our existing teams
in the United States, we are also establishing service and support teams
internationally to support our major 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 intend to
pursue acquisitions that will enable us to broaden our product, service and
technology portfolios. See "Acquisitions".

Products

 ONLINE Products

   Our ONLINE products can be used in conventional 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 flexable network solutions for service providers.

  ONLINE9000(TM)

   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 ONWAVE SONET/SDH Multiplexer(TM) and ONWAVE
    Data Multiplexer(TM) products; and

  . integrated optical amplifiers with sophisticated power management
    capabilities.

                                       7
<PAGE>

  ONLINE7000(TM)

   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 Multiplexer and ONWAVE
     Data Multiplexer products; and

   . optional integrated optical amplifiers with sophisticated power
     management capabilities.

  ONLINE11000(TM)

   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 Multiplexer and ONWAVE
    Data Multiplexer products.

  ONLINE2500(TM)

   We recently announced the ONLINE2500, which we anticipate will be generally
available in the second quarter of 2001 and available for volume delivery in
the third quarter of 2001. The ONLINE2500 is designed to be a cost effective,
flexible optical transport solution which will enable service providers to
deliver a comprehensive set of high bandwidth services to customer sites at the
optical edge of their metro networks. The ONLINE2500 will share the same
management and operating system as our other ONLINE products and will be able
to be deployed together with them as required to provide flexible network
solutions for service providers. We expect that a typical configuration will
include the following key features:

  . 8 coarse wave division multiplexing channels with protection;

  . point-to-point or ring configurations;

                                       8
<PAGE>

  . 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(TM) multiplexer products to be
    specifically designed for the ONLINE2500.

 ONWAVE Multiplexer Products

   Our ONWAVE SONET/SDH Multiplexer and ONWAVE Data Multiplexer products allow
multiple synchronous optical network or data signals to be combined within an
individual wavelength channel. Service providers who deploy our ONWAVE products
with our ONLINE 7000, 9000 and 11000 products can combine up to 16 lower-speed
signals into a single wavelength channel, resulting in efficiencies by
eliminating the need for traditional multiplexing equipment in the network.

   The key features of our ONWAVE SONET/SDH Multiplexer include:

  . sophisticated performance monitoring capabilities;

  . STS3 switching; and

  . tributary side protection for unprotected interfaces between end-users
    and service providers.

   The key features of our ONWAVE Data Multiplexer include:

  . sophisticated performance monitoring capabilities; and

  . the capability to combine either two fibre channels or two gigabit
    ethernet signals, onto a single wavelength using standards-based OC-
    48/STM-16 frames for direct connection from metro to long-haul networks.

 Software Products

  OPTX(TM) Network 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.

  OLMP(TM) Optical Link Management Platform

   Our ONLINE products also incorporate our OLMP inter-network communications
platform. This software enables the data routing and switching equipment of
other vendors to exchange information with our equipment. This information
exchange allows data switching and routing equipment to request and receive
required resources from optical transmission equipment. Our OLMP platform is
designed to enable data equipment to directly request the network to set up and
drop optical channels when required in real time. For example, OLMP enables
fibre channel equipment to exchange route-length, latency and bandwidth
availability for end-to-end management of storage area networks. We believe
that our OLMP was one of the first network-level internetworking platforms to
link the data and switching equipment to optical transmission equipment.

                                       9
<PAGE>

  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 EMS(TM), an element management system that allows service providers
    to remotely control and manage the nodes in their networks from a central
    location;

  . OPTX NET(TM), 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(TM), a management tool which 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 Guide Application(TM), a tool that allows our customers to
    efficiently configure their networks by downloading network design
    information from OPTXNET directly into our ONLINE products;

  . OPTX CIT(TM), 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(TM), 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, 2000, we
had 16 customers, including COLT Telecom plc, EPIK Communications,
Incorporated, Internet Initiative Japan Inc., Marietta Fibernet, S.A., Progress
Telecom, Qwest Communications International, Inc., Sphera Optical Networks,
Inc., StorageNetworks, Inc., Williams Communications, Inc. and two service
providers in China, China Netcom Corporation Ltd. and China Telecom, through
our OEM relationship with Lucent Technologies.

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 and are developing a
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. For example, in April 2000, we entered into an OEM relationship with
Lucent Technologies that expires on December 31, 2001. Under the terms of our
agreement, Lucent Technologies has the exclusive right to sell some of our
products in China through April 2001.

   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

                                       10
<PAGE>

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, 2000 we had assembled a team
of approximately 259 highly skilled optical hardware and software engineers,
manufacturing and test engineers and system and network architects. Research
and development expenses were $53.7 million for the year ended December 31,
2000. We will continue to make substantial investments in research and
development.

   Our product development process is driven by market demand and a close
collaboration between 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 conduct 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 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 a number of manufacturing vendors for electronic
assemblies while E-TEK Dynamics, Inc., a subsidiary of 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 many of our electrical and optical components through
purchase orders. In order to help us maintain a supply of components, and
specifically optical components, we use long term supply agreements with our
significant vendors.

Competition

   Competition in the metro and regional communications networking equipment
market is intense. In 2000, our primary competitors included CIENA, Nortel
Networks and Sycamore Networks. In addition, numerous other established
companies, such as Alcatel, Cisco Systems and Lucent Technologies, currently or
may in the future 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

                                       11
<PAGE>

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 negative factors pertaining to our competitive position include
our relative newness in the market and the fact that some of our competitors
have large financial resources available to promote sales of their products and
to develop products more directly competitive with ours. If we are unable to
compete successfully against 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 Opticity(TM) product line from Finisar. The acquired
technology is being incorporated into our new ONLINE2500. We accounted for this
transaction as a purchase of assets.

   This acquisition involves numerous risks, including problems combining
technology or operations, unanticipated costs, diversion of management
attention from our core business, responsibilities for unanticipated
liabilities, dilutive stock issuances and risks associated with entering new
markets. If we do not effectively address these risks, this acquisitions could
negatively impact our operating results and financial condition.

Intellectual Property

   Our success and ability to compete depends on our ability to develop
technological expertise 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, 2001, we have been
issued six patents in the United States. However, only two of these patents are
currently significant to our business. In addition, we currently have 33 patent
applications pending in the United States and internationally, all of which are
currently significant to our business. These patents 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

                                       12
<PAGE>

obtain and use our products or technology. These precautions may not prevent
misappropriation or infringement of our intellectual property.

   ONI Systems(TM), ONI(TM), ONLINE11000(TM), ONLINE9000(TM), ONLINE7000(TM),
ONLINE2500(TM), ONWAVE(TM), ONWAVE SONET/SDH Multiplexer(TM), ONWAVE Data
Multiplexer(TM), OPTX(TM), OPTX EMS(TM), OPTX NET(TM), OPTX Management
Portal(TM), OPTX Guide Application(TM), OPTX CIT(TM), OPTX CORBA Gateway(TM)
and OLMP(TM) are 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, 2000, we had a total of 541 employees

  . 207 in research and development;

  . 72 in sales and marketing;

  . 54 in customer service and support;

  . 125 in manufacturing; and

  . 83 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 is intense. 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 two leased facilities in San Jose,
California, one consisting of approximately 53,000 square feet under a lease
that expires in 2001 and one consisting of approximately 58,000 square feet
under a lease that expires in 2006. In May 2000, we entered into a lease which
will expire in 2011 for a new facility in San Jose, California. The new
facility will initially be approximately 346,000 square feet, and is expected
to expand to approximately 445,000 square feet in January 2003. We intend to
move our headquarters to this new facility early in the third quarter of 2001.
We are evaluating plans for our current 58,000 square feet headquarters
facility, which we have the right to sublease. We also lease a facility of
approximately 7,500 square feet in Raleigh, North Carolina, under a short-term
lease. In December 2000, we entered into a lease for a new facility of
approximately 54,000 square feet in Durham, North Carolina. We intend to vacate
our short term facility and move our North Carolina office to this new facility
in the second quarter of 2001. In addition to these facilities, we have leased
office space for our sales and customer service operations in several locations
worldwide. We expect to require additional space for sales, service and certain
research and development projects in the United States and worldwide within the
next 12 months.

ITEM 3. LEGAL PROCEEDINGS

   In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. This suit 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.

                                       13
<PAGE>

   We are in the process of investigating the claims asserted by Nortel
Networks and conducting discovery concerning Nortel Networks' claims. 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.

                                       14
<PAGE>

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 executive officers and their areas of
responsibility as of March 1, 2001. Biographies are included after the table.

<TABLE>
<CAPTION>
Name                     Age                                 Position
----                     ---                                 --------
<S>                      <C> <C>
Hugh C. Martin..........  47 President, Chief Executive Officer and Chairman of the Board of Directors
Chris A. Davis..........  50 Executive Vice President, Chief Financial and Administrative Officer
Hon Wah Chin............  46 Chief Engineer
William R. Cumpston.....  39 Executive Vice President, Engineering and Operations
Michael A. Dillon.......  42 Vice President, General Counsel and Secretary
Robert J. Jandro........  45 Executive Vice President, Global Sales and Services
Andrew W. Page..........  35 Vice President, Business Development
Rohit Sharma............  32 Chief Technology Officer
Matthew W. Bross........  40 Director
Kevin R. Compton........  42 Director
Jonathan D. Feiber......  44 Director
James F. Jordan.........  61 Director
Gregory B. Maffei.......  40 Director
</TABLE>

   Hugh C. Martin has 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.

   Chris A. Davis has served as Executive Vice President, Chief Financial and
Administrative Officer of ONI Systems since May 2000. Ms. Davis served as
Executive Vice President, Chief Financial and Administrative Officer of
Gulfstream Aerospace Corporation from 1993 until April 2000 and as Vice
President of General Dynamics from July 1999, when it acquired Gulfstream
Aerospace, until April 2000. She is a member of the boards of directors of
Cytec Industries, Inc. and Wolverine Tube, Inc. She holds an M.S. in Finance
and Statistics and a B.S. in Finance from the University of Florida.

   Hon Wah Chin has served as Chief Engineer of ONI Systems since August 2000.
Mr. Chin served as Chief Technology Officer of ONI Systems from June 1998 to
July 2000. Mr. Chin served as Senior Systems Architect at Cisco Systems, Inc.,
a network equipment company, from 1994 to June 1998 and was a Cisco
Distinguished Engineer. He holds an S.B. in Electrical Engineering and Computer
Science from the Massachusetts Institute of Technology.

   William R. Cumpston has served as Executive Vice President, Engineering and
Operations of ONI Systems since June 1999 and served 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. Dillon has 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.

                                       15
<PAGE>

   Robert J. Jandro has 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 1994 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.

   Andrew W. Page has served as Vice President, Business Development of ONI
Systems since February 2000. Mr. Page served as Managing Director and head of
the Global Communications Group of FleetBoston Robertson Stephens Inc., an
investment bank, from April 1997 to February 2000. He served as a Principal of
Volpe, Welty & Company from 1993 to March 1997. He holds an M.B.A. from Harvard
University Graduate School of Business and a B.A. in English Literature from
Princeton University.

   Rohit Sharma founded ONI Systems in our spin-out from Optivision, Inc. and
has served 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. Bross has served as a director of ONI Systems since November
1999. Since May 1999, he has served as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc., a communications service
provider. From March 1997 to May 1999, he served in various 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. Compton has 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 360networks Inc., Citrix Systems, Inc., Rhythms NetConnections
Inc. and VeriSign, Inc.

   Jonathan D. Feiber has 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. Jordan has 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. Maffei has 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 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.

                                       16
<PAGE>

                                    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 30, 2001, the
closing price of our common stock was $19.50.

<TABLE>
<CAPTION>
                                                                High     Low
                                                              -------- --------
   <S>                                                        <C>      <C>
   Fiscal Year Ended December 31, 2000
   Second quarter (starting June 1, 2000).................... $142.000 $72.9844
   Third quarter.............................................  128.625  71.9375
   Fourth quarter............................................   82.750  30.7500
</TABLE>

Stockholders

   As of March 19, 2001, we had approximately 884 record holders of our common
stock, and approximately 14,500 beneficial holders.

Annual Meeting of Stockholders

   The date of our next Annual Meeting of Stockholders will be May 16, 2001.

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 December 5, 2000, we issued 274,015 shares of ONI Systems common stock to
Comdisco, Inc. upon Comdisco's net exercise of certain previously issued
warrants to purchase 277,926 shares of common stock at an exercise price of
$0.88 per share. On February 5, 2001, FMR Corp. net exercised five percent of a
previously issued warrant to purchase 223,000 shares of common stock at an
exercise price of $0.91 per share, and we issued 10,955 shares of ONI Systems
common stock to FMR. Our issuance of these shares upon the exercise of these
warrants was exempt from registration pursuant to Section 4(2) of the
Securities Act, as amended.

   On February 28, 2001, we issued 488,624 shares of ONI Systems common stock
to Finisar Corporation as partial consideration for certain assets and
technology acquired by us. Our issuance of these shares was exempt from
registration pursuant to Rule 506 promulgated under the Securities Act of 1933.

                                       17
<PAGE>

Use of Proceeds

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

   As of December 31, 2000, we had used $51.0 million of the net proceeds from
the initial public offering for working capital, capital expenditures and other
general corporate purposes, including sales and marketing, customer support,
research and development, expansion of our operation and administrative
infrastructure, and the leasing of additional facilities. The remaining $161.1
million of the net proceeds are expected to be used for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the remaining net proceeds from our initial public offering to
acquire or invest in businesses, technologies or products that are
complementary to our business. Except for our commitments in connection with
our acquisition of assets from Finisar, we currently have no commitments or
agreements with respect to any acquisitions or investments. We have not
determined the amounts of the remaining proceeds that we plan to spend on any
of the uses described above or the timing of these expenditures. Pending our
use of the remaining net proceeds, we intend to invest them in short-term,
interest- bearing, cash equivalent instruments.

                                       18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with the consolidated and notes there to 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 the years ended December 2000, 1999 and 1998
and the period from October 20, 1997 (inception) to December 31, 1997 and the
balance sheet data as of December 31, 2000, 1999 and 1998 are derived from our
audited financial statements which are included elsewhere in this report. The
historical results are not necessarily indicative of results to be expected for
any future period.

<TABLE>
<CAPTION>
                                                                   Period from
                                                                 October 20, 1997
                                 Years Ended December 31,         (inception) to
                          --------------------------------------   December 31,
                              2000         1999         1998           1997
                          ------------ ------------ ------------ ----------------
                          (In thousands, except per share data)
<S>                       <C>          <C>          <C>          <C>
Consolidated Statements
 of Operations Data:
Revenue.................   $  59,662     $  3,034     $ 1,733         $  --
  Costs of goods sold...      39,980        1,032       1,208            --
                           ---------     --------     -------         ------
  Gross profit..........      19,682        2,002         525            --
                           ---------     --------     -------         ------
Operating expenses:
  Research and
   Development,
   excluding deferred
   stock compensation
   amortization
   amounts..............      53,654       24,858       4,009             39
  Sales and Marketing,
   excluding deferred
   stock compensation
   amortization
   amounts..............      25,304        4,557         649             21
  General and
   Administrative,
   excluding deferred
   stock compensation
   amortization
   amounts..............      16,385        3,455       1,591             49
  Amortization of
   deferred stock
   compensation.........      66,413       11,422       3,310             89
  Common stock warrant
   expense..............       4,545        2,891         --             --
  Amortization of
   goodwill and
   intangibles..........       3,594        1,842         --             --
  In-process research
   and development......         --           170         --             --
                           ---------     --------     -------         ------
    Total operating
     expenses...........     169,895       49,195       9,559            198
                           ---------     --------     -------         ------
    Operating loss......    (150,213)     (47,193)     (9,034)          (198)
Interest income
 (expense), net.........      13,333          623         183             (1)
                           ---------     --------     -------         ------
    Loss before income
     taxes..............    (136,880)     (46,570)     (8,851)          (199)
Income taxes............           7            2           1            --
                           ---------     --------     -------         ------
    Net loss............    (136,887)     (46,572)     (8,852)          (199)
Beneficial conversion of
 preferred stock........      (4,242)         --          --             --
                           ---------     --------     -------         ------
Net loss attributable to
 common stockholders....   $(141,129)    $(46,572)    $(8,852)        $ (199)
                           =========     ========     =======         ======
Basic and diluted net
 loss per share.........   $   (1.22)    $  (2.58)    $ (0.74)        $(0.77)
Weighted-average shares
 outstanding used in
 computing basic and
 diluted net loss per
 share..................     115,587       18,043      11,919            257
<CAPTION>
                          December 31, December 31, December 31,
                              2000         1999         1998
                          ------------ ------------ ------------
<S>                       <C>          <C>          <C>          <C>
Balance Sheet Data:
Cash and cash
 equivalents............     852,360       80,023      19,092
Working Capital.........     917,608       81,758      19,627
Total assets............   1,015,468      100,942      21,312
Long term debt, less
 current portion........     300,187          367          79
Total stockholders'
 equity.................     677,644       91,728      20,565
</TABLE>

                                       19
<PAGE>

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. Our actual results could
differ materially from those anticipated in forward looking statements as a
result of certain 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. 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 eliminate the need for traditional multiplexing
equipment in the network by combining lower speed signals and multiple data
formats into a single wavelength.

   In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In December 1997, we were spun
out of Optivision and Optivision distributed its holdings of our common stock
and half of its holdings of our preferred stock to Optivision shareholders.
Optivision also retained 4,000,000 shares of our Series A preferred stock. In
connection with the spin-out, we reserved, and were obligated to issue, 233,468
shares of our common stock upon the exercise of warrants to purchase capital
stock of Optivision. These warrants were exercised in August 2000, and we
issued 233,468 shares of our common stock. We did not receive any proceeds from
the exercise of these warrants. In January 1998, all of the shares of our
Series A preferred stock were converted into Series B preferred stock on a one-
to-one basis. In January 1998, Optivision sold 2,666,667 shares of our
preferred stock to our initial venture investors. In March 1998, we repurchased
all of our outstanding stock owned by Optivision, consisting of 1,333,333
shares of our Series B preferred stock, for an aggregate purchase price of $1.0
million. Optivision does not currently own any shares of ONI Systems. See note
7 of notes to our consolidated financial statements.

   In June 1999, we acquired all of the outstanding common shares of Object-
Mart, Inc. in exchange for 4,569,276 shares of our common stock and
approximately $3.2 million in cash. Object-Mart was located in San Jose,
California, and provided software products and services to 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 been included in our consolidated financial statements since
June 29, 1999. Upon consummation of this acquisition, we recorded goodwill of
$5.7 million that is to be amortized over a period of two years. As of December
31, 2000, the remaining unamortized goodwill was $1.5 million.

   Since our inception, we have incurred significant losses, and as of December
31, 2000, we had an accumulated deficit of $192.5 million. We have not achieved
profitability on a quarterly or annual basis. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, will need to generate significant revenue to achieve
and maintain profitability.

   We primarily market and sell our products through our direct sales force to
competitive local exchange carriers, inter-exchange carriers, Internet service
and application service providers, cable operators, utilities and their
affiliates and incumbent local exchange carriers. In some international regions
where it is difficult to

                                       20
<PAGE>

maintain a direct sales force, we may rely on resellers for distribution of our
products, such as our OEM agreement with Lucent Technologies for the sale of
our products in China.

   Our policy is to recognize revenue at the time of shipment unless we have
future obligations related to that revenue or customer acceptance is required,
in which case revenue is deferred until these obligations are met or the
customer accepts the product. Revenue from service obligations are deferred and
recognized as the services are performed. Prior to September 30, 1999, our
revenue resulted from government research and development contracts, which were
completed in 1999, and the sale of a non-product related software license.

   We conduct supply chain management, production engineering, documentation
and quality assurance at our manufacturing facility in San Jose, California. We
outsource most of the manufacturing of optical modules used in our products,
and we complete the final assembly of these optical modules at our facilities.
The majority of our electronic manufacturing and assembly is outsourced.
Currently, we use a number of manufacturing vendors for electronic assemblies
while E-Tek Dynamics, a subsidiary of JDS Uniphase Corporation, performs the
majority of our outsourced optical assembly. This approach to manufacturing
allows us to:

  . reduce capital equipment expenditures required for a turnkey
    manufacturing operation;

  . reduce our facilities square footage requirements by limiting the amount
    of space dedicated to manufacturing and operations;

  . conserve working capital by reducing the amount of inventory we must
    stock; and

  . provide flexibility in meeting market demand.

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 July 2000, we
announced the opening of our Lightwave Design Centre in Raleigh, North Carolina
to further enhance our research and development activities in optical data and
transport technologies.

   Sales and marketing expenses consist primarily of salaries and the related
personnel costs of sales and marketing personnel, customer service and support
personnel, commissions, promotional, travel and other marketing expenses and
recruiting expenses.

   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.

   In 1998, we recorded total deferred stock compensation of approximately $8.4
million in connection with stock sales and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of sale or grant.
Options granted are typically subject to a four-year vesting period. We are
amortizing 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
separately for each 25% portion of the total award, in accordance with
Financial Accounting Standards Board Interpretation No. 28. The result of this
accounting treatment is that approximately 59% of the unearned deferred
compensation will be amortized in the first year, 25% in the second year, 12%
in the third year and 4% in the fourth year following the date of the grant. We
amortized $3.3 million of deferred stock compensation in the year ended
December 31, 1998. For the year ended December 31, 1999 and 2000, we recorded
approximately $41.7 million, and $84.3 million, respectively, in additional
deferred stock compensation for stock options granted at prices subsequently
deemed to be below fair value on the date of grant. We amortized a total of
approximately $11.4 million and $66.4 million of deferred stock compensation in
the year ended December 31, 1999 and 2000, respectively. Approximately $56.0
million of deferred stock compensation related to all prior issuances remained
to be amortized over four years as of December 31, 2000, respectively.

                                       21
<PAGE>

Results of Operations

   Beginning in 2000, our revenue generally is derived from the sale 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 the comparison between the year ended December 31, 2000 and
prior years is not meaningful. We expect to experience seasonality in the sales
of our products. Historically, the telecommunications equipment market has
experienced increased sales in the first and fourth quarter of a calendar year
due in part to purchasers' budgetary cycles. We further expect that sales may
decline during summer months, particularly in European markets. These seasonal
variations in our sales may lead to fluctuations in our quarterly operating
results.

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

Comparison of Year 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

   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.

   Cost of goods sold as a percentage of revenue for year ended December 31,
2000 is higher than it is anticipated to be in the future due to the high cost
of initial start-up of production and the low volume of sales. We expect to
develop additional products in the future such that the product mix of our
sales may vary. Accordingly, we expect the quarterly gross profit percentages
to fluctuate in accordance with the quarterly product mix of related sales.

 Research and development expense

   Research and development expense was $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 is
primarily due to the significant expansion of our research and development
department, particularly attributable to the increase of engineering staff.
Research and development is essential to our future success and we expect that
research and development expenses will continue to increase in absolute dollars
in future periods. At December 31, 2000 we had approximately 207 research and
development employees, an increase of 97 from 110 at December 31, 1999.

                                       22
<PAGE>

 Sales and marketing expense

   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. We expect to continue to expand our domestic and international sales
force and marketing activity, and as a result, expect that the dollar amounts
of sales and marketing expenses will continue to increase in absolute dollars
in future periods. 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

   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
reflects the expansion in infrastructure to support our planned growth. We
expect that the absolute dollar amount of general and administrative expenses
will continue to increase in future periods as a result of the expansion of
business activity. 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 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%;

                                       23
<PAGE>

  . 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 are being amortized over a period not exceeding two years.

 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.

Comparison of Year Ended December 31, 1999 and 1998

 Revenue

   In connection with our spinout from Optivision, we inherited several
government research and development contracts. Prior to 1999, all of our
revenue resulted from these contracts. In 1999, we recognized approximately
$1.1 million in revenue from the licensing of our operating system software.
The remaining revenue of approximately $1.9 million was derived from government
research and development contracts and other consulting services. The
government research and development contracts were completed in June 1999. We
will not continue these activities, and they will not contribute to our revenue
in the future.

   As of December 31, 1999, our ONLINE9000 product was undergoing field trial
testing and was not generally available for sale; accordingly, no product
revenue was recorded.

 Cost of revenue

   Cost of revenue for 1999 and 1998 consisted primarily of salaries,
contracted services and materials required in the fulfillment of obligations
under government contracts.

 Research and development

   Research and development expenses were $24.9 million for the year ended
December 31, 1999, an increase of $20.8 million, or 520%, from the year ended
December 31, 1998. The increase in research and development expenses was
primarily related to the increase in the number of personnel and an increase in
engineering and prototype expenses related to the design, development and
testing of our ONLINE9000 product. At December 31, 1999, we had a total of
approximately 110 research and development employees an increase of 67 from 43
employees at December 31, 1998.

 Sales and marketing

   Sales and marketing expenses were $4.6 million for the year ended December
31, 1999, an increase of $3.9 million, or 602%, from the year ended December
31, 1998. The increase in sales and marketing expenses was primarily related to
the increase in the number of personnel, including the establishment of a
direct sales force and customer service and support team, as well as costs
associated with tradeshows, promotional

                                       24
<PAGE>

activities and public relations. At December 31, 1999, we had a total of 21
sales and marketing employees an increase of 18 employees from 3 employees at
December 31, 1998.

 General and administrative

   General and administrative expenses were $3.5 million for the year ended
December 31, 1999, an increase of $1.9 million, or 117%, from the year ended
December 31, 1998. The increase in general and administrative expenses was
primarily related to the increase in personnel and increased legal, information
systems, facilities and consulting services associated with our growing
business activities. At December 31, 1999, we had a total of approximately 30
general and administrative employees, an increase of 18 employees from 12
employees at December 31, 1998.

 Amortization of deferred stock compensation

   In connection with grants of stock options and sales of stock to employees
with exercise or sales prices subsequently determined to be below the deemed
fair value of our common stock on the dates of grant or sale, we recorded
amortization of deferred stock compensation of $11.4 million in 1999 an
increase of $8.1 million, or 245%, from the year ended December 31, 1998. As of
December 31, 1999, our unamortized deferred stock compensation was $35.5
million.

 Common stock warrant expense

   In December 1999, in connection with the signing of a purchase and license
agreement with COLT Telecom plc, we issued a warrant to purchase 500,000 shares
of common stock at an exercise price of $0.91 per share. COLT is not obligated
to purchase any of our products as a condition to 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
$2.9 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 six years.

Given that there are no future performance obligations to exercise this
warrant, the warrant was expensed in the year ended December 31, 1999.

 Interest income, net

   Interest income, net includes interest income from our cash investments net
of interest expense related to our lease financing obligations and amortization
of warrants issued in conjunction with our equipment lease and credit
facilities. We had interest income, net, of $623,000 in 1999, an increase of
$440,000, or 241%, from 1998. The increase was primarily due to the interest
income earned on proceeds from preferred stock issuances.

Liquidity and Capital Resources

   At December 31, 2000, our principal source of liquidity was our cash and
cash equivalents of $852.4 million.

   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

                                       25
<PAGE>

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
million shares of common stock. Of these shares, ONI sold 5,646,643 shares and
received net proceeds of approximately $401.5 million. The remaining 2,353,357
shares were sold by existing stockholders of ONI. Concurrent with the
completion of the follow-on public offering of common stock, we sold $300
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.

   At December 31, 2000, cash and cash equivalents totaled $852.4 million, an
increase of $772.3 million from the balance of $80.0 million at December 31,
1999. The increase was due to the receipt of $941.4 million, primarily from the
net proceeds of our two public offerings, issuance of convertible subordinated
notes and sale of convertible preferred stock, offset by $117.2 million of cash
used in operating activities and $52.3 million of cash used in investing
activities. At December 31, 1999, cash and cash equivalents totaled $80.0
million, an increase of $60.9 million, from the balance of $19.1 million at
December 31, 1998. The increase was due to the receipt of $97.1 million,
primarily from the sale of convertible preferred stock, offset by $29.6 million
of cash used in operating activities and $6.6 million of cash used in investing
activities.

   We used $117.2 million in cash in operating activities in the year ended
December 31, 2000, an increase of $87.6 million from the $29.6 million used in
the year ended December 31, 1999. The increase was primarily due to the
increase in our net loss of $90.3 million, an increase in inventory of $61.0
million, an increase in accounts receivable of $24.1 million and an increase in
prepaid expenses and other current assets of 9.8 million, offset by increased
amortization of deferred stock compensation and common stock warrants of $56.6
million, an increase in accounts payable and accrued liabilities of $27.3
million, and increased depreciation and amortization of $11.1 million. We used
$29.6 million in cash in operating activities in 1999, an increase of $23.8
million, from the $5.8 million used in 1998. The increase was primarily due to
the increase in our net loss of $37.7 million and an increase in inventory of
$9.6 million, offset by decreased working capital of $9.5 million, increased
amortization of deferred stock compensation and common stock warrants of $11.0
million, and depreciation and amortization of $2.5 million.

   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 minority investments we
made during the year ended December 31, 2000. We used $6.6 million in cash in
investing activities in 1999, an increase of $5.6 million, from the $1.0
million used in 1998. The increase was primarily 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 $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, an increase of $71.2 million, from the
$25.9 million generated in 1998, primarily from the private sales of
convertible preferred stock and issuance of common stock.

   We have an equipment financing facility for $1.5 million, of which $467,000
had been drawn as of December 31, 2000. This facility with a 7.51% annual
interest charge expires in December 2002.

   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.

                                       26
<PAGE>

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

   In February 2001, we acquired the technology and other assets associated
with Finisar's Corporation's Opticity product line for $50 million, comprised
of $30 million in cash and $20 million of our common stock. At closing, we paid
$5 million in cash and issued 488,624 shares of common stock in Finisar. The
remaining $25 million of cash payments will be made upon timely completion of
certain mutually agreed deliverables.

Recent Accounting Pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS
No.133). This accounting standard, which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, requires that all derivatives be
recognized as either assets or liabilities at estimated fair value. In June
2000, the FASB issued Statement of Financial Accounting Standards No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of SFAS No. 133. This accounting standard amended the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. The adoption of SFAS No. 133, as amended, will not have a
material effect on our financial position or results of operations.

                                       27
<PAGE>

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 Form 10-K.

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

   Through December 31, 2000, we incurred cumulative losses of $192.5 million,
and we expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large fixed expenses,
and we plan to incur significant and increasing sales and marketing, research
and development, manufacturing, and general and administrative expenses. In
February 2000, we began to ship our first product, the ONLINE9000, and our
revenue to date has been limited. In order for us to become profitable, we will
need to generate and sustain higher revenue while maintaining reasonable cost
and expense levels.

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

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

   We commenced business as an independent company in December 1997. We
announced general availability of our first product, the ONLINE9000, in January
2000 and our second product, the ONLINE7000, in June 2000. Consequently, we
have a limited history upon which we can rely in planning and making the
critical decisions that will affect our future operating results. Similarly,
because of the relatively immature state of our business, it will be difficult
for investors to evaluate our prospects. We will need to make decisions in the
immediate future regarding resource allocations for research and development
and marketing and sales. If our predictions about the best use of our resources
turn out to be inaccurate, we may not make the best use of our resources and we
may forego better opportunities. Our limited history makes it difficult for
investors to gauge our capability in making these decisions.

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

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

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

   The market in which we compete is characterized by more rapid technological
change than most, because it is newly emerging. As a result, we expect there
will be frequent new product introductions, changes in customer requirements
and evolving industry standards. We have no significant track record of our
ability to

                                       28
<PAGE>

respond to these developments, and we may not be able to develop new products
or product enhancements in a timely manner, or at all.

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

   Any failure of our future products to achieve market acceptance could harm
our business and financial results. For example, we are currently developing
new products, including our ONLINE2500. We have devoted and expect to continue
to devote significant engineering and financial resources to the development
and marketing of new products and features. Unexpected technical challenges
could prevent us from successfully developing new products and features in a
timely manner or at all. In addition, new products and features could be more
costly to develop and test than we anticipate. Even if we are able to develop
and introduce new products and 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, 2000, we had sixteen customers. Most of these customers are not
contractually committed to purchase any minimum quantities of our products. If
these customers or future customers do not purchase large quantities of our
products for any reason, our ability to succeed would be harmed. The decision
to purchase substantial quantities of our products will depend, in part, on our
customers' and potential customers' desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will introduce or
expand commercial services utilizing our products on a timely basis, if at all.
Any delay in introducing, or failure to introduce, these services would
seriously harm our revenue, results of operations and financial condition.

   In addition, if we fail to attract new customers, our growth will be
limited. The growth of our customer base could be limited by:

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

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

  . failure of our products to perform as expected;

  . difficulties in meeting customers' delivery requirements;

  . introductions of new products by our competitors; and

  . other competitive factors such as aggressive pricing or financing by our
    competitors.

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

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

                                       29
<PAGE>

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

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

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

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

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

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

  . tariffs, export controls and other trade barriers;

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

  . difficulties and costs of staffing and managing foreign operations;

  . certification requirements with which we may be unfamiliar; and

  . reduced protection for intellectual property rights in some countries.

If we do not expand our direct sales operations, we may be unable to increase
market awareness and sales of our products.

   If we are unable to expand our direct sales force, we may not be able to
increase market awareness and sales of our products, which may prevent us from
achieving and maintaining profitability. Our products and services require a
technical sales effort targeted at several key people within each of our
prospective customers' organizations. Our sales efforts require the attention
of sales personnel and specialized system engineers with extensive experience
in networking technologies. Competition for these individuals is intense, and
we may not be able to hire sufficient numbers of qualified sales personnel and
specialized system engineers.

                                       30
<PAGE>

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

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

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

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

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

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

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

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

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

                                       31
<PAGE>

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

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

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

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

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

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

   We are still a relatively small company and our success depends on growth.
At December 31, 1998, we had 63 employees, at December 31, 1999, we had 202
employees and at December 31, 2000, we had 541 employees. We plan to hire a
significant number of additional employees this year. Our growth has placed,
and we expect it to continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures, and will
need to continue to expand, train and manage our work force worldwide.

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

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

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

                                       32
<PAGE>

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

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

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

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

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

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

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

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

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

  . loss of customers;

  . damage to our reputation;

  . diversion of development resources;

  . increased service and warranty costs;

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

  . increased insurance costs.

                                       33
<PAGE>

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

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

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

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

   It is possible that no patents will be issued from our currently pending or
future patent applications. Moreover, any issued patents may not provide us
with any competitive advantages over, or may be challenged by, third parties.

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

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

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

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

   In March 2000, Nortel Networks filed suit against us in the United States
District Court for the Northern District of California. The suit alleges that
our products infringe five patents held by Nortel Networks, and sets forth
allegations of misappropriation of trade secrets, unlawful business practices
and common law unfair competition. We are in the process of investigating these
allegations. Nortel Networks is seeking preliminary and permanent injunctions
and damages against us in connection with these claims. If Nortel Networks is
able to obtain an injunction preventing us from selling our products, we would
suffer a substantial reduction in our revenues and incur losses over an
extended period of time. We have incurred and expect to incur substantial legal
and other expenses as well as diversion of management and technical time and
attention in connection

                                       34
<PAGE>

with this litigation. The expenses and diversion of resources associated with
this litigation could seriously harm our business and financial condition and
could affect our ability to raise capital in the future. In the event of an
adverse ruling, we may be unable to sell our products or be required to pay
substantial damages to Nortel Networks, and if this litigation is resolved by
settlement, we might need to make substantial payments to Nortel Networks.

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

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

  . obtain from the owner of the infringed intellectual property right a
    license to sell or use the relevant technology, which license may not be
    available on reasonable terms, or at all; or

  . redesign those products that use the challenged technology.

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

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

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

Acquisitions could disrupt our business and harm our financial condition.

   We intend to acquire or invest in complementary businesses, products and
technologies. We may not successfully integrate any businesses, products,
technologies or personnel that we might acquire and, as a result, our operating
results could suffer. For example, in February 2001, we acquired certain
technology and other assets from Finisar Corporation which we intend to
incorporate into our new ONLINE2500 product. If we cannot successfully
incorporate Finisar's technology into our ONLINE2500, we may not be able to
make this product available for sale in a timely fashion, or at all, and our
business would suffer. This acquisition and any future acquisitions or
investments could lead to:

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

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

  . responsibility for unanticipated liabilities;

  . amortization expenses related to goodwill and other intangible assets;

  . large and immediate write-offs;

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

  . unanticipated costs;

                                       35
<PAGE>

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

  . adverse effects on existing relationships with suppliers and customers;

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

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

The continuing control of ONI Systems by insiders could delay or prevent a
change in corporate control, which could prevent you from realizing a premium
over the market price of our common stock.

   As of March 1, 2001, our executive officers, directors and entities
affiliated with them beneficially owned approximately 26.9% of our outstanding
common stock. These stockholders, if acting together, would be able to
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. This ability to exercise influence over all matters requiring
stockholder approval could prevent or significantly delay another company or
person from acquiring or merging with us. As a result, offers to acquire ONI
Systems which represent a premium over the available market price of our common
stock may be withdrawn or otherwise fail to be realized.

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

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

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

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

  . changes in financial estimates by securities analysts;

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

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

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

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

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

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

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

                                       36
<PAGE>

   Our substantial leverage could have significant negative consequences,
including:

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

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

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

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

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

  . authorizing the issuance of preferred stock without stockholder approval;

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

  . prohibiting cumulative voting in the election of directors;

  . prohibiting stockholders from calling stockholders meetings; and

  . prohibiting stockholder actions by written consent.

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

ITEM 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. In addition, we maintain our cash equivalents in
money market funds. Accordingly, we are not a party to financial instruments or
contracts, and do not have investments, that expose us to material interest
rate risk. Our subordinated convertible notes were issued at a fixed interest
rate and therefore do not expose us to the risk of earnings or cash flow loss
due to changes in market interest rates.

Exchange rate sensitivity

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

                                       37
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                               ONI SYSTEMS CORP.

Annual Financial Statements

   Our financial statements required by this item are submitted as a separate
section of the Form 10-K. See item 14(a)(1) for a listing of financial
statements provided in the section titled "Financial Statements."

Selected 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 the Form 10-K. This information has been
derived from our unaudited consolidated financial statements that, in our
opinion, reflect all 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.

<TABLE>
<CAPTION>
                               First     Second    Third     Fourth    Fiscal
                              Quarter   Quarter   Quarter   Quarter     Year
                              --------  --------  --------  --------  ---------
                                  (In thousand, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
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
Fiscal 1999
Revenue.....................  $    565  $    401  $    742  $  1,326  $   3,034
Gross profit................       140        67       536     1,259      2,002
Loss before income taxes....    (4,775)   (7,332)  (12,550)  (21,913)   (46,570)
Net loss....................    (4,777)   (7,332)  (12,550)  (21,913)   (46,572)
Basic and diluted net loss
 per share..................  $  (0.35) $  (0.50) $  (0.63) $  (1.01) $   (2.58)
Number of shares used in
 computing basic and diluted
 net loss per share.........    13,542    14,557    20,065    21,690     18,043
</TABLE>

                                       38
<PAGE>

                    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, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity(deficit), and cash flows for each of the
years in the three-year period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and
its cash flows for each of the years in the three year period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.

                                          KPMG LLP

   Mountain View, California
   February 7, 2001

                                       39
<PAGE>

                               ONI SYSTEMS CORP.

                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                             December 31,
                                                          --------------------
                                                             2000       1999
                                                          ----------  --------

<S>                                                       <C>         <C>
                         ASSETS
Current assets:
  Cash and cash equivalents.............................. $  852,360  $ 80,023
  Accounts receivable....................................     24,309       163
  Inventory..............................................     70,626     9,649
  Prepaid expenses and other current assets..............      7,950       771
                                                          ----------  --------
    Total current assets.................................    955,245    90,606
Property and equipment, net..............................     41,581     5,315
Other assets.............................................     16,829        24
Goodwill and Intangibles, net............................      1,813     4,997
                                                          ----------  --------
    Total assets......................................... $1,015,468  $100,942
                                                          ==========  ========

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable....................................... $   17,518  $  6,902
  Accrued liabilities....................................     18,492     1,779
  Deferred revenue.......................................      1,466       --
  Current portion of capital lease obligations...........        161       167
                                                          ----------  --------
    Total current liabilities............................     37,637     8,848
Capital lease obligations, less current portion..........        187       366
Subordinated convertible notes...........................    300,000       --
                                                          ----------  --------
    Total liabilities....................................    337,824     9,214
                                                          ----------  --------

Commitments and contingencies

Stockholders' equity:
  Convertible preferred stock, $0.0001 par value per
   share, 10,000,000 and 80,309,408 shares authorized at
   December 31, 2000 and December 31, 1999, respectively;
   zero and 78,855,900 shares issued and outstanding at
   December 31, 2000 and December 31, 1999, respectively;
   aggregate liquidation preference of $0 and $125,956 at
   December 31, 2000 and December 31, 1999,
   respectively..........................................        --          8
  Common stock, $0.0001 par value per share, 700,000,000
   and 159,690,592 shares authorized at December 31, 2000
   and December 31, 1999, respectively; 133,089,074 and
   31,279,590 shares issued and outstanding at December
   31, 2000 and December 31, 1999, respectively..........         13         3
  Additional paid-in capital.............................    933,670   186,781
  Notes receivable from stockholders.....................     (7,545)   (3,824)
  Services receivable from stockholder...................        --        (85)
  Deferred stock compensation............................    (55,984)  (35,532)
  Accumulated deficit....................................   (192,510)  (55,623)
                                                          ----------  --------
    Total stockholders' equity...........................    677,644    91,728
                                                          ----------  --------
    Total liabilities and stockholders' equity........... $1,015,468  $100,942
                                                          ==========  ========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       40
<PAGE>

                               ONI SYSTEMS CORP.

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

<TABLE>
<CAPTION>
                                              Years ended December 31,
                                        --------------------------------------
                                            2000         1999         1998
                                        ------------  -----------  -----------
<S>                                     <C>           <C>          <C>
Revenue................................ $     59,662  $     3,034  $     1,733
  Cost of goods sold, excluding
   deferred stock compensation
   amortization amounts................       39,980        1,032        1,208
                                        ------------  -----------  -----------
  Gross profit.........................       19,682        2,002          525
                                        ------------  -----------  -----------
Operating expenses:
  Research and development, excluding
   deferred stock compensation
   amortization amounts................       53,654       24,858        4,009
  Sales and marketing, excluding
   deferred stock compensation
   amortization amounts................       25,304        4,557          649
  General and administrative, excluding
   deferred stock compensation
   amortization amounts................       16,385        3,455        1,591
  Amortization of deferred stock
   compensation*.......................       66,413       11,422        3,310
  Common stock warrant expense.........        4,545        2,891          --
  Amortization of goodwill and
   intangibles.........................        3,594        1,842          --
  In-process research and development..          --           170          --
                                        ------------  -----------  -----------
    Total operating expenses...........      169,895       49,195        9,559
                                        ------------  -----------  -----------
    Operating loss.....................     (150,213)     (47,193)      (9,034)
Interest income, net...................       13,333          623          183
                                        ------------  -----------  -----------
Loss before income taxes...............     (136,880)     (46,570)      (8,851)
Income taxes...........................            7            2            1
                                        ------------  -----------  -----------
Net loss...............................     (136,887)     (46,572)      (8,852)
Beneficial conversion of preferred
 stock.................................        4,242          --           --
                                        ------------  -----------  -----------
Net loss attributable to common
 shareholders.......................... $   (141,129) $   (46,572) $    (8,852)
                                        ============  ===========  ===========
Basic and diluted net loss per share... $      (1.22) $     (2.58) $     (0.74)
Weighted-average shares outstanding
 used in computing basic and diluted
 net loss per share....................  115,587,139   18,043,188   11,918,628
                                        ============  ===========  ===========

--------
*Amortization of deferred stock
 compensation:
  Cost of goods sold................... $      8,133  $       --   $       --
  Research and development.............       32,623        8,142        2,509
  Sales and marketing..................       15,468        1,583          160
  General and administrative...........       10,189        1,697          641
                                        ------------  -----------  -----------
                                        $     66,413  $    11,422  $     3,310
                                        ============  ===========  ===========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>

                               ONI SYSTEMS CORP.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                  ----------------------------
                                                    2000       1999     1998
                                                  ---------  --------  -------
<S>                                               <C>        <C>       <C>
Cash flows from operating activities:
 Net loss........................................ $(136,887) $(46,572) $(8,852)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation and amortization.................    13,948     2,806      289
   Amortization of deferred stock compensation...    66,413    11,422    3,310
   Loss on disposal of property and equipment....       112       164      --
   Value of leased facilities received in
    exchange for preferred stock.................        85        97      --
   Purchased in-process research and
    development..................................       --        170      --
   Amortization of debt financing costs..........       392        54      --
   Common stock warrant expense..................     4,545     2,891      --
   Stock-based compensation for non-employees....       241        73      --
 Changes in operating assets and liabilities:
   Accounts receivable...........................   (24,146)    1,570   (1,002)
   Inventory.....................................   (60,977)   (9,649)     --
   Prepaid expenses and other current assets.....    (9,755)     (534)    (111)
   Accounts payable..............................    10,616     2,393      172
   Other accrued liabilities.....................    16,712     5,528      383
   Deferred revenue..............................     1,466       --       --
                                                  ---------  --------  -------
     Net cash used in operating activities.......  (117,235)  (29,587)  (5,810)
                                                  ---------  --------  -------
Cash flows used in investing activities:
 Purchase of property and equipment and
  intangibles....................................   (47,314)   (4,859)  (1,016)
 Proceeds from disposal of property and
  equipment......................................       173       --       --
 Minority investments............................    (5,150)      --       --
 Acquisition of Object-Mart, net of cash
  acquired.......................................       --     (1,744)     --
                                                  ---------  --------  -------
     Net cash used in investing activities.......   (52,291)   (6,603)  (1,016)
                                                  ---------  --------  -------
Cash flows from financing activities:
 Repayment of short-term borrowings..............       --        --      (130)
 Proceeds from issuance of convertible
  subordinated notes.............................   290,529       --       --
 Payments under capital lease obligations........      (185)      (52)     (14)
 Proceeds from issuance of preferred stock, net
  of issuance costs..............................    21,960    96,889   27,015
 Repurchase of preferred stock...................       --        --    (1,000)
 Payment on stockholder notes....................       647        12      --
 Proceeds from issuance of common stock, net of
  issuance costs.................................   628,912       272       35
                                                  ---------  --------  -------
     Net cash provided by financing activities...   941,863    97,121   25,906
                                                  ---------  --------  -------
     Net increase in cash and cash equivalents...   772,337    60,931   19,080
Cash and cash equivalents at beginning of year...    80,023    19,092       12
                                                  ---------  --------  -------
Cash and cash equivalents at end of year......... $ 852,360  $ 80,023  $19,092
                                                  ---------  --------  -------
Supplemental disclosures of cash flow
 information:
 Interest paid during year....................... $      37  $     16  $     4
                                                  =========  ========  =======
 Noncash investing and financing activities:
   Equipment recorded under capital leases....... $     --   $    467  $   133
                                                  =========  ========  =======
   Contribution of property and equipment by
    common stockholder........................... $     --   $    --   $   142
                                                  =========  ========  =======
   Issuance of common stock upon exercise of
    options in exchange for notes receivable..... $   4,652  $  3,713  $   123
                                                  =========  ========  =======
   Issuance of preferred stock in exchange for
    leased facilities............................ $     --   $    182  $   --
                                                  =========  ========  =======
   Issuance of common stock in connection with
    Object-Mart, Inc. acquisition................ $     --   $  5,875  $   --
                                                  =========  ========  =======
   Issuance of warrants in connection with debt
    Financing.................................... $     --   $    204  $   --
                                                  =========  ========  =======
   Issuance of common stock for future services.. $  86,865  $ 41,730  $ 8,432
                                                  =========  ========  =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       42
<PAGE>

                               ONI SYSTEMS CORP.

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
                 Years ended December 31, 1998, 1999 and 2000
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                     Convertible                                     Notes      Services                                Total
                   preferred stock     Common stock    Additional  receivable  receivable    Deferred               stockholders'
                  ------------------ -----------------  paid-in       from        from        stock     Accumulated   (deficit)
                    Shares    Amount   Shares   Amount  capital   stockholders stockholder compensation   deficit      equity
                  ----------  ------ ---------- ------ ---------- ------------ ----------- ------------ ----------- -------------
<S>               <C>         <C>    <C>        <C>    <C>        <C>          <C>         <C>          <C>         <C>
Balances as of
 December 31,
 1997...........   8,000,000    --   11,565,752    1        214        --           --          (101)        (199)         (85)
Issuance of
 common stock
 for notes
 receivable.....         --     --    5,991,496    1        122       (123)         --           --           --           --
Exercise of
 stock purchase
 rights for
 cash...........         --     --      440,000   --         27        --           --           --           --            27
Exercise of
 options for
 cash...........         --     --        4,000   --          7        --           --           --           --             7
Contribution of
 property and
 equipment by
 common
 stockholder....         --     --          --    --        142        --           --           --           --           142
Exchange of
 Series A
 preferred stock
 for Series B
 preferred
 stock..........  (8,000,000)   --          --    --        --         --           --           --           --           --
Issuance of
 Series B
 preferred
 stock, net of
 $50 in issuance
 costs..........  26,128,843     3          --    --      4,206        --           --           --           --         4,209
Repurchase and
 cancellation of
 Series B
 preferred
 stock..........  (1,333,333)   --          --    --     (1,000)       --           --           --           --        (1,000)
Issuance of
 Series C
 preferred
 stock, net of
 $62 in issuance
 costs..........   2,733,332    --          --    --      1,988        --           --           --           --         1,988
Issuance of
 Series D
 preferred
 stock, net of
 $46 in issuance
 costs..........   4,969,148    --          --    --      4,335        --           --           --           --         4,335
Issuance of
 Series E
 preferred
 stock, net of
 $17 in issuance
 costs..........  18,082,200     2          --    --     16,482        --           --           --           --        16,484
Deferred stock
 compensation...         --     --          --    --      8,432        --           --        (8,432)         --           --
Amortization of
 deferred stock
 compensation...         --     --          --    --        --         --           --         3,310          --         3,310
Net loss........         --     --          --    --        --         --           --           --        (8,852)      (8,852)
                  ----------   ---   ----------  ---    -------      -----        ----       -------      -------      -------
Balances as of
 December 31,
 1998...........  50,580,190   $ 5   18,001,248  $ 2    $34,955      $(123)       $ --       $(5,223)     $(9,051)     $20,565
                  ==========   ===   ==========  ===    =======      =====        ====       =======      =======      =======
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       43
<PAGE>

                               ONI SYSTEMS CORP

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
                 Years ended December 31, 1998, 1999 and 2000
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                     Convertible                                    Notes      Services                                Total
                   preferred stock    Common stock    Additional  receivable  receivable    Deferred               stockholders'
                  ----------------- -----------------  paid-in       from        from        stock     Accumulated   (deficit)
                    Shares   Amount   Shares   Amount  capital   stockholders stockholder compensation   deficit      equity
                  ---------- ------ ---------- ------ ---------- ------------ ----------- ------------ ----------- -------------
<S>               <C>        <C>    <C>        <C>    <C>        <C>          <C>         <C>          <C>         <C>
Exercise of
options for
cash............         --  $ --    3,023,220 $ --    $    272    $   --        $ --       $    --     $    --       $   272
Issuance of
Series E
preferred stock,
net of $37 in
issuance costs..   8,001,824     1         --    --       7,263        --          --            --          --         7,264
Issuance of
Series E
preferred stock
in exchange for
services........     200,000   --          --    --         182        --         (182)          --          --           --
Performance of
services........         --    --          --    --         --         --           97           --          --            97
Issuance of
common stock for
acquisition of
Object-Mart.....         --    --    4,569,276   --       5,874        --          --            --          --         5,874
Issuance of
Series F
preferred stock,
net of $21 in
issuance costs..   8,249,468     1         --    --      14,969        --          --            --          --        14,970
Exercise of
options for
notes
receivable......         --    --    5,685,846     1      3,712     (3,713)        --            --          --           --
Payment on
stockholder
notes...........         --    --          --    --         --          12         --            --          --            12
Issuance of
warrants in
connection with
debt financing..         --    --          --    --         204        --          --            --          --           204
Issuance of
Series G
preferred stock,
net of $45 in
issuance costs..  11,824,418     1         --    --      74,655        --          --            --          --        74,656
Issuance of
warrants in
connection with
purchase and
license
agreement.......         --    --          --    --       2,891        --          --            --          --         2,891
Stock-based
compensation to
non-employees...         --    --          --    --          73        --          --            --          --            73
Deferred stock
compensation....         --    --          --    --      41,731        --          --        (41,731)        --           --
Amortization of
deferred stock
compensation....         --    --          --    --         --         --          --         11,422         --        11,422
Net loss........         --    --          --    --         --         --          --            --      (46,572)     (46,572)
                  ---------- -----  ---------- -----   --------    -------       -----      --------    --------      -------
Balances as of
December 31,
1999............  78,855,900 $   8  31,279,590 $   3   $186,781    $(3,824)      $ (85)     $(35,532)   $(55,623)     $91,728
                  ========== =====  ========== =====   ========    =======       =====      ========    ========      =======
</TABLE>

          See accompanying notes to consolidated financial statements

                                       44
<PAGE>

                               ONI SYSTEMS CORP.

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
                 Years ended December 31, 2000, 1999 and 1998
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                       Notes     Services                             Total
                     Convertible                                     receivable receivable                           stock-
                   preferred stock       Common stock     Additional    from       from      Deferred                holders
                  ------------------- -------------------  paid-in     stock-     stock-      stock     Accumulated (deficit)
                    Shares     Amount   Shares     Amount  capital    holders     holder   compensation   deficit    equity
                  -----------  ------ -----------  ------ ---------- ---------- ---------- ------------ ----------- ---------
<S>               <C>          <C>    <C>          <C>    <C>        <C>        <C>        <C>          <C>         <C>
Exercise of
options for
cash............          --    $ --    4,106,514   $ --   $  1,286   $   --       $ --      $    --     $     --   $   1,286
Exercise of
options for
notes
receivable......          --      --    2,675,860     --      4,652    (4,652)       --           --           --         --
Payment on
stockholder
notes...........          --      --          --      --        --        647        --           --           --         647
Issuance of
common shares in
exchange for
services........          --      --       18,002     --         57       --         --           --           --          57
Exercise of
common stock
warrants........          --      --      507,483     --        --        --         --           --           --         --
Issuance of
Series G shares,
net of $8 in
issuance costs..      310,000     --          --      --      4,341       --         --        (2,381)         --       1,960
Issuance of
Series G shares
in exchange for
services........       29,000     --          --      --        406       --         --          (222)         --         184
Amortization of
cost of
preferred stock
issued for
leased
facility........          --      --          --      --        --        --         85           --           --          85
Issuance of
warrants in
connection with
purchase and
license
agreement.......          --      --          --      --      3,000       --         --           --           --       3,000
Issuance of
warrants in
exchange for
services........          --      --          --      --      1,545       --         --           --           --       1,545
Deferred stock
compensation....          --      --          --      --     84,262       --         --       (84,262)         --         --
Amortization of
deferred stock
compensation....          --      --          --      --        --        --         --        66,413          --      66,413
Issuance of
Series H
shares..........    1,333,333     --          --      --     20,000       --         --           --           --      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       --         --           --           --     627,626
Conversion of
preferred stock
to common
stock...........  (80,528,233)    (8)  80,164,597      8        --        --         --           --           --         --
Net loss........          --      --          --      --        --        --         --           --      (136,887)  (136,887)
                  -----------   ----  -----------   ----   --------   -------      ----      --------    ---------  ---------
Balance at
December 31,
2000............          --    $ --  133,089,074   $ 13   $933,670   $(7,545)     $ --      $(55,984)   $(192,510) $ 677,644
                  ===========   ====  ===========   ====   ========   =======      ====      ========    =========  =========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       45
<PAGE>

                               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
equipment to communication service providers in the metropolitan and regional
markets.

   ONI was originally incorporated in California, as Optical Networks,
Incorporated, on October 20, 1997, and through November 1999, was considered to
be in the development stage, principally engaged in research and development,
raising capital and building its management team. ONI recognized its first
commercial sale in the fourth quarter of 1999 with the licensing of its network
operating system. Historically, ONI also recognized revenue derived from
research and development contracts with agencies of the United States
government. These contracts were completed in June 1999. ONI was reincorporated
in Delaware and changed its name to ONI Systems Corp. in April 2000. 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 inter-
company balances and transactions have been eliminated on consolidation.

 (c) Stock Splits

   Share information for all periods has been retroactively adjusted to reflect
a one-for-three reverse split of common stock effected in March 1998, 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. Actual results
could differ from those estimates.

 (e) Cash and Cash Equivalents

   ONI considers all highly liquid investments with remaining maturities of
three months or less at the date of purchase to be cash equivalents. As of
December 31, 2000 and 1999 cash equivalents totaled $847,400, and $79,005,
respectively. Cash equivalents consisted primarily of money market funds.

 (f) Inventory

   Inventories are stated at the lower of average cost or market.

                                       46
<PAGE>

                               ONI SYSTEMS CORP.

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


 (g) 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.

 (h) Goodwill and Intangibles

   Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired in the Object-Mart, Inc. business combination
is recorded at cost less accumulated amortization. ONI has capitalized the cost
of identifiable intangibles associated with the acquisition of Object-Mart,
Inc. Goodwill and intangibles are amortized over their estimated useful lives,
not exceeding two years.

 (i) 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.

 (j) Revenue Recognition

   ONI recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.

   ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Arrangements". Accordingly, ONI recognizes revenue from licenses of
software products provided that a purchase order has been received, the
software and related documentation have been shipped, collection of the
resulting receivable is deemed probable, and the fee is fixed or determinable.

   In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted principles to revenue recognition in financial statements. ONI adopted
SAB No. 101 during the quarter ended December 31, 2000. There was no material
change to ONI's accounting for revenue as a result of the adoption of SAB No.
101.

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

   Deferred revenue represents amounts billed in excess of revenue recognized.

                                       47
<PAGE>

                               ONI SYSTEMS CORP.

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


   In 1998 and 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.

 (k) Warranty Reserves

   ONI provides a limited warranty for its products. Estimated expenses for
warranty obligations are recorded at the time revenue is recognized. As at
December 31, 2000, the warranty reserve totaled $1,879.

 (l) 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.

 (m) Fair Value of Financial Instruments

   The fair value of ONI's cash and cash equivalents, 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.

   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 $202,875 respectively at December 31, 2000. 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.

 (n) Concentration of Risk

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

   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. For the year ended December 31, 1999, there
were two customers that represented 46% and 26% of total revenue.

 (o) Stock-Based Compensation

   ONI accounts for stock-based awards to employees using the intrinsic value
method. 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 Financial Accounting Standards Board (FASB)

                                       48
<PAGE>

                               ONI SYSTEMS CORP.

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

Interpretation No. 28. Accordingly, approximately 59% of the unearned deferred
compensation is amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of the grant. 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".

   In March 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting
for Certain Transactions involving Stock Compensation--an Interpretation of
Accounting Principles Board (APB) Opinion No. 25". FIN 44 clarifies the
application of APB Opinion No. 25 and is effective July 1, 2000. The
application of FIN 44 did not have a material effect on ONI's financial
position or results of operations.

 (p) 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.

 (q) Comprehensive Loss

   Other comprehensive loss refers to revenues, expenses, gains and losses that
are not included in net income, but rather are recorded directly in
stockholders' (deficit) equity. To date, ONI has no items of other
comprehensive loss and, accordingly, comprehensive loss is the same as net
loss.

 (r) 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:

<TABLE>
<CAPTION>
                                              Years ended December 31,
                                        --------------------------------------
                                            2000         1999         1998
                                        ------------  -----------  -----------
   <S>                                  <C>           <C>          <C>
   Net loss attributable to common
    stockholders....................... $   (141,129) $   (46,572) $    (8,852)
   Basic and diluted:
   Weighted-average shares of stock
    outstanding........................  121,745,982   21,873,721   17,140,923
   Less: weighted-average shares
    subject to repurchase..............    6,158,843    3,830,533    5,222,241
   Weighted-average shares used in
    computing basic and diluted net
    loss per common share..............  115,587,139   18,043,188   11,918,682
   Basic and diluted net loss per
    common share....................... $      (1.22) $     (2.58) $     (0.74)
</TABLE>

                                       49
<PAGE>

                               ONI SYSTEMS CORP.

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


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

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                               --------------------------------
                                                  2000       1999       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Shares issuable under stock options.......  19,640,187 17,548,724  8,789,776
   Shares of unvested stock subject to
    repurchase...............................   6,435,277  8,587,699  5,992,684
   Shares issuable pursuant to stock warrants
    to purchase common stock.................     923,000    733,468    233,468
   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 50,580,190
</TABLE>

   The weighted-average exercise price of stock options outstanding was $8.55,
$0.29 and $0.08, as of December 31, 2000, 1999, and 1998 respectively. The
weighted-average purchase price of shares of common stock subject to the
Company's right of repurchase was $0.99, $0.44 and $0.02 as of December 31,
2000, 1999 and 1998, respectively. The exercise price of warrants to purchase
shares of convertible preferred stock was $0.88 as of December 31, 1999. The
weighted-average exercise price of warrants to purchase shares of common stock
was $3.96, $0.62 and $0 as of December 31, 2000, 1999 and 1998, respectively.

 (s) Segment Reporting

   ONI adopted SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, for the year ended December 31, 1999. SFAS No. 131
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The method for
determining what information to report is based on the way management organizes
the operating segments within a company for making operating decisions and
assessing financial performances.

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

   Beginning January 1, 2000, ONI's revenue has been derived from sales of its
ONLINE and ONWAVE products. ONI expects to continue selling these products in
the future, and also to develop other lines of products for sale. ONI's
geographic distribution of revenues for year ended December 31, 2000, is as
follows:

<TABLE>
<CAPTION>
                                                                     Year ended
                                                                    December 31,
                                                                        2000
                                                                    ------------
     <S>                                                            <C>
     North America.................................................      78%
     Asia..........................................................      15%
     Europe........................................................       7%
</TABLE>

   For the year ended December 31, 2000, export sales to Europe and Asia were
denominated in United States dollars. Substantially all of ONI's assets are
located in the United States of America.

                                       50
<PAGE>

                               ONI SYSTEMS CORP.

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


   Through December 31, 1999, ONI's revenue was primarily from government
research and development contracts. 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.

 (t) Advertising Costs

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

 (u) Recent Accounting Pronouncements

   In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, and amendment to SFAS
No. 133". Statement No. 138 addresses a limited number of issues causing
implementation difficulties for companies that are required to apply SFAS No
133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-- Deferral of the effective date of SFAS No.
133", and SFAS No. 138 are effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The application of SFAS 133 and SFAS 138
will not have a material effect on ONI's financial position or results of
operations.

 (v) Reclassification

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

(2) Business Combination

   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 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.

                                       51
<PAGE>

                               ONI SYSTEMS CORP.

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


   The following unaudited pro forma financial information presents the
combined results of operations of ONI and Object-Mart as if the acquisition had
occurred as of the beginning of 1998 and 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 these periods.

<TABLE>
<CAPTION>
                                                               Year ended
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
   <S>                                                      <C>       <C>
   Revenue................................................. $  4,626  $  3,666
   Net loss................................................ $(47,780) $(11,172)
   Basic and diluted net loss per share.................... $  (2.65) $  (0.94)

(3) Inventory

   Inventory consists of:

<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
   <S>                                                      <C>       <C>
   Raw materials........................................... $ 27,821  $  8,914
   Work in progress........................................   15,414       --
   Finished goods..........................................   16,763       735
   Consignment inventory...................................   10,628       --
                                                            --------  --------
                                                             $70,626  $  9,649
                                                            ========  ========

(4) Property and Equipment

   Property and equipment is as follows:

<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
   <S>                                                      <C>       <C>
   Computers and equipment................................. $ 44,801  $  5,570
   Furniture and fixtures..................................    2,660       714
   Leasehold improvements..................................    5,647       274
                                                            --------  --------
                                                              53,108     6,558
   Less accumulated depreciation and amortization..........   11,527     1,243
                                                            --------  --------
                                                            $ 41,581  $  5,315
                                                            ========  ========
</TABLE>

   Equipment recorded under capital leases was $364 and $542 as of December 31,
2000 and 1999, respectively, and the related accumulated amortization was $236
and $58 as of December 31, 2000 and 1999, respectively.

                                       52
<PAGE>

                               ONI SYSTEMS CORP.

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


(5) Goodwill and Intangibles

   A summary of goodwill and intangibles is as follows:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  2000    1999
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Goodwill..................................................... $ 5,680 $5,680
   Purchased technology and workforce...........................     530    530
   Assembled workforce and non-compete agreements...............     630    630
   Other intangibles............................................     250    --
                                                                 ------- ------
                                                                 $ 7,090 $6,840
   Less accumulated amortization................................   5,277  1,843
                                                                 ------- ------
                                                                 $ 1,813 $4,997
                                                                 ======= ======
</TABLE>

(6) Accrued Liabilities

   Accrued liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  2000    1999
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Accrued employee benefits.................................... $ 8,442 $  671
   Interest payable.............................................   3,125    --
   Sales and use tax payable....................................   2,328    --
   Legal accrual................................................   1,984    241
   Other........................................................   2,613    867
                                                                 ------- ------
                                                                 $18,492 $1,779
                                                                 ======= ======
</TABLE>

(7) Related Party Transactions

   On October 20, 1997, ONI was incorporated as a wholly-owned subsidiary of
Optivision, Inc. and in connection therewith issued 11,565,752 shares of common
stock, 8,000,000 shares of Series A preferred stock and a $90 promissory note
to Optivision in exchange for cash of $100, property and equipment of $15, and
certain intellectual property and technology rights. On December 22, 1997, ONI
was spun-out from Optivision. In conjunction with the spin-out, ONI reserved
233,468 shares of common stock issuable to a third party holding warrants to
purchase common shares of Optivision. In January 1998, a further $142 of
property and equipment was provided by Optivision to ONI for no additional
consideration. In August 2000, the third party exercised the warrants and ONI
issued 233,468 shares of ONI's common stock to the third party. ONI did not
receive any proceeds from the exercise of these warrants.

   In 1998, in conjunction with the issuance of the Series B and Series C
preferred stock, 8,000,000 shares of Series A preferred stock were converted to
Series B preferred stock, and the Company repurchased and canceled 1,333,333
shares of Series B preferred stock from Optivision in exchange for $1,000 in
cash.

   During 2000, 1999 and 1998, ONI received $4,652, $3,712 and $123,
respectively, in promissory notes from certain officers in exchange for common
stock. As of December 31, 2000, $659 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.

                                       53
<PAGE>

                               ONI SYSTEMS CORP.

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


(8) Financing Arrangements

   In February 1999, ONI entered into a Loan and Security Agreement with a
financing company that allowed ONI to borrow up to $2,000. The loan bears
interest at the prime rate, is repayable in 36 equal monthly installments of
principal and interest and is secured by certain assets of ONI. ONI also
entered into a Subordinated Loan and Security Agreement with the same financing
company, which allowed ONI to borrow up to $1,000. The subordinated loan bears
interest at 12% per annum, is repayable in 36 equal monthly installments of
principal and interest and is secured by certain assets of ONI. These
agreements expired unutilized on February 10, 2000.

   In connection with the loan and security agreement and subordinated loan and
security agreement, 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.


   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 $1000 principal amount
of notes, subject to adjustment in certain circumstances. This is equivalent to
a conversion price of approximately $91.64 per share. ONI will pay interest on
the notes on April 15 and October 15 of each year. The first interest payment
will be 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, 2000, ONI has amortized $353 of debt issuance costs.

(9) Stockholders' Equity

 (a) Preferred Stock

   As of December 31, 2000, ONI had 10,000,000 shares of preferred stock
authorized. ONI has designated and issued preferred stock as follows:

<TABLE>
<CAPTION>
                                                         December 31,
                            -----------------------------------------------------------------------
                                     2000                    1999                    1998
                            ----------------------- ----------------------- -----------------------
                              Shares    Liquidation   Shares    Liquidation   Shares    Liquidation
                            outstanding preference  outstanding preference  outstanding preference
                            ----------- ----------- ----------- ----------- ----------- -----------
   <S>                      <C>         <C>         <C>         <C>         <C>         <C>
   Series B................      --          --     24,795,510   $  5,840   24,795,510    $ 5,840
   Series C................      --          --      2,733,332      2,050    2,733,332      2,050
   Series D................      --          --      4,969,148      4,381    4,969,148      4,381
   Series E................      --          --     26,284,024     23,984   18,082,200     16,500
   Series F................      --          --      8,249,468     15,000           --         --
   Series G................      --          --     11,824,418     74,701           --         --
                                ---         ---     ----------   --------   ----------    -------
                                 --          --     78,855,900   $125,956   50,580,190    $20,771
                                ===         ===     ==========   ========   ==========    =======
</TABLE>

                                       54
<PAGE>

                               ONI SYSTEMS CORP.

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


   In January 1998, ONI raised $4,209, net of issuance costs of $50, through
the sale of 18,128,843 shares of Series B preferred stock for cash of $0.24
per share. In addition, ONI issued 8,000,000 shares of Series B preferred
stock in exchange for the redemption and cancellation of 8,000,000 shares of
Series A preferred stock and repurchased 1,333,333 shares of Series B
preferred stock for cash consideration of $1,000. Concurrently, ONI raised
$1,988, net of issuance costs of $62, from the sale of 2,733,332 shares of
Series C preferred stock for cash of $0.75 per share.

   In April 1998, ONI raised $4,335, net of issuance costs of $46, from the
sale of 4,969,148 shares of Series D preferred stock for cash of $0.88 per
share.

   In December 1998, ONI raised $16,484, net of issuance costs of $17, from
the sale of 18,082,200 shares of Series E preferred stock for cash of $0.91
per share. In March 1999, ONI closed a second round of Series E preferred
financing, raising $7,264, net of issuance costs of $37, from the sale of
8,001,824 shares of Series E preferred stock. In addition ONI issued 200,000
shares of Series E preferred stock in exchange for additional lease space at
its 166 Baypointe Parkway location. The value of $182 ascribed to the Series E
preferred stock was recorded as a reduction of stockholders' equity and is
being amortized to rent expense over the period of the lease agreement.

   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 $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.

   The rights, preferences and restrictions of the Series B, C, D, E, F and G
preferred stock were as follows:

  . Each share of Series B, C, D, E, F and G preferred stock is convertible
    at the option of the holder at any time after the date of issuance on a
    one-for-one basis subject to certain antidilution provisions. Conversion
    of all Series B, C, D, E, F and G preferred stock is automatic upon the
    earlier of (1) the closing of a firm underwritten commitment with respect
    to an initial public offering of shares of

                                      55
<PAGE>

                               ONI SYSTEMS CORP.

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

   common stock of ONI, in which ONI receives cash proceeds of at least
   $20,000 (net of underwriters' commissions and expenses) or (2) the written
   consent of the holders of 66 2/3% of the outstanding shares of preferred
   stock, voting together as a single class.

  . Holders of Series B, C, D, E, F and G preferred stock are entitled to
    receive dividends equal to 10% of their respective liquidation preference
    in preference to any dividend on common stock when, as and if declared by
    the Board of Directors out of legally available funds. These preferential
    dividends are noncumulative. In addition, the holders of Series B, C, D,
    E, F and G preferred stock are entitled to receive dividends on a basis
    equal to common stockholders out of funds legally available therefor,
    when, as and if declared by the Board of Directors. No dividends have
    been declared through December 31, 2000.

  . Series B, C, D, E, F and G preferred stock have liquidation preferences
    of $0.24, $0.75, $0.88, $0.91, $1.82 and $6.32, respectively, plus all
    declared but unpaid dividends on such shares.

  . Series B, C, D, E, F and G preferred stock have the same voting rights as
    the number of shares of common stock issuable upon conversion of such
    shares. Four directors are elected by the holders of record of the Series
    B, C and E preferred stock voting as a separate class; one director is
    elected by the holders of record of the common stock voting as a separate
    class; and two directors are elected by the holders of record of the
    Series B, C, D, E, F and G preferred stock and common stock voting
    together as a single class.

 (b) Common Stock
   As of December 31, 2000, ONI had 700,000,000 shares of common stock
authorized.

   In 1998, ONI issued 6,431,496 shares of restricted common stock at prices
ranging from $0.0016 to $0.0882 per share, 5,991,496 of which were issued in
exchange for notes receivable of $123. 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, as defined, 50% of the unvested shares
of common stock becomes vested. 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.

   ONI maintains a right of first refusal with respect to restricted common
stock. A stockholder must notify ONI prior to selling these shares to a third
party. Upon notification, ONI may purchase the shares from the holder at the
price offered by the third party.

   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.

                                       56
<PAGE>

                               ONI SYSTEMS CORP.

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


   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, and
provided 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 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
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.


 (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.

                                       57
<PAGE>

                               ONI SYSTEMS CORP.

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


  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.

  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 our 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 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:

<TABLE>
<CAPTION>
                                                        Outstanding options
                                                     -------------------------
                                                     Weighted
                              Shares                 average  Weighted average
                             available   Number of   exercise    grant date
                             for grant     shares     price      fair value
                            -----------  ----------  -------- ----------------
<S>                         <C>          <C>         <C>      <C>
Balance as of December 31,
 1997......................  28,673,548   1,078,220   $0.005
  Granted.................. (10,885,796) 10,885,796     0.08       $ 0.69
  Exercised................         --   (1,651,332)    0.08
  Cancelled................   1,522,908  (1,522,908)    0.07
                            -----------  ----------   ------
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
                            ===========  ==========   ======
</TABLE>

                                       58
<PAGE>

                               ONI SYSTEMS CORP.

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


   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 and 10,885,796 options with exercise prices less than
fair value at date of grant for the periods ended December 31, 1999 and 1998,
respectively.

   The following table summarizes information with respect to stock options
outstanding as of December 31, 2000:

<TABLE>
<CAPTION>
                                                      Contractual
                              Options                    life                   Exercisable
    Exercise price          outstanding                 (years)                   Options
    --------------          -----------               -----------               -----------
   <S>                      <C>                       <C>                       <C>
   $ 0.005 -   0.46          8,049,538                   8.20                    1,483,044
     0.91  -   3.2           6,618,737                   8.94                      859,887
     4.0   -  10.0           2,566,550                   9.31                    1,000,000
    15.0   -  60.0           1,483,487                   9.69                        4,000
    76.09  - 102.88            921,875                   9.67                       10,833
                            ----------                                           ---------
                            19,640,187                                           3,357,764
                            ==========                                           =========
</TABLE>

  Accounting for Stock-Based Compensation

   ONI uses the intrinsic value method prescribed by APB No. 25 in accounting
for its stock-based compensation arrangements for employees whereby
compensation cost is recognized to the extent the fair value of the underlying
common stock exceeds the exercise price of the stock options at the date of
grant. Deferred stock compensation of $84,262, $41,730 and $8,432, for the year
ended December 31, 2000, 1999 and 1998, 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. These amounts are being
amortized on an accelerated basis over the vesting period, generally four
years, consistent with the method described in FASB Interpretation No. 28.
Amortization of deferred compensation was $64,869 in 2000, $11,422 in 1999 and
$3,310 in 1998.

   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:

<TABLE>
<CAPTION>
                                                      Years ended December
                                                               31,
                                                     -------------------------
                                                       2000     1999     1998
                                                     --------  -------  ------
<S>                                                  <C>       <C>      <C>
Net loss--as reported............................... $136,887  $46,572  $8,852
Net loss--pro forma................................. $159,589  $46,918  $8,900
Basic and diluted net loss per share--as reported... $  (1.22) $ (2.58) $(0.74)
Basic and diluted net loss per share--pro forma..... $  (1.42) $ (2.60) $(0.75)
</TABLE>

   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 5.75% and 5.5% in 1998 and 1999,
respectively, and an expected life of five years. From January 1, 2000 to May
31, 2000, ONI

                                       59
<PAGE>

                               ONI SYSTEMS CORP.

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

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 5.5% 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 5.5%, volatility of 110% and expected
life of 5 years.

(10) Commitments and Contingencies

 (a) Leases

   In February 1999, the Company 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 Series B preferred
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.

   ONI leases its headquarters facility under a noncancelable operating lease,
and has acquired furniture and other equipment through capital leases. Future
minimum payments for both operating and capital leases as of December 31, 2000
are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
Year ending December 31,                                       leases   leases
------------------------                                       ------- ---------
<S>                                                            <C>     <C>
2001..........................................................  $182   $  7,130
2002..........................................................   151     10,706
2003..........................................................    49     12,340
2004..........................................................   --      14,044
2005..........................................................   --      14,597
Thereafter....................................................   --      76,214
                                                                ----   --------
Future minimum lease payments.................................   382   $135,031
Less amount representing interest.............................   (34)
                                                                ----
Present value of future minimum lease payments................   348
                                                                ----
Less current portion..........................................   161
Long-term portion.............................................  $187
                                                                ----
</TABLE>

   Total rent expense under the operating leases was $3,902, $908 and $494 for
the years ended December 31, 2000, 1999 and 1998, respectively.

                                       60
<PAGE>

                               ONI SYSTEMS CORP.

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


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

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

(11) Income Taxes

   Income tax expense consists of current state tax of $7, $2 and $1 for the
years ended December 31, 2000, 1999 and 1998, respectively

   The reconciliation between the amount 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 a follows:

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                   ---------------------------
                                                     2000      1999     1998
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Income tax (benefit) at statutory rate...........  $(46,539) $(15,834) $(3,009)
State taxes net of federal income tax benefit....         7         2        1
Permanent differences............................       115        24        4
Stock Compensation...............................    15,857     3,162      418
Goodwill Amortization............................       966       483       --
Current year net operating loss and temporary
 differences for which no benefit is recognized..    29,601    12,165    2,587
                                                   --------  --------  -------
Total income tax expense.........................  $      7  $      2  $     1
                                                   ========  ========  =======
</TABLE>

                                       61
<PAGE>

                               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 are as follows:

<TABLE>
<CAPTION>
                               December 31,
                             ------------------
                               2000      1999
                             --------  --------
<S>                          <C>       <C>
Deferred tax assets:
  Deferred state taxes...... $      5  $      1
  Fixed assets..............      --        141
  Capitalized start-up and
   organizational expense...      155       236
  Net operating loss
   carryforwards............   60,122    14,707
  Deferred stock
   compensation.............   11,742     3,502
  Research and other credit
   carryforwards............    9,996     2,047
  Accrual amounts...........    3,059       293
                             --------  --------
    Total gross deferred tax
     assets.................   85,079    20,927
Valuation allowance.........  (84,901)  (20,682)
                             --------  --------
    Total deferred tax
     assets.................      178       245
  Deferred tax liabilities:
  Intangibles...............      (62)     (245)
  Fixed Assets..............     (116)      --
                             --------  --------
    Total Deferred tax
     liabilities............     (178)     (245)
  Net deferred tax assets,
   net of deferred tax
   liabilities.............. $    --   $    --
                             ========  ========
</TABLE>

   ONI has established a valuation allowance of $84,901 as of December 31,
2000, and the valuation allowance increased by $64,219 from $20,682 as of
December 31, 1999. Included in the valuation allowance are tax benefits
attributable to noncompensatory stock options of $31,327, which, when realized,
will be a credit to additional paid-in-capital. The valuation allowance for
deferred tax assets increased by $16.7 million and $3.7 million in 1999 and
1998, respectively.

   As of December 31, 2000, ONI has net operating loss carryforwards for
federal and California income tax purposes of approximately $161,000 and
$88,000, respectively, available to reduce future income subject to income
taxes. The net operating loss carryforwards for federal income tax purposes
expire in various years beginning in 2017 through 2020. The net operating loss
carryforwards for California income tax purposes expire beginning in 2005
through 2010.

   ONI has research credit carryforwards as of December 31, 2000, for federal
and California income tax return purposes of approximately $6,476 and $5,132,
respectively, available to reduce future income taxes. The federal research
credit carryforward will expire in various years beginning in 2012 through
2020. The California research credit can be carried forward indefinitely until
utilized. ONI also has a California manufacturing investment credit
carryforward of approximately $232 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.

                                       62
<PAGE>

                               ONI SYSTEMS CORP.

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


(12) 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.

(13) Subsequent Event (unaudited)

   In February 2001, ONI acquired the technology and other assets associated
with Finisar Corporation's Opticity product line for $50,000, comprised of
$30,000 in cash and $20,000 of ONI's common stock. At closing, ONI paid $5,000
in cash and issued 488,624 shares of common stock to Finisar. The remaining
$25,000 of cash payments will be made upon the timely completion of certain
mutually agreed deliverables. ONI has accounted for this acquisition as a
purchase of assets.

                                       63
<PAGE>

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

   The information about directors that is required by this Item is
incorporated by reference to our Proxy Statement for our May 2001 Annual
Meeting of Stockholders. Information about executive officers that is required
by this Item can be found in Item 4A.

ITEM 11. EXECUTIVE COMPENSATION

   This information is incorporated by reference to our Proxy Statement for
our May 2001 Annual Meeting.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   This information is incorporated by reference to our Proxy Statement for
our May 2001 Annual Meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   This information is incorporated by reference to our Proxy Statement for
our May 2001 Annual Meeting.

                                    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. Index to Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
   <S>                                                                    <C>
   Report of KPMG LLP, independent auditors..............................  39

   Consolidated Balance Sheets as of December 31, 2000 and 1999..........  40

   Consolidated Statements of Operations for the three years ended
    December 31, 2000....................................................  41

   Consolidated Statements of Cash Flows for the three years ended
    December 31, 2000....................................................  42

   Consolidated Statements of Stockholders' (Deficit) Equity for the
    three years ended December 31, 2000..................................  43

   Notes to Consolidated Financial Statements............................  46
</TABLE>

                                      64
<PAGE>

   2. Exhibits

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
  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.

  4.03  Voting Agreement portion of Series D Preferred Stock Purchase
         Agreement, dated April 1, 1998, by and between Cisco Systems, Inc. and
         ONI Systems. Incorporated herein by reference to Exhibit 4.03 filed
         with ONI Systems' Registration Statement on Form S-1, filed with the
         Commission on March 10, 2000 (Commission File No. 333-32104).

  4.04  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.

  4.05  Note (included in Exhibit 4.04)

  4.06  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).

  4.07  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).

  4.08  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).

  4.09  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).

  4.10  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).

  4.11  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).

  4.12  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).
</TABLE>


                                       65
<PAGE>

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
 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+ Davis Stock Option Plan and Agreement. Incorporated herein by reference
         to Exhibit 10.07 filed with ONI Systems' Registration Statement on
         Form S-8, filed with the Commission on June 1, 2000 (Commission File
         No. 333-38290).

 10.08  Assignment of Lease, dated June 23, 1998, by and between JTS
         Corporation ("JTS") and ONI Systems. Incorporated herein by reference
         to Exhibit 10.07 filed with ONI Systems' Registration Statement on
         Form S-1, filed with the Commission on March 10, 2000 (Commission File
         No. 333-32104).

 10.09  Agreement, dated June 23, 1998, by and between JTS and ONI Systems.
         Incorporated herein by reference to Exhibit 10.08 filed with ONI
         Systems' Registration Statement on Form S-1, filed with the Commission
         on March 10, 2000 (Commission File No. 333-32104).

 10.10  Amendment to Lease, dated May 1, 1999, by and between Cilker Revocable
         Trust of October 9, 1990 and ONI Systems. Incorporated herein by
         reference to Exhibit 10.09 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* Second Amendment to Lease, dated June 19, 2000, by and between Cilker
         Revocable Trust of October 9, 1990 and ONI Systems.

 10.12  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).

 10.13  Regus Business Centre Service Agreement dated March 29, 2000.
         Incorporated herein by reference to Exhibit 10.26 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  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).
</TABLE>


                                       66
<PAGE>

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
 10.15* Lease Agreement, dated December 7, 2000, by and between Petula
         Associates, Ltd. and ONI Systems.

 10.16+ Offer Letter, dated December 12, 1997, from ONI Systems to Hugh C.
         Martin. Incorporated herein by reference to Exhibit 10.12 filed with
         ONI Systems' Registration Statement on Form S-1, filed with the
         Commission on March 10, 2000 (Commission File No. 333-32104).

 10.17+ Offer Letter, dated June 1, 1998, from ONI Systems to Hon Wah Chin.
         Incorporated herein by reference to Exhibit 10.14 filed with ONI
         Systems' Registration Statement on Form S-1, filed with the Commission
         on March 10, 2000 (Commission File No. 333-32104).

 10.18+ 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).

 10.19+ 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).

 10.20+ 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).

 10.21+ Offer Letter, dated April 14, 2000, from ONI Systems to Chris A. Davis.
         Incorporated herein by reference to Exhibit 10.22 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).

 10.22+ Separation Agreement dated March 29, 2000 between Terrence J. Schmid
         and ONI Systems. Incorporated herein by reference to Exhibit 10.23
         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).

 10.23  Series F Preferred Stock Purchase Agreement dated as of September 2,
         1999. Incorporated herein by reference to Exhibit 10.20 filed with ONI
         Systems' Registration Statement on Form S-1, filed with the Commission
         on March 10, 2000 (Commission File No. 333-32104).

 10.24  Series G Preferred Stock Purchase Agreement dated as of December 22,
         1999. Incorporated herein by reference to Exhibit 10.21 filed with ONI
         Systems' Registration Statement on Form S-1, filed with the Commission
         on March 10, 2000 (Commission File No. 333-32104).

 10.25  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).

 21.01* List of ONI Systems' Subsidiaries.

 23.01* Consent of KPMG LLP, independent auditors.

 24.01* Power of Attorney (See Part IV of this report).
</TABLE>
--------
+  Indicates a management contract or compensatory plan or arrangement

*  Filed with this Form 10-K

   (b) Reports on Form 8-K

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

   (c) Exhibits

   See Item 14(a)(3) above.

   (d) Financial Statement Schedules

   Financial Statement schedules are omitted because the information called for
is not required or is shown either in the financial statements or the notes
thereto.

                                       67
<PAGE>

                                   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.

                                                   /s/ Chris A. Davis
Dated: March 30, 2001                     By:__________________________________
                                                      Chris A. Davis
                                              Executive Vice President, Chief
                                               Financial and Administrative
                                             Officer (Principal Financial and
                                                    Accounting Officer)

                               POWER OF ATTORNEY

   By signing this Form 10-K below, I hereby appoint each of Hugh C. Martin and
Chris A. Davis, 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 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.

<TABLE>
<CAPTION>
                 Name                          Title                Date
                 ----                          -----                ----

Principal Executive Officer:

 <C>                                  <S>                      <C>
        /s/ Hugh C. Martin            President, Chief         March 30, 2001
 ____________________________________  Executive Officer and
            Hugh C. Martin             Chairman of the Board
                                       of Directors


Principal Financial Officer and
Principal Accounting Officer:

        /s/ Chris A. Davis            Executive Vice           March 30, 2001
 ____________________________________  President, Chief
            Chris A. Davis             Financial and
                                       Administrative
                                       Officer


Additional Directors:

       /s/ Matthew W. Bross           Director                 March 30, 2001
 ____________________________________
           Matthew W. Bross

       /s/ Kevin R. Compton           Director                 March 30, 2001
 ____________________________________
           Kevin R. Compton

      /s/ Jonathan D. Feiber          Director                 March 30, 2001
 ____________________________________
          Jonathan D. Feiber

       /s/ James F. Jordan            Director                 March 30, 2001
 ____________________________________
           James F. Jordan

      /s/ Gregory B. Maffei           Director                 March 30, 2001
 ____________________________________
          Gregory B. Maffei
</TABLE>


<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Number                            Exhibit Title
 ------                            -------------
 <C>    <S>
  4.02  Registration Rights Agreement with Finisar Corporation.

 10.11  Second Amendment to Lease with Cilker Revocable Trust of October 9,
         1990.

 10.15  Lease Agreement with Petula Associates, Ltd.

 21.01  List of Registrant's Subsidiaries.

 23.01  Consent of KPMG LLP, independent auditors.

 24.01  Power of Attorney. (See Part IV of this report)
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