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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2001
Commission File Number 0-29811

NEW FOCUS, INC.
(Exact Name of Registrant as Specified in its Charter)

Incorporated in the State of Delaware
I.R.S. Employer Identification Number 33-0404910
5215 Hellyer Avenue, San Jose, California 95138-1001
Telephone: (408) 284-4700

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 [   ]

On September 30, 2001, 75,924,394 shares of the Registrants common stock,
$0.001 par value, were issued and outstanding.





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|                           |                                                                                       |                                            |  |  |  |  |  | 
|-------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                           |                                                                                       | CONSOLIDATED BALANCE SHEETS               
|                           |                                                                                       | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                           |                                                                                       | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                           |                                                                                       | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                           | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                           | Qualitative and Quantitative Disclosures About Market Risk:                          
|PART II. OTHER INFORMATION
|                           | ITEM 1. Legal Proceedings                                                            
|                           | ITEM 2. Changes in Securities and Use of Proceeds                                    
|                           | ITEM 3. Defaults Upon Senior Securities  Not Applicable.                            
|                           | ITEM 4. Submission of Matters to a Vote of Security Holders  Not Applicable.        
|                           | ITEM 5. Other Information                                                            
|                           | ITEM 6. Exhibits and Reports on Form 8-K                                             
|SIGNATURES                
|Exhibit 10.1              
|Exhibit 10.2              



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INDEX

NEW FOCUS, INC.

|           |  |                                                                                                         
|---------- |  | --------------------------------------------------------------------------------------------------------
|PART I.    |  | FINANCIAL INFORMATION                                                                                   
|          
|Item 1.    |  | Consolidated Financial Statements (Unaudited)                                                           
|           |  | Consolidated balance sheetsSeptember 30, 2001
and December 31, 2000                                    
|           |  | Consolidated statements of operationsThree and nine months
ended September 30, 2001 and October 1, 2000
|           |  | Consolidated statements of cash flows-Nine months
ended September 30, 2001 and October 1, 2000          
|           |  | Notes to consolidated financial statementsSeptember 30, 2001                                           
|Item 2.    |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                   
|Item 3.    |  | Quantitative and Qualitative Disclosures About
Market Risk                                              
|          
|PART II.   |  | OTHER INFORMATION                                                                                       
|Item 1.    |  | Legal Proceedings                                                                                       
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                               
|Item 3.    |  | Defaults Upon Senior Securities                                                                         
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                     
|Item 5.    |  | Other Information                                                                                       
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                        
|SIGNATURES |  |                                                                                                         

-2-



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NEW FOCUS, INC.




|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |         |        |         | 
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------- | ------------------------------------------ | -------- | ------------- | ------- | ------------ | ------- | ------ | ------- | 
|                                                                                                           |                                                                               |                  |                                            |          | September 30, |         | December 31,
|                                                                                                           |                                                                               |                  |                                            |          | 2001          |         | 2000        
|                                                                                                           |                                                                               |                  |                                            |          |               |         |             
|                                                                                                           |                                                                               |                  |                                            |          | (unaudited)   |         | (see note)  
|ASSETS                                                                                                     |                                                                               |                  |                                            |          |               |         |              |        
|Current Assets                                                                                             |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           | Cash and cash equivalents                                                     |                  | $                                          | 96,057   |               |         | $            | 363,375 |       
|                                                                                                           | Short-term investments                                                        |                  |                                            | 205,338  |               |         |              | 122,118 |       
|                                                                                                           | Trade accounts receivable, less allowances of
$861 in 2001 and $1,390 in 2000 |                  |                                            | 9,176    |               |         |              | 13,835  |       
|                                                                                                           | Inventories:                                                                  |                  |                                            |          |               |         |              |         |       
|                                                                                                           |                                                                               | Raw materials    |                                            |          | 5,195         |         |              |         | 15,218 |        
|                                                                                                           |                                                                               | Work in progress |                                            |          | 2,754         |         |              |         | 10,226 |        
|                                                                                                           |                                                                               | Finished goods   |                                            |          | 2,831         |         |              |         | 4,941  |        
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total Inventories                          |          |               | 10,780  |              |         |        | 30,385  | 
|                                                                                                           | Deferred tax assets                                                           |                  |                                            | 5,480    |               |         |              |        |       
|                                                                                                           | Prepaid expenses and other current assets                                     |                  |                                            | 8,165    |               |         |              | 4,805   |       
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total current assets                       |          |               | 334,996 |              |         |        | 534,518 | 
|Property, plant and equipment:                                                                             |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           | Land and building                                                             |                  |                                            | 24,605   |               |         |              | 13,214  |       
|                                                                                                           | Manufacturing and development equipment                                       |                  |                                            | 54,372   |               |         |              | 26,304  |       
|                                                                                                           | Computer software and equipment                                               |                  |                                            | 7,696    |               |         |              | 5,205   |       
|                                                                                                           | Office equipment                                                              |                  |                                            | 3,758    |               |         |              | 1,782   |       
|                                                                                                           | Leasehold improvements                                                        |                  |                                            | 16,475   |               |         |              | 3,857   |       
|                                                                                                           | Construction in progress                                                      |                  |                                            | 5,771    |               |         |              | 11,033  |       
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | 112,677                                    |          |               |         | 61,395       |        
|                                                                                                           | Less allowances for depreciation and amortization                             |                  |                                            | (15,026  | )             |         |              | (6,651  | )     
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Net property, plant and equipment          |          |               | 97,651  |              |         |        | 54,744  | 
|Goodwill and other intangible assets, net of accumulated amortization
of $291,100 in 2001 and $200 in 2000 |                                                                               |                  | 65,342                                     |          |               |         | 577          |        
|Other assets                                                                                               |                                                                               |                  | 13,988                                     |          |               |         | 11,105       |        
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total assets                               |          | $             | 511,977 |              |         | $      | 600,944 | 
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |                                                                               |                  |                                            |          |               |         |              |        
|Current liabilities:                                                                                       |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           | Accounts payable                                                              |                  | $                                          | 3,938    |               |         | $            | 21,556  |       
|                                                                                                           | Accrued expenses                                                              |                  |                                            | 13,213   |               |         |              | 10,355  |       
|                                                                                                           | Deferred research and development funding                                     |                  |                                            | 743      |               |         |              | 343     |       
|                                                                                                           | Current portion of long-term debt                                             |                  |                                            | 203      |               |         |              | 281     |       
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total current liabilities                  |          |               | 18,097  |              |         |        | 32,535  | 
|Long-term debt, less current portion                                                                       |                                                                               |                  | 10                                         |          |               |         | 111          |        
|Deferred rent                                                                                              |                                                                               |                  | 1,459                                      |          |               |         | 1,188        |        
|Deferred tax liability                                                                                     |                                                                               |                  | 10,536                                     |          |               |         |             |        
|Commitments and contingencies                                                                              |                                                                               |                  |                                            |          |               |         |              |        
|Stockholders equity:                                                                                      |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           | Common stock                                                                  |                  |                                            | 76       |               |         |              | 64      |       
|                                                                                                           | Additional paid-in capital                                                    |                  |                                            | 984,876  |               |         |              | 652,184 |       
|                                                                                                           | Notes receivable from stockholders                                            |                  |                                            | (6,526   | )             |         |              | (7,281  | )     
|                                                                                                           | Deferred compensation                                                         |                  |                                            | (31,675  | )             |         |              | (26,453 | )     
|                                                                                                           | Accumulated other comprehensive income                                        |                  |                                            | 2,528    |               |         |              | 80      |       
|                                                                                                           | Accumulated deficit                                                           |                  |                                            | (467,404 | )             |         |              | (51,484 | )     
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total stockholders equity                 |          |               | 481,875 |              |         |        | 567,110 | 
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        
|                                                                                                           |                                                                               |                  | Total liabilities and stockholders equity |          | $             | 511,977 |              |         | $      | 600,944 | 
|                                                                                                           |                                                                               |                  |                                            |          |               |         |              |        

Note: The December 31, 2000 consolidated balance sheet has been derived from audited financial statements.See notes to consolidated financial statements.





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NEW FOCUS, INC.




|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |        |         |  
|----------------------------------------------------------- | ------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------- | ----------------- | ------- | ------------- | ------ | ---------- | -------- | ------- | -------- | - | ------- | ------ | ------- | -
|                                                            |                                                               |                          |         | Three Months Ended |         | Nine Months Ended
|                                                            |                                                               |                          |         |                    |         |                  
|                                                            |                                                               |                          |         | September 30,      |         | October 1,        |         | September 30, |        | October 1,
|                                                            |                                                               |                          |         | 2001               |         | 2000              |         | 2001          |        | 2000      
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |           
|Net revenues                                                |                                                               | $                        | 15,838  |                    |         | $                 | 22,250  |               |        | $          | 83,249   |         |          | $ | 46,483  |       
|Cost of net revenues(1)                                     |                                                               |                          | 16,882  |                    |         |                   | 17,248  |               |        |            | 98,673   |         |          |   | 41,090  |       
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|Gross profit (loss)                                         |                                                               |                          | (1,044  | )                  |         |                   | 5,002   |               |        |            | (15,424  | )       |          |   | 5,393   |       
|Operating Expenses:                                         |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|                                                            | Research and development(2)                                   |                          |         | 14,646             |         |                   |         | 7,306         |        |            |          | 41,908  |          |   |         | 16,523 |        
|                                                            | Less funding received from research
and development contracts |                          |         | (1,166             | )       |                   |         | (36           | )      |            |          | (1,256  | )        |   |         | (752   | )      
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|                                                            | Research and development, net(2)                              |                          |         | 13,480             |         |                   |         | 7,270         |        |            |          | 40,652  |          |   |         | 15,771 |        
|                                                            | Sales and marketing(3)                                        |                          |         | 2,592              |         |                   |         | 1,526         |        |            |          | 7,981   |          |   |         | 4,091  |        
|                                                            | General and administrative(4)                                 |                          |         | 5,010              |         |                   |         | 2,538         |        |            |          | 17,643  |          |   |         | 6,330  |        
|                                                            | Amortization of goodwill and other intangibles                |                          |         | 5,255              |         |                   |         |              |        |            |          | 49,154  |          |   |         |       |        
|                                                            | Impairment of goodwill                                        |                          |         |                   |         |                   |         |              |        |            |          | 241,574 |          |   |         |       |        
|                                                            | In-process research and development                           |                          |         |                   |         |                   |         |              |        |            |          | 13,400  |          |   |         |       |        
|                                                            | Restructuring charges                                         |                          |         | 2,162              |         |                   |         |              |        |            |          | 5,785   |          |   |         |       |        
|                                                            | Deferred compensation                                         |                          |         | 11,766             |         |                   |         | 5,879         |        |            |          | 53,147  |          |   |         | 18,935 |        
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|                                                            |                                                               | Total operating expenses |         |                    | 40,265  |                   |         |               | 17,213 |            |          |         | 429,336  |   |         |        | 45,127  |  
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|Operating loss                                              |                                                               |                          | (41,309 | )                  |         |                   | (12,211 | )             |        |            | (444,760 | )       |          |   | (39,734 | )     
|Interest and other income, net                              |                                                               |                          | 4,341   |                    |         |                   | 5,082   |               |        |            | 13,840   |         |          |   | 6,017   |       
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|Loss before provision (benefit) for income taxes            |                                                               |                          | (36,968 | )                  |         |                   | (7,129  | )             |        |            | (430,920 | )       |          |   | (33,717 | )     
|Provision (benefit) for income taxes                        |                                                               |                          | (5,000  | )                  |         |                   | 2       |               |        |            | (15,000  | )       |          |   | 2       |       
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|                                                            |                                                               | Net loss                 |         | $                  | (31,968 | )                 |         | $             | (7,131 | )          |          | $       | (415,920 | ) |         | $      | (33,719 | )
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|Basic and diluted net loss per share                        |                                                               | $                        | (0.43   | )                  |         | $                 | (0.12   | )             |        | $          | (5.69    | )       |          | $ | (1.06   | )     
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       
|Shares used to compute basic and
diluted net loss per share |                                                               |                          | 74,212  |                    |         |                   | 58,140  |               |        |            | 73,130   |         |          |   | 31,783  |       
|                                                            |                                                               |                          |         |                    |         |                   |         |               |        |            |          |         |          |   |         |       



---

|(1) |  | Excluding amortization of deferred stock compensation of $1,773 and $7,685 for the three and nine months
ended September 30, 2001, and $956 and $3,419 for the three and nine months ended October 1, 2000, respectively.   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excluding amortization of deferred stock compensation of $7,982 and $37,815 for the three and nine months
ended September 30, 2001, and $1,877 and $5,173 for the three and nine months ended October 1, 2000, respectively.
|   
|   
|   
|   
|(3) |  | Excluding amortization of deferred stock compensation of $670 and $2,968 for the three and nine months
ended September 30, 2001, and $458 and $1,213 for the three and nine months ended October 1, 2000, respectively.     
|   
|   
|   
|   
|(4) |  | Excluding amortization of deferred stock compensation of $1,341and $4,679 for the three and nine months
ended September 30, 2001, and $2,588 and $9,130 for the three and nine months ended October 1, 2000, respectively.  

See notes to consolidated financial statements.





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NEW FOCUS, INC.




|                                                                            |                                                |                                               |                                                  |         |                   |          |            |        |         |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------- | ------------------------------------------------ | ------- | ----------------- | -------- | ---------- | ------ | ------- | ------- | -
|                                                                            |                                                |                                               |                                                  |         | Nine Months Ended
|                                                                            |                                                |                                               |                                                  |         |                  
|                                                                            |                                                |                                               |                                                  |         | September 30,     |          | October 1,
|                                                                            |                                                |                                               |                                                  |         | 2001              |          | 2000      
|                                                                            |                                                |                                               |                                                  |         |                   |          |           
|Operating activities                                                        |                                                |                                               |                                                  |         |                   |          |            |       
|Net loss                                                                    |                                                | $                                             | (415,920                                         | )       |                   | $        | (33,719    | )     
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            | Depreciation and amortization                  |                                               |                                                  | 9,575   |                   |          |            | 2,561  |        
|                                                                            | Amortization of goodwill and other intangibles |                                               |                                                  | 49,154  |                   |          |            | 96     |        
|                                                                            | Impairment of goodwill                         |                                               |                                                  | 241,574 |                   |          |            |       |        
|                                                                            | Acquired in-process research and development   |                                               |                                                  | 13,400  |                   |          |            |       |        
|                                                                            | Restructuring charges                          |                                               |                                                  | 2,067   |                   |          |            |       |        
|                                                                            | Amortization of deferred compensation          |                                               |                                                  | 53,147  |                   |          |            | 18,935 |        
|                                                                            | Deferred rent                                  |                                               |                                                  | 271     |                   |          |            | 317    |        
|                                                                            | Changes in operating assets and liabilities:   |                                               |                                                  |         |                   |          |            |        |        
|                                                                            |                                                | Trade accounts receivable                     |                                                  |         | 9,119             |          |            |        | (7,980  | )      
|                                                                            |                                                | Inventories                                   |                                                  |         | 22,552            |          |            |        | (14,711 | )      
|                                                                            |                                                | Prepaid expenses and other current assets     |                                                  |         | (3,371            | )        |            |        | (5,019  | )      
|                                                                            |                                                | Accounts payable                              |                                                  |         | (19,776           | )        |            |        | 4,996   |        
|                                                                            |                                                | Accrued expenses                              |                                                  |         | 361               |          |            |        | 3,961   |        
|                                                                            |                                                | Deferred tax liability and income tax payable |                                                  |         | (15,355           | )        |            |        |        |        
|                                                                            |                                                | Deferred research and development funding     |                                                  |         | 400               |          |            |        | 93      |        
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            |                                                |                                               | Net cash used in operating activities            |         |                   | (52,802  | )          |        |         | (30,470 | )
|Investing activities                                                        |                                                |                                               |                                                  |         |                   |          |            |       
|Purchase of available-for-sale investments                                  |                                                |                                               | (216,242                                         | )       |                   |          |           |       
|Proceeds from sales and maturities of investments                           |                                                |                                               | 135,470                                          |         |                   |          |           |       
|Acquisition of businesses and related expenses, net of cash acquired        |                                                |                                               | (81,693                                          | )       |                   |          |           |       
|Acquisition of property, plant and equipment                                |                                                |                                               | (51,719                                          | )       |                   |          | (26,529    | )     
|Proceeds from sale of property, plant and equipment                         |                                                |                                               | 617                                              |         |                   |          |           |       
|Increase in other assets                                                    |                                                |                                               | (2,870                                           | )       |                   |          | (9,734     | )     
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            |                                                |                                               | Net cash used in investing activities            |         |                   | (216,437 | )          |        |         | (36,263 | )
|Financing activities                                                        |                                                |                                               |                                                  |         |                   |          |            |       
|Proceeds from initial and follow-on public offerings                        |                                                |                                               |                                                 |         |                   |          | 542,407    |       
|Payments on equipment loan                                                  |                                                |                                               | (180                                             | )       |                   |          | (203       | )     
|Proceeds from issuance of common stock, net of repurchases                  |                                                |                                               | 1,679                                            |         |                   |          | 818        |       
|Proceeds from payment of notes receivable with shareholders                 |                                                |                                               | 422                                              |         |                   |          | 97         |       
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            |                                                |                                               | Net cash provided by financing activities        |         |                   | 1,921    |            |        |         | 543,119 |  
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            |                                                |                                               | Increase (decrease) in cash and cash equivalents |         |                   | (267,318 | )          |        |         | 476,386 |  
|                                                                            |                                                |                                               | Cash and cash equivalents at beginning of period |         |                   | 363,375  |            |        |         | 28,067  |  
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       
|                                                                            |                                                |                                               | Cash and cash equivalents at end of period       |         | $                 | 96,057   |            |        | $       | 504,453 |  
|                                                                            |                                                |                                               |                                                  |         |                   |          |            |       

See notes to consolidated financial statements.





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NEW FOCUS, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
SEPTEMBER 30, 2001

NOTE 1  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2001, are
not necessarily indicative of the results that may be expected for the year
ending December 30, 2001.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

For further information, refer to the consolidated financial statements
and footnotes thereto included in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 29, 2001.

Beginning in 2000, the Company maintains a fifty-two/fifty-three week
fiscal year cycle ending on the Sunday closest to December 31. The three-month
periods ended September 30, 2001 and October 1, 2000 each contained 91 days.
The nine-month periods ended September 30, 2001 and October 1, 2000 contained
273 days and 275 days, respectively.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, Accounting for
Derivative Instruments and Hedging Activities  Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The adoption of FAS 133 did not
have a significant impact on the Companys operating results or cash flows.

In July 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. These standards become
effective for fiscal





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##### Table of Contents



years beginning after December 15, 2001. Beginning in
2002, goodwill will no longer be amortized, but will be subject to annual
impairment tests. All other intangible assets will continue to be amortized
over their estimated useful lives. Based on acquisitions
completed as of June 30, 2001, application of the non-amortization provisions
of these rules is expected to result in a decrease in the net loss of
approximately $7.5 million per year starting with fiscal year 2002.

The new rules also require business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and goodwill
acquired after June 30, 2001 will not be amortized. Goodwill of $24.5 million
at September 30, 2001 will continue to be amortized through the end of fiscal
2001. Beginning in 2002, the Company will test goodwill for impairment under
the new rules, applying a fair-value-based test.

In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which is effective for fiscal periods
beginning after December 15, 2001 and supersedes Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. FAS 144 provides a single
model for accounting and reporting the impairment and disposal of long-lived
assets. The statement also sets new criteria for the classification of assets
held-for-sale and changes the reporting of discontinued operations. The
Company will assess the impact of FAS 144 on its financial statements upon
adoption in fiscal 2002.

NOTE 2  COMPREHENSIVE LOSS

Comprehensive loss for the three months ended September 30, 2001 is $30.5
million, comprised of the Companys net loss of $32.0 million offset by $1.5
million of net unrealized holding gains on marketable equity securities.
Comprehensive loss for the nine months ended September 30, 2001 is $413.4
million, comprised of the Companys net loss of $415.9 million offset by $2.5
million of net unrealized holding gains on marketable equity securities.
Comprehensive loss for the three and nine months ended October 1, 2000 is the
same as the Companys net loss.

NOTE 3  INVENTORIES

During the second and
third quarters of fiscal 2001, the Company recorded substantial
inventory write-downs. The write-downs were based on a significant decrease in
forecast demand for the Companys products relative to the inventory levels.

Due to the significant downturn in the telecommunications market and the rapid
obsolescence in technology-based products, the Company reduces inventories to
net realizable value based upon forecast demand. However, backlog is subject
to revisions, cancellations, and rescheduling. Actual demand may differ from
forecast demand and such difference may have a material effect on the Companys
financial position and results of operations.

NOTE 4  LOSS PER SHARE

|                                                                             |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------- | ------ | ---------- |  | - | -------- | - |  | - | ------- | -
|                                                                             |  | Three Months Ended |         | Nine Months Ended
|                                                                             |  |                    |         |                  
|                                                                             |  | September 30,      |         | October 1,        |  | September 30, |        | October 1,
|                                                                             |  | 2001               |         | 2000              |  | 2001          |        | 2000      
|                                                                             |  |                    |         |                   |  |               |        |           
|(in thousands, except per share amounts)                                    
|Net loss (numerator)                                                         |  | $                  | (31,968 | )                 |  | $             | (7,131 | )          |  | $ | (415,920 | ) |  | $ | (33,719 | )
|                                                                             |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  
|Shares used in computing basic and diluted
net loss per share (denominator): |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  
|Weighted average common shares outstanding                                   |  |                    | 75,754  |                   |  |               | 62,110 |            |  |   | 74,920   |   |  |   | 35,607  |  
|Less shares subject to repurchase                                            |  |                    | (1,542  | )                 |  |               | (3,970 | )          |  |   | (1,790   | ) |  |   | (3,824  | )
|                                                                             |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  
|Denominator for basic and diluted net loss
per share                         |  |                    | 74,212  |                   |  |               | 58,140 |            |  |   | 73,130   |   |  |   | 31,783  |  
|                                                                             |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  
|Basic and diluted net loss per share                                         |  | $                  | (0.43   | )                 |  | $             | (0.12  | )          |  | $ | (5.69    | ) |  | $ | (1.06   | )
|                                                                             |  |                    |         |                   |  |               |        |            |  |   |          |   |  |   |         |  

The Company has excluded the impact of all convertible preferred stock,
common stock subject to repurchase, warrants for convertible preferred stock
and common stock, and outstanding stock options from the calculation of diluted
loss per common share





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##### Table of Contents



because all such securities are antidilutive for all
periods presented. The total number of shares of stock, including common stock
subject to repurchase, options and warrants to purchase stock, excluded from
the calculations of diluted net loss per share was 8,477,000 for both the three
and nine months ended September 30, 2001 and 5,528,000 for both the three and
nine months ended October 1, 2000, respectively.

NOTE 5  INCOME TAXES

The benefit for income taxes of approximately $5.0 million and $15.0
million for the three and nine months ended September 30, 2001, respectively,
relates to the deferred tax benefit associated with the amortization of other
identifiable intangible assets and deferred compensation resulting from the JCA
and Globe Y acquisitions. Excluding the tax benefit associated with these
acquisitions, we recorded a provision for income taxes of approximately
$175,000 and $525,000, respectively, primarily for minimum taxes and foreign
withholding taxes.

NOTE 6  SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

The Company has two reportable segments: Telecom and Photonics Tools. The
Telecom segment performs research and development, manufacturing, marketing and
sales of fiber amplifier products, wavelength management products, high-speed
opto-electronics and tunable laser modules, which are primarily sold to
manufacturers of networking and test equipment in the optical
telecommunications markets. The Photonics Tools segment performs research and
development, manufacturing, marketing and sales of photonics tools, which are
primarily used for commercial and research applications.

The Company evaluates performance and allocates resources based on profit
or loss from operations. Operating segment profit and loss excludes
amortization of goodwill and other intangibles, in-process research and
development, impairment of goodwill, restructuring charges and amortization of
deferred stock based compensation. The accounting policies for the reportable
segments are consistent with those described in the summary of significant
accounting policies. There were no intercompany sales or transfers.

The Company does not segregate assets or interest expense by segment.





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##### Table of Contents



|                                 |  |                                       |         |                 |  |       |        |   |  |   |         |  
|-------------------------------- |  | ------------------------------------- | ------- | --------------- |  | ----- | ------ | - |  | - | ------- | -
|                                 |  | Three Months Ended September 30, 2001
|                                 |  |                                      
|                                 |  | Telecom                               |         | Photonics Tools |  | Total
|                                 |  |                                       |         |                 |  |      
|                                 |  | (in thousands)                       
|Revenues from external customers |  | $                                     | 9,721   |                 |  | $     | 6,117  |   |  | $ | 15,838  |  
|Depreciation expense             |  | $                                     | 3,449   |                 |  | $     | 425    |   |  | $ | 3,874   |  
|Operating segment profit (loss)  |  | $                                     | (21,020 | )               |  | $     | (1,106 | ) |  | $ | (22,126 | )

|                                 |  |                                    |        |                 |  |       |       |  |  |   |        |  
|-------------------------------- |  | ---------------------------------- | ------ | --------------- |  | ----- | ----- |  |  | - | ------ | -
|                                 |  | Three Months
Ended October 1, 2000
|                                 |  |                                   
|                                 |  | Telecom                            |        | Photonics Tools |  | Total
|                                 |  |                                    |        |                 |  |      
|                                 |  | (in thousands)                    
|Revenues from external customers |  | $                                  | 14,919 |                 |  | $     | 7,331 |  |  | $ | 22,250 |  
|Depreciation expense             |  | $                                  | 963    |                 |  | $     | 184   |  |  | $ | 1,147  |  
|Operating segment profit (loss)  |  | $                                  | (9,018 | )               |  | $     | 2,686 |  |  | $ | (6,332 | )

|                                 |  |                                      |         |                 |  |       |        |   |  |   |         |  
|-------------------------------- |  | ------------------------------------ | ------- | --------------- |  | ----- | ------ | - |  | - | ------- | -
|                                 |  | Nine Months Ended September 30, 2001
|                                 |  |                                     
|                                 |  | Telecom                              |         | Photonics Tools |  | Total
|                                 |  |                                      |         |                 |  |      
|                                 |  | (in thousands)                      
|Revenues from external customers |  | $                                    | 61,037  |                 |  | $     | 22,212 |   |  | $ | 83,249  |  
|Depreciation expense             |  | $                                    | 8,251   |                 |  | $     | 1,088  |   |  | $ | 9,339   |  
|Operating segment profit (loss)  |  | $                                    | (81,443 | )               |  | $     | (257   | ) |  | $ | (81,700 | )

|                                 |  |                                   |         |                 |  |       |        |  |  |   |         |  
|-------------------------------- |  | --------------------------------- | ------- | --------------- |  | ----- | ------ |  |  | - | ------- | -
|                                 |  | Nine
Months Ended October 1, 2000
|                                 |  |                                  
|                                 |  | Telecom                           |         | Photonics Tools |  | Total
|                                 |  |                                   |         |                 |  |      
|                                 |  | (in thousands)                   
|Revenues from external customers |  | $                                 | 28,269  |                 |  | $     | 18,214 |  |  | $ | 46,483  |  
|Depreciation expense             |  | $                                 | 1,941   |                 |  | $     | 620    |  |  | $ | 2,561   |  
|Operating segment profit (loss)  |  | $                                 | (25,582 | )               |  | $     | 4,783  |  |  | $ | (20,799 | )

|                                               |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |         |  
|---------------------------------------------- | ------------------------ | -------------- | ------------------ | ------- | ----------------- | - | --------- | ------ | ------- | - | -------- | -------- | - | - | ------- | ------- | -
|                                               |                          |                | Three Months Ended |         | Nine Months Ended
|                                               |                          |                |                    |         |                  
|                                               |                          |                | Sept. 30,          |         | Oct. 1,           |   | Sept. 30, |        | Oct. 1,
|                                               |                          |                | 2001               |         | 2000              |   | 2001      |        | 2000   
|                                               |                          |                |                    |         |                   |   |           |        |        
|                                               |                          | (in thousands)
|Loss                                           |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|Total loss for reportable segments             |                          | $              | (22,126            | )       |                   | $ | (6,332    | )      |         | $ | (81,700  | )        |   | $ | (20,799 | )      
|Interest and other income, net                 |                          |                | 4,341              |         |                   |   | 5,082     |        |         |   | 13,840   |          |   |   | 6,017   |        
|Amortization of goodwill and other intangibles |                          |                | (5,255             | )       |                   |   |          |        |         |   | (49,154  | )        |   |   |        |        
|Impairment of goodwill                         |                          |                |                   |         |                   |   |          |        |         |   | (241,574 | )        |   |   |        |        
|In-process research and development            |                          |                |                   |         |                   |   |          |        |         |   | (13,400  | )        |   |   |        |        
|Restructuring charges                          |                          |                | (2,162             | )       |                   |   |          |        |         |   | (5,785   | )        |   |   |        |        
|Amortization of deferred compensation          |                          |                | (11,766            | )       |                   |   | (5,879    | )      |         |   | (53,147  | )        |   |   | (18,935 | )      
|                                               |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|                                               | Loss before income taxes |                | $                  | (36,968 | )                 |   | $         | (7,129 | )       |   | $        | (430,920 | ) |   | $       | (33,717 | )
|                                               |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|Geographic information                         |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|Net revenues                                   |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|United States                                  |                          | $              | 9,334              |         |                   | $ | 15,890    |        |         | $ | 51,918   |          |   | $ | 32,776  |        
|Asia                                           |                          |                | 1,385              |         |                   |   | 597       |        |         |   | 4,701    |          |   |   | 1,671   |        
|Europe                                         |                          |                | 5,119              |         |                   |   | 5,763     |        |         |   | 26,630   |          |   |   | 12,036  |        
|                                               |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        
|                                               | Consolidated total       |                | $                  | 15,838  |                   |   | $         | 22,250 |         |   | $        | 83,249   |   |   | $       | 46,483  |  
|                                               |                          |                |                    |         |                   |   |           |        |         |   |          |          |   |   |         |        





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##### Table of Contents



NOTE 7  SIGNIFICANT CUSTOMERS

In the three months ended September 30, 2001, Agilent Technologies and
Alcatel each accounted for 12.4% of the Companys net revenues.

NOTE 8  CONTINGENCIES

On July 20, 2001, Photonetics, Inc. and Photonetics, S.A. filed a
complaint against the Company for patent infringement in the United States
District Court for the District of Delaware. Photonetics, Inc. and
Photonetics, S.A. claim that the Company infringes U.S. Patent No. 5,594,744
and seek preliminary and injunctive relief and damages. Photonetics, Inc. and
Photonetics, S.A. allege that the Companys infringement is willful and seek
enhanced damages and attorneys fees. The Company filed its answer and
counterclaims on September 10, 2001. In the answer, the Company denied
infringement of U.S. Patent No. 5,594,744 and asserted that the patent was
invalid and unenforceable. In a declaratory judgment counterclaim, the Company
claimed that U.S. Patent No. 5,594,744 is invalid, unenforceable and not
infringed. The Company also counterclaimed for patent infringement of U.S.
Patent Nos. 5,995,521 and 5,319,668 and seeks preliminary and injunctive relief
and damages. Additionally, the Company claims that Photonetics, Inc. and
Photonetics, S.A.s infringement of the patents is willful and seeks enhanced
damages and attorneys fees. On October 9, 2001, Photonetics, Inc. and
Photonetics, S.A. filed its reply to the Companys counterclaims. Photonetics,
Inc. and Photonetics, S.A. denied infringement of U.S. Patent Nos. 5,995,521
and 5,319,668 and alleged that the patents were invalid. Trial is scheduled
for August 4, 2003. An unfavorable resolution of this action could have a
material adverse effect on the business, results of operations or financial
condition of the Company.

On June 26, 2001 a putative securities class action, captioned Lanter v.
New Focus, Inc. et al.,01-CV-5822, was filed against the firms that underwrote
New Focus initial public offering, New Focus and several of its officers and
directors in the United States District Court for the Southern District of New
York. The complaint alleges violations of Sections 11 and 15 of the Securities
Exchange Act of 1933 and Section 20(a) of the Securities Exchange Act of 1934
against the Company, and seeks unspecified damages on behalf of a purported
class that purchased New Focus common stock between May 18, 2000 and June 11,
2001.

On June 28, 2001 a similar complaint, captioned Pond Equities v. New
Focus, Inc. et al.,Civil Action No. 01-CV-5925, was filed in the United States
District Court for the Southern District of New York. The complaint is
substantially identical to the Lantercomplaint: it names the same defendants,
contains the virtually identical claims, and seeks unspecified damages on
behalf of a purported class of purchasers of common stock during an identical
class period. There have been subsequent lawsuits filed containing allegations
substantially identical to those in the Lanterand Pond Equitiescomplaints.
The Company anticipates that additional, substantially similar lawsuits may be
brought.





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##### Table of Contents



Various plaintiffs have filed similar actions in the United States
District Court for the Southern District of New York asserting virtually
identical allegations against more than 180 other issuers. These cases have
all been assigned to the Hon. Shira A. Scheindlin for coordination and decisions
on pretrial motions, discovery, and related matters other than trial. The
Company believes that it has meritorious defenses to these lawsuits and will
defend itself vigorously in the litigation. An unfavorable resolution of the
actions could have a material adverse effect on the business, results of
operations or financial condition of the Company.

On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc., et. al.,Civil Action No. C-01-1020, was filed against New
Focus and several of its officers and directors in the United States District
Court for the Northern District of California. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions captioned Rosen v. New Focus, Inc., et. al.,Civil Action No.
C-01-1065; Solomon v. New Focus, Inc., et. al.,Civil Action No. C-01-2023;
Deutch v. New Focus, Inc., et. al.,Civil Action No. C-01-1123; Connors v. New
Focus, Inc., et. al.,Civil Action No. C-01-1148; Spanos v. New Focus, Inc.,
et. al.,Civil Action No. C-01-1328; Patton v. New Focus, Inc., et. al.,Civil
Action No. C-01-1413, and Naiditch v. New Focus, Inc., et. al.,Civil Action
No. C-01-1689 have also been filed against New Focus and several of its
officers and directors in the United States District Court for the Northern
District of California. The Naiditchaction asserts a class period from October
25, 2000 to March 5, 2001. The cases have been consolidated, a lead plaintiff
has been appointed and the defendants have moved to dismiss the consolidated
complaint. The Company believes it has meritorious defenses to the claims and
intends to contest the lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the business, results of
operations or financial condition of the Company.

On April 10, 2001, a shareholder derivative action purportedly on behalf
of the Company, captioned Sherman v. Harris et. al.,Civil Action No. 18797-NC,
was filed in Delaware Chancery Court. The complaint alleges that the Companys
directors breached their fiduciary duties to the Company by engaging in alleged
wrongful conduct including conduct complained of in the securities litigation
described above. The Company is named solely as a nominal defendant against
whom the plaintiff seeks no recovery. On June 4, 2001, the Company and the
individual defendants filed a motion to dismiss the complaint.

On March 10, 2000, a former employee filed a lawsuit against the Company
in Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The claims stem from the termination of his
employment with the Company in February 2000. The former employee sought
unspecified general and special damages, punitive damages, attorneys fees and
costs in the form of cash and shares of the Companys common stock. The Company
filed a counter-claim in August 2000 alleging fraud,





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##### Table of Contents



negligent
misrepresentation, breach of contract and breach of the covenant of good faith
and fair dealing. In June 2001, the parties agreed to settle the case for an
amount expensed in the three months ended July 1, 2001. A confidential
settlement agreement
has been executed by both parties, and the lawsuit has been dismissed with
prejudice. The settlement did not have a material impact on the Companys
results of operations.

In December 1999, U.S.A. Kaifa Technology, Inc., acquired by E-Tek
Dynamics, Inc., which was acquired by JDS Uniphase Corporation, filed a
complaint against the Company for patent infringement in the United States
District Court, Northern District of California. In May 2001, the Company and
Kaifa reached a confidential settlement agreement and the litigation was
dismissed with prejudice on June 7, 2001. The settlement did not have a
material impact on the Companys results of operations.

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

NOTE 9  BUSINESS ACQUISITIONS

Acquisition of JCA Technology, Inc.

On January 16, 2001, the Company acquired JCA Technology, Inc. (JCA), a
privately held designer and manufacturer of fiber-optic products for
modulators, for a total purchase price of approximately $311.5 million in a
transaction to be accounted for as a purchase. The Company paid $75.0 million
in cash and exchanged approximately 7,954,000 shares of common stock with a
combined total fair value of $303.4 million for all of the outstanding stock of
JCA. In addition, the Company issued approximately 2,079,000 shares of
restricted stock subject to forfeiture. The common stock was valued using the
Companys average stock price for the seven-day period ending December 27,
2000. The average price was $28.71. Direct transaction costs related to the
acquisition were approximately $8.1 million. In addition, the Company recorded
$56.0 million of unearned compensation related to approximately 1,951,000
shares of restricted stock. Vesting for the remaining 128,096 shares of
restricted stock was contingent upon meeting certain fiscal 2001 operating
objectives. These shares were forfeited in September 2001.

The acquisition has been accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of JCA
subsequent to the acquisition date. The purchase price has been allocated to
the tangible net assets acquired based on managements estimate of their fair
values, and to the intangible assets acquired and in-process research and
development based on their estimated fair values as determined by an
independent appraisal. The purchase price allocation is as follows (in
thousands):





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##### Table of Contents



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

Tangible net assets acquired include cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued expenses and a note payable. Intangible assets acquired and
goodwill are each being amortized on a straight-line basis over estimated
useful lives ranging from two to four years (see Note 10  Impairment of
Goodwill). In-process research and development, which has not reached
technological feasibility and therefore has no alternative future use, has been
expensed during the three months ended April 1, 2001.

Acquisition of Globe Y. Technology, Inc.

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

The acquisition has been accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of Globe Y
subsequent to the acquisition date. The purchase price has been allocated to
the tangible net assets acquired based on managements estimate of their fair
values, and to the intangible assets acquired based on their estimated fair
values as determined by an independent appraisal. The purchase price allocation
is as follows (in thousands):





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##### Table of Contents



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

Tangible net assets acquired include cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued expenses, income taxes payable and customer deposits.
Intangible assets acquired and goodwill are each being amortized on a
straight-line basis over estimated useful lives ranging from two to four years
(See Note 10  Impairment of Goodwill).

Unaudited Pro Forma Information

The following unaudited pro forma information presents the consolidated
results of operations of the Company, excluding the charge for acquired
in-process research and development, as if the acquisitions of JCA and Globe Y
had occurred at the beginning of fiscal 2000. The pro forma 2001 and 2000
results of operations combine the consolidated results of operations of the
Company, excluding the charge for in-process research and development
attributable to JCA, for the nine months ended September 30, 2001 and October
1, 2000 with the historical results of operations of JCA and Globe Y for the
nine months ended September 30, 2001 and September 30, 2000, respectively. The
unaudited pro forma information does not purport to be indicative of what would
have occurred had the acquisitions been made as of the beginning of fiscal 2000
or of results which may occur in the future.

|                   |  |                                          |         |                   |  |                    |         |                 |  |   |          |   |  |   |          |  
|------------------ |  | ---------------------------------------- | ------- | ----------------- |  | ------------------ | ------- | --------------- |  | - | -------- | - |  | - | -------- | -
|                   |  | Three Months Ended                       |         | Nine Months Ended
|                   |  |                                          |         |                  
|                   |  | September 30, 2001                       |         | October 1, 2000   |  | September 30, 2001 |         | October 1, 2000
|                   |  |                                          |         |                   |  |                    |         |                
|                   |  | (In thousands, except per share amounts)
|Revenues           |  | $                                        | 15,838  |                   |  | $                  | 29,198  |                 |  | $ | 84,851   |   |  | $ | 64,651   |  
|Net loss           |  | $                                        | (29,922 | )                 |  | $                  | (36,003 | )               |  | $ | (373,553 | ) |  | $ | (137,676 | )
|Net loss per share |  | $                                        | (0.40   | )                 |  | $                  | (0.62   | )               |  | $ | (5.11    | ) |  | $ | (4.33    | )

NOTE 10  IMPAIRMENT OF GOODWILL

The Company has evaluated the carrying value of certain long-lived assets
and acquired intangibles, consisting primarily of goodwill, recorded on its
balance sheet at September 30, 2001 as a result of forecast reductions in
demand for products manufactured by JCA and Globe Y. Pursuant to accounting
rules, the majority of the goodwill was recorded based on stock prices at the
time acquisition agreements were executed and announced. Goodwill and
intangible assets are generally evaluated on an individual acquisition, market,
or product basis whenever events or changes in circumstances indicate that such
assets are impaired or the estimated useful lives are no longer appropriate.
Periodically, the Company reviews its goodwill and other intangible





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assets for impairment based on estimated future undiscounted cash flows attributable to
the assets. In the event such cash flows are not expected to be sufficient to
recover the recorded value of the assets, the assets are written down to their estimated
fair values based on the expected discounted future cash flows attributable to
the assets.

Due to the circumstances created by the significant downturn in the
telecommunications market, the Company recorded an impairment charge against
the goodwill associated with its acquisitions of JCA and Globe Y in the second
quarter ended July 1, 2001. The downturn has negatively impacted the forecasted
revenues and cash flows from the JCA and Globe Y businesses acquired in early
2001. In accordance with the Companys policy, undiscounted cash flows
indicated that the assets were impaired. The Company calculated the impairment
charge by comparing the fair value of the intangible assets, based on future
discounted cash flow expectations from these acquired businesses, to the
carrying amount of the related intangible assets. The discount rate applied to
these cash flows was based on the Companys weighted average cost of capital,
which represents the blended after-tax costs of debt and equity. This resulted
in a $241.6 million write-down of goodwill for the quarter ended July 1, 2001.
The remaining goodwill will continue to be amortized through 2001 using an
estimated useful life of four years. In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. These standards become effective for fiscal years beginning after
December 15, 2001. Beginning in 2002, goodwill will no longer be amortized, but
will be subject to annual impairment tests.

NOTE 11  RESTRUCTURING CHARGES

In 2001, the Company recorded restructuring charges totaling $5.8 million for
plans to resize the Companys operations as a result of a decline in demand for
its products. These restructuring activities include closing and consolidating
the Companys older Santa Clara, California facility and its smaller Shenzhen,
China production facility into larger, existing facilities in San Jose and
Shenzhen, respectively, and subleasing a previously unoccupied facility in
Camarillo, California. Additionally, the Company reduced its workforce in its
U.S. and China operations through reduction in force programs and attrition by
approximately 1,000 employees from a peak of approximately 2,100 in February
2001 to approximately 1,100 employees in September 2001. The restructuring
charges included $1.3 million for severance costs covering approximately 550
employees, $2.1 million for the write down of the net book value of impaired
leasehold improvements and equipment, and $2.4 million for facility closure
costs. Non-cash items included in the restructuring charges totaled $2.1
million. As of September 30, 2001, $2.4 million in accrued restructuring costs,
consisting of $2.2 million for facility closure costs and $0.2 million for
severance costs, remained in current liabilities.

In October 2001, the Company announced plans for a further reduction of
35%, or approximately 400 people, in its worldwide workforce by the end of
2002. About 40% of this planned reduction will occur by the end of this fiscal
year. The Company is continuing to review and implement cost saving
initiatives to meet its operational and





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financial objectives. The Company expects to record an additional restructuring
charge in the fourth quarter of 2001 associated with these activities.

NOTE 12  RELATED PARTY TRANSACTION

On July 12, 2001, New Focus extended to Kenneth E. Westrick two secured
full recourse short-term loans in the aggregate of $8.0 million. Mr. Westrick
was the Companys president and chief executive officer and a member of the
Companys Board of Directors at the time these loan agreements were executed.
The first note in the principal amount of $2.1 million bears interest at the
per annum rate, recalculated each calendar quarter, of (a) the three-month
LIBOR rate as quoted in The Wall Street Journal on the first business day of
such calendar quarter, plus (b) 100 basis points, compounded annually and is
secured on the shares of the Companys common stock held by Mr. Westrick. This
note is due on June 30, 2002. The second note in the principal amount of $5.9
million currently bears interest at the per annum rate of 9.99% compounded
annually and is secured on certain other assets of Mr. Westrick. The interest
rate on this note is subject to reduction upon satisfaction of certain
conditions. Mr. Westrick also has a $1.3 million note payable to the Company in
connection with previously exercised stock options which is also secured by
shares of the Companys common stock held by Mr. Westrick. This note is due in
March 2002 in accordance with its terms.

Mr. Westrick resigned as the Companys president and chief executive
officer and as a member of the Companys Board of Directors effective October
10, 2001. In connection with his resignation, Mr. Westrick and the Company
entered into a Separation and Release Agreement. The agreement extended the
due date of the $5.9 million note to June 30, 2004 from June 30, 2002.
Additionally, the Company accelerated 633,333 unvested options to purchase the
Companys common stock and agreed to pay the equivalent of eighteen months of
compensation to Mr. Westrick. The Company expects to record a charge of
approximately $2.2 million related to the acceleration of stock option vesting
and payment of compensation in its financial results for the fourth quarter of
2001.

The Company believes that the market value of Mr. Westricks common shares
of the Company and the market value of his other assets, based on independent
appraisals performed in October 2001, provide adequate collateral for the
notes.

NOTE 13  SHAREHOLDER RIGHTS PLAN

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





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NEW FOCUS, INC.




MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations:

The following discussion contains predictions, estimates and other
forward-looking statements regarding our revenue outlook for the fourth quarter
of 2001, our projected cash outflow for the fourth quarter of 2001, planned
reductions in our expense structure by the end of 2002, our plan to effect a
significant workforce reduction, our plan to transfer more production offshore
to support a further consolidation of our U.S. manufacturing operations, and
our goal to achieve breakeven at $25 million in quarterly revenue. These
forward-looking statements are subject to risks and uncertainties and actual
results may differ materially from any future performance suggested herein. The
risks and uncertainties include the difficulty of forecasting anticipated
revenues due to weakness and uncertainties related to general economic
conditions and overall demand within the telecommunications industry, inventory
levels within the industry, sudden and unexpected order reductions and
cancellations by customers, lower backlog of customer orders, and potential
pricing pressures that may arise from supply-demand conditions within the
industry; the high sensitivity of the size of our net loss to our level of
revenue due to the fixed and/or project orientation of our expenses; the
challenge of managing inventory levels during periods of weakening demand; the
difficulty of achieving anticipated cost reductions due to unforeseen expenses,
including costs arising from the consolidation of our manufacturing operations,
that may arise in future quarters; the difficulty of achieving anticipated cost
reductions due to an inability to reduce expenses without jeopardizing product
development schedules; any unforeseen delays in completing the development of
our new products on a timely basis and achieving sufficient production to
generate volume revenues; our ability to gain customer acceptance of new
products; and our ability to generate future revenue from new products
commensurate with prior investments in research and development activities.
Other risk factors that may affect our financial performance are listed in
Risk Factors elsewhere in this document.

Overview:

Demand for our products fell abruptly beginning in the latter half of the
first quarter of 2001 due to the continuing, widespread business downturn in
the telecommunications industry. During this period, we experienced order
cancellations and rescheduling of orders to later periods. Revenue from our
telecom products has declined in each quarter of 2001, from $32.3 million
in the first quarter, to $19.0 million in the second quarter and $9.7 million
in the third quarter. Revenue from our photonics tool products has also
declined in each quarter of 2001, from $8.5 million in the first quarter, to
$7.6 million in the second quarter and $6.1 million in the third quarter. We
expect that our total net revenue in the fourth quarter of 2001 will further
decline and be within a range of $12-15 million.





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In the second quarter of 2001, we announced our plans to reduce our
quarterly expense structure, defined as the combination of manufacturing
overhead and operating expenses, by $6 million by the fourth quarter of 2001
compared to the second quarter of 2001. In the third quarter of 2001, we
reduced our quarterly expense structure by $3.6 million and expect to realize
the remainder of the $6 million quarterly expense reduction in the fourth
quarter of 2001. In June 2001, we closed and consolidated our older Santa
Clara, California facility and our smaller Shenzhen, China production facility
into larger, existing facilities in San Jose and Shenzhen, respectively. Additionally, we
have reduced our worldwide workforce through reductions in force and attrition
by approximately 1,000 from a peak of approximately 2,100 in February 2001 to
approximately 1,100 at the end of September 2001.

We expect difficult conditions within the telecommunications market to
continue for the balance of this year and 2002. In light of these expectations,
we are taking aggressive steps to minimize our costs and preserve our cash. In
addition to our plans to reduce our quarterly expense structure by $6 million
between the second and fourth quarters of 2001, we are taking actions to
generate an incremental $10 million in quarterly savings by the end of 2002.
These cost reductions are expected to structure the Company for breakeven at
approximately $25 million in quarterly revenue.

We expect that the majority of the additional $10 million in quarterly
cost savings will be generated by three major initiatives:



| |  | Worldwide workforce reduction                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We plan to reduce our workforce by an additional 35%, or approximately
400 people, by the end of 2002. About 40% of this planned reduction will
occur by the end of this year. We expect our workforce to be
approximately 700 people at the end of 2002, down from the peak
employment level of 2,100 people in February 2001.
|
| |  | Product development spending reduction                                                                                                                                                                                                                                                                                         
|
| |  | Product development spending will be reduced to a rate of $7-8 million
per quarter by the end of 2002. This action will more closely align
development expenses with recent changes in new product plans at various
customers and with the companys revenue expectations for 2002.                                            
|
| |  | Consolidation of excess facilities                                                                                                                                                                                                                                                                                             
|
| |  | We will aggressively transfer more production to our offshore
manufacturing facility in Shenzhen, China, which will allow us to further
consolidate our current U.S. manufacturing facilities in the coming year.                                                                                                              





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Acquisitions:

On January 16, 2001, we acquired JCA Technology, Inc. (JCA), a designer,
manufacturer and marketer of a full line of fiber-optic products for OC-48 and
OC-192 modulators, including high-speed clock amplifiers and broadband data
driver amplifiers, for a total purchase price of approximately $311.5 million
in a transaction accounted for as a purchase. The consideration consisted of
$75.0 million in cash and approximately 7,954,000 shares of our common stock
for a combined total fair value of $303.4 million in exchange for all of the
outstanding stock of JCA. In addition, we issued approximately 2,079,000 shares
of restricted stock subject to forfeiture. We recorded $56.0 million of
unearned compensation related to the issuance of approximately 1,951,000 shares
of restricted stock. Vesting for the remaining 128,000 shares of restricted
stock was contingent upon meeting certain fiscal 2001 operating objectives. These
shares were forfeited in September 2001. JCA operates as a wholly owned
subsidiary of New Focus, and our financial statements for the three and nine
months ended September 30, 2001 include the results of operations of JCA
subsequent to the acquisition date.

On February 15, 2001, we acquired Globe Y. Technology, Inc. (Globe Y), a
manufacturer of fused fiber coupling machines, for a total purchase price of
approximately $45.2 million in a transaction to be accounted for as a purchase.
The consideration consisted of approximately 1,002,000 shares of our common
stock in exchange for all of the outstanding stock of Globe Y. In addition, we
recorded approximately $2.3 million of unearned compensation related to the
issuance of approximately 53,000 shares of restricted stock subject to
forfeiture. Globe Y operates as a wholly owned subsidiary of New Focus, and our
financial statements for the three and nine months ended September 30, 2001
include the results of operations of Globe Y subsequent to the acquisition
date.

Net Revenues:

Net revenues decreased to $15.8 million for the three months ended
September 30, 2001, from $22.3 million for the three months ended October 1,
2000. Net revenues increased to $83.2 million for the nine months ended
September 30, 2001, from $46.5 million for the nine months ended October 1,
2000. Net revenues for both the three- and nine-month periods of 2001 included
sales of products manufactured by JCA and Globe Y made subsequent to our
acquisitions of these companies in mid-January and mid-February 2001,
respectively. Net revenue for the third quarter of 2001 decreased from the
third quarter of 2000, despite the incremental revenue provided by JCA and
Globe Y, as a result of the significant adverse market conditions in 2001. The
increase in net revenue between the comparable nine-month periods was
attributable to a combination of the incremental revenue provided by these
acquisitions and higher sales of New Focus products in the first nine months of
2001. Sales of our telecom products were $9.7 million, or 61% of total net
revenues, for the three months ended September 30, 2001 and were $61.0 million,
or 73% of total net revenues, for the nine months ended September 30, 2001.
Telecom net revenues were $14.9 million, or 67% of total net revenues, for the
three months ended October 1, 2000 and were $28.3 million, or 61% of total net
revenues for the nine months ended October 1, 2000.





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Gross Margin (Loss):

Gross margin (loss), including amortization of deferred stock
compensation, decreased to a negative 17.8% in the three months ended September
30, 2001 from a positive 18.2% in the three months ended October 1, 2000.
Excluding amortization of deferred stock compensation of $1.8 million and
$956,000, respectively, gross margin decreased to a negative 6.6% in the three
months ended September 30, 2001 from a positive 22.5% in the three months ended
October 1, 2000. Cost of net revenues for the three months ended September 30,
2001 includes a $1.3 million charge for inventory write-downs and order
cancellation fees as a result of the revised order outlook for the balance of
the year. There were no significant write-downs of inventories or related
charges during the third quarter of 2000. Excluding amortization of deferred
stock compensation of $1.8 million and the charge for inventory write-downs of
$1.3 million, the gross margin was a positive 1.6% for the third quarter of 2001.

Gross margin, including amortization of deferred stock compensation, decreased
to a negative 27.8% in the nine months ended September 30, 2001 from a positive
4.2% in the nine months ended October 1, 2000. Excluding amortization of
deferred stock compensation of $7.7 million and $3.4 million, respectively,
gross margin decreased to a negative 18.5% in the nine months ended September
30, 2001 from a positive 11.6% in the nine months ended October 1, 2000. Cost
of net revenues for the nine months ended September 30, 2001 includes $36.4
million for the write-down of excess inventories and related charges,
reflecting lower customer demand for our products and a current lack of
visibility into future order flow resulting from the sudden and sharp decline
in capital equipment expenditures by telecommunications carriers. There were no
significant write-downs of inventories or related charges during the nine
months ended October 1, 2000. Excluding amortization of deferred stock
compensation of $7.7 million and the write-down of excess inventories and
related charges of $36.4 million, the gross margin percentage was a positive
25.2% for the nine months of 2001.

Research and Development Expenses:

Research and development expenses, including amortization of deferred
stock compensation, increased to 135.5% of net revenues, or $21.5 million, in
the three months ended September 30, 2001 from 41.1% of net revenues, or $9.1
million, in the three months ended October 1, 2000. Excluding amortization of
deferred stock compensation of $8.0 million and $1.8 million, respectively,
research and development expenses increased to 85.1% of net revenues, or $13.5
million, in the three months ended September 30, 2001 from 32.7% of net
revenues, or $7.3 million, in the three months ended October 1, 2000. Research
and development expenses, including amortization of deferred stock
compensation, increased to 94.3% of net revenues, or $78.5 million, in the nine
months ended September 30, 2001 from 45.1% of net revenues, or $20.9 million,
in the nine months ended October 1, 2000. Excluding amortization of deferred
stock compensation of $37.8 million and $5.2 million, respectively, research
and development expenses increased to 48.8% of net revenues, or $40.7 million,
in the nine months ended September 30, 2001 from 33.9% of net revenues, or
$15.8 million, in the nine months
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ended October 1, 2000. Research and
development expenses, excluding amortization of deferred stock compensation,
increased both as a percentage of net revenues and in absolute dollars for the
comparable periods as a result of continued development of existing telecom
products and development of new telecom products. In October 2001, the Company
announced plans to reduce product development spending to a rate of $7 to $8
million per quarter, excluding amortization of deferred stock compensation, by
the end of 2002.

Sales and Marketing Expenses:

Sales and marketing expenses, including amortization of deferred stock
compensation, increased to 20.6% of net revenues, or $3.3 million, in the three
months ended September 30, 2001 from 8.9% of net revenues, or $2.0 million, in
the three months ended October 1, 2000. Excluding amortization of deferred
stock compensation of $670,000 and $458,000, respectively, sales and marketing
expenses increased as a percentage of net revenues to 16.4%, or $2.6 million,
in the three months ended September 30, 2001, from 6.9% of net revenues, or $1.5 million, in the three months ended
October 1, 2000. Sales and marketing expenses, including amortization of
deferred stock compensation, increased to 13.2% of net revenues, or $10.9
million, in the nine months ended September 30, 2001 from 11.4% of net
revenues, or $5.3 million, in the nine months ended October 1, 2000. Excluding
amortization of deferred stock compensation of $2.9 million and $1.2 million,
respectively, sales and marketing expenses increased as a percentage of net
revenues to 9.6%, or $8.0 million, in the nine months ended September 30, 2001,
from 8.8% of net revenues, or $4.1 million, in the nine months ended October 1,
2000. Sales and marketing expenses increased as a percentage of revenues and in
absolute dollars for the comparable periods primarily as a result of hiring of
additional sales and marketing personnel and the expansion of our sales and
marketing efforts in the 2001 periods relative to the comparable periods of
2000.

General and Administrative Expenses:

General and administrative expenses, including amortization of deferred
stock compensation, increased to 40.1% of net revenues, or $6.4 million, in the
three months ended September 30, 2001 from 23.0% of net revenues, or $5.1
million, in the three months ended October 1, 2000. Excluding amortization of
deferred stock compensation of $1.3 million and $2.6 million, respectively,
general and administrative expenses increased as a percentage of net revenues
to 31.6%, or $5.0 million, in the three months ended September 30, 2001, from
11.4% of net revenues, or $2.5 million, in the three months ended October 1,
2000. General and administrative expenses, including amortization of deferred
stock compensation, decreased to 26.8% of net revenues, or $22.3 million, in
the nine months ended September 30, 2001 from 33.3% of net revenues, or $15.5
million, in the nine months ended October 1, 2000. Excluding amortization of
deferred stock compensation of $4.7 million and $9.1 million, respectively,
general and administrative expenses increased as a percentage of net revenues
to 21.2%, or $17.6 million, in the nine months ended September 30, 2001, from
13.6% of net revenues, or $6.3 million, in the nine months ended October 1,
2000. The increase in
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absolute spending for general and administrative expenses
between the comparable periods was primarily due to increased staffing and
associated expenses necessary to manage and support our increased scale of
operations, significant legal costs, and integration costs associated with our
acquisitions of JCA and Globe Y.

Amortization of Goodwill and Other Intangibles and Impairment of Goodwill:

Amortization of goodwill and other intangibles totaled $5.3 million and
$49.2 million in the three and nine months ended September 30, 2001, and arose
from our acquisitions of JCA and Globe Y in January and February 2001,
respectively. Goodwill and other intangibles are being amortized over estimated
useful lives of two to four years.

Due to the circumstances created by the significant downturn in the
telecommunications market, the Company recorded an impairment charge against
the goodwill associated with its acquisitions of JCA and Globe Y in the second
quarter of 2001. The downturn has negatively impacted the forecasted revenues
and cash flows from the JCA and Globe Y businesses. In accordance with the Companys policy,
undiscounted cash flows indicated that the assets were impaired. The Company
calculated the impairment charge by comparing the fair value of the intangible
assets, based on future discounted cash flow expectations from these acquired
businesses, to the carrying amount of the related intangible assets. The
discount rate applied to these cash flows was based on the Companys weighted
average cost of capital, which represents the blended after-tax costs of debt
and equity. This resulted in a $241.6 million write-down of goodwill for the
second quarter of 2001. The remaining goodwill balance will continue to be
amortized through 2001 using an estimated useful life of four years. In July
2001, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. These standards become effective for
fiscal years beginning after December 15, 2001. Beginning in 2002, goodwill
will no longer be amortized, but will be subject to annual impairment tests.

In-process Research and Development:

A one-time in-process research and development charge of $13.4 million
related to our acquisition of JCA was recorded in the nine months ended
September 30, 2001. In-process research and development represents the value
assigned in a purchase business combination to research and development
activities of the acquired business that had not yet reached technological
feasibility and have no alternative future use.

Restructuring charges:

In 2001 we recorded restructuring charges totaling $5.8 million for
actions taken to resize our operations as a result of a decline in demand for
our products. These restructuring activities include closing and consolidating
our older Santa Clara, California facility and our smaller Shenzhen, China
production facility into larger, existing facilities in San Jose and Shenzhen,
respectively, and subleasing a previously unoccupied facility
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in Camarillo,
California. Additionally, we reduced our workforce in our U.S. and China
operations by approximately 1,000 employees from a peak of 2,100 in February
2001 to 1,100 in September 2001 through a combination of reduction in force
programs and attrition. The restructuring charges included $1.3 million for
severance costs covering approximately 550 employees, $2.1 million for the
write down of the net book value of impaired leasehold improvements and
equipment, and $2.4 million for facility closure costs. Non-cash items
included in the restructuring charges totaled $2.1 million. As of September 30,
2001, $2.4 million in accrued restructuring costs, consisting of $2.2 million
for facility closure costs and $0.2 million for severance costs, remained in
current liabilities.

In October 2001, we announced plans for a further reduction of 35%, or
approximately 400 people, in our worldwide workforce by the end of 2002. About
40% of this planned reduction will occur by the end of this fiscal year. We
are continuing to review and implement cost saving initiatives to meet our
operational and financial objectives. We expect to record an additional
restructuring charge in the fourth quarter of 2001 associated with these
activities.

Interest and Other Income, net:

Interest and other income, net totaled $4.3 million and $13.8 million for
the three and nine months ended September 30, 2001, respectively, compared to
$5.1 million and $6.0 million for the three and nine months ended October 1,
2000, respectively. Interest income was the largest component, totaling $4.0
million and $14.3 million for the three and nine months ended September 30,
2001, respectively, and $5.1 million and $6.1 million for the three and nine
months ended October 1, 2000, respectively. The increase in interest income for
the three and nine months ended September 30, 2001 was primarily due to higher
average cash balances as a result of the $542.4 million proceeds received from
our May 2000 initial public offering and August 2000 follow-on public offering.
Net interest and other income includes realized and unrealized losses totaling
$300,000 for the third quarter of 2001 and $660,000 for the nine months ended
September 30, 2001 related to our investment in a Southern California Edison
debt security.

Income Taxes:

The benefit for income taxes of approximately $5.0 million and $15.0
million for the three and nine months ended September 30, 2001, respectively,
relates to the deferred tax benefit associated with the amortization of other
identifiable intangible assets and deferred compensation resulting from the JCA
and Globe Y acquisitions. Excluding the tax benefit associated with these
acquisitions, we recorded a provision for income taxes of approximately
$175,000 and $525,00, respectively, primarily for minimum taxes and foreign
withholding taxes.





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Liquidity and Capital Resources:

Our cash, cash equivalents and short-term investments decreased to $301.4
million at September 30, 2001 from $485.5 million at December 31, 2000. The
decrease in cash, cash equivalents and short-term investments was primarily due
to investments of $81.7 million in the acquisitions of JCA and Globe Y and
$51.7 million for the purchase of property, plant and equipment. Net working
capital was $316.9 million at September 30, 2001.

Cash used in operating activities of $52.8 million in the nine months
ended September 30, 2001 was attributable to our net loss (excluding non-cash
charges) of $46.7 million, decreases in accounts payable of $19.8 million,
decreases in deferred taxes and income taxes payable of $15.4 million and
increases in prepaid expense and other current assets of $3.4 million,
partially offset by decreases in accounts receivable and inventories of $31.7
million. Cash generated by financing activities, primarily proceeds from sales
of stock under stock option and employee stock purchase plans, was $1.9 million
in the nine months ended September 30, 2001.

We are undertaking several initiatives to reduce our quarterly expense
structure and rate of cash consumption. We are currently evaluating our
capital spending requirements for the remainder of 2001 and 2002 and expect our
quarterly capital spending levels will fall below the $9.0 million spent in the
third quarter of 2001. We believe that our current cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at
least the next twelve months.




Qualitative and Quantitative Disclosures About Market Risk:

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

Interest Rate Sensitivity:

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We maintain our cash and cash equivalents primarily in money
market funds. Our short-term investments consist primarily of government-backed
securities, in addition to debt securities such as commercial paper, corporate
bonds and notes, euro dollar bonds and asset-backed securities with original
maturity dates between three months and one year. We do not have any derivative
financial instruments. Accordingly, we do not believe that our investments have
significant exposure to interest rate risk. However, the Company has on
occasion been subject to market risk from changes in the credit rating of
certain securities held. During the three and nine months ended September 30,
2001, the Company recorded losses of $300,000 and $660,000, respectively, from
such changes.





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Exchange Rate Sensitivity:

A substantial majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, we do enter into these
transactions in other currencies, primarily the Chinese yuan renminbi (CNY).
Since late 1997, the CNY has been trading at a conversion rate of approximately
8.28 CNY to the U.S. dollar. Accordingly, we have not experienced any
significant foreign currency rate fluctuations.

Risk Factors:

You should carefully consider the risks described below and all of the
information contained in this Form 10-Q. If any of the following risks actually
occur, our business, financial condition and results of operations could be
harmed, the trading price of our common stock could decline, and you may lose
all or part of your investment in our common stock.

Risks Related to Our Financial Results

WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.

We incurred net losses of $415.9 million for the nine months ended
September 30, 2001, $36.0 million for the fiscal year ended December 31, 2000,
$7.7 million for the nine-month period ended December 31, 1999, and $5.0
million for our fiscal year ended March 31, 1999. As of September 30, 2001, we
had an accumulated deficit of $467.4 million. Due to the current economic
climate and associated uncertainty within the telecommunications industry as
well as the decline in demand for our products, we are currently unable to
provide meaningful forecasts beyond the fourth quarter of 2001. We have
experienced reduced order volumes, and expect to continue to experience at a
diminishing rate, order cancellations and extensions of product shipment dates
by our customers who continue to adjust their inventory levels in response to
the current economic climate. These reduced order rates, cancellations and
extensions have, and will continue to have, an adverse impact on our revenues and have resulted in
higher inventory levels than required to support our sales forecast. As a
result, we have recorded charges of $36.4 million for inventory write-downs and
other related charges in the first nine months of 2001. We expect the difficult
industry conditions to continue throughout 2001 and 2002. These conditions may
significantly delay, and could prevent, our ability to operate profitably. Our
planned reduction in spending is subject to risks and uncertainties, including
the difficulty of achieving anticipated cost reductions due to unforeseen
expenses we may incur in future quarters and an inability to reduce expenses
without further jeopardizing product development schedules. Consequently, our
efforts to reduce our expense structure and minimize the use of our cash may
not be successful. As a result of the foregoing, we may not be able to
generate sufficient revenues and adequately contain costs and operating
expenses necessary to achieve profitability. Even if we achieve profitability,
given the competition in, and the evolving nature of, the optical networking
market, we may not be able to sustain or increase profitability on a quarterly
or annual basis.

LOW ORDER VOLUMES AND LIMITED ORDER BACKLOG HAVE ADVERSELY IMPACTED OUR
OPERATING RESULTS.

Our sales are generally made pursuant to purchase orders that are subject
to cancellation, modification or rescheduling without significant penalties.
None of our current customers have any minimum purchase obligations, and they
may stop placing orders with us at any time, regardless of any forecast they
may have previously provided. Low order volumes and limited order backlog have
We had an adverse impact on our revenues. If our customers stop placing orders,
or further reduce orders, our net revenues would be lower than the levels
currently expected, which would further adversely impact our operating results.

WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF THESE CUSTOMERS OR A
SIGNIFICANT REDUCTION IN SALES TO THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE
OUR REVENUES.





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In the three months ended September 30, 2001, Agilent Technologies and
Alcatel each accounted for 12.4% of our net revenues. In the fiscal year ended
December 31, 2000, Corvis Corporation, Agilent Technologies, and Corning
Incorporated accounted for 17.6%, 14.4%, and 10.6% of our net revenues,
respectively. In the nine-month period ended December 31, 1999, none of our
customers accounted for more than 10% of our net revenues. We anticipate that
our operating results will continue to depend on sales to a relatively small
number of customers. Our customers have reduced their order volumes and we have
a limited amount of order backlog. The loss of any of these key customers or
further reductions in sales to these key customers could further materially
adversely affect our revenues.

IF WE DO NOT ACCURATELY FORECAST DEMAND FOR OUR PRODUCTS, OUR NET REVENUES AND
RESULTS OF OPERATIONS MAY FLUCTUATE AND MAY RESULT IN VOLATILITY OR DECLINES IN
OUR STOCK PRICE.

The demand for our products depends on many factors and is difficult to
forecast, in part due to weaknesses and uncertainties regarding overall demand
for our products and general economic uncertainties, our customers inventory
levels, sudden order reductions and cancellations by customers, lower backlog
of customer orders, and potential pricing pressures that may arise from
supply-demand conditions within the industry. We have in the past been, and may
in the future be, unable to accurately forecast our revenues, and therefore our
future operating expenses. Many of our expenses are fixed in the short term,
and the steps we have taken to reduce spending may not be adequate if our
revenue is lower than we project. Major new product introductions will also
result in increased operating expenses in advance of generating revenues, if
any. Therefore, net losses in a given quarter could be greater than expected.
Failure to accurately forecast our revenues and future operating expenses could
cause quarterly fluctuations in our net revenues and may result in volatility
or a decline in our stock price.

Risks Related to the Optical Networking Industry

IF THE BANDWIDTH REQUIREMENTS DO NOT EXPAND AND OPTICAL NETWORKS ARE NOT
DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS, SALES OF OUR PRODUCTS
MAY DECLINE, AND OUR NET REVENUES MAY BE ADVERSELY AFFECTED.

We continue to derive over 60% of our revenue from our telecom products.
Our financial performance in this product segment depends on the continued
growth of the Internet as a widely-used medium for commerce and communications,
the continuing increase in the amount of data transmitted over communications
networks, or bandwidth, and the growth and upgrading of optical networks to
meet the increased demand for bandwidth. If the bandwidth requirements do not
expand and upgrading of optical networks does not continue, sales of our
fiber-optic products may decline further, which would adversely affect our total net
revenues.

THE OPTICAL NETWORKING MARKET IS NEW AND UNPREDICTABLE AND CHARACTERIZED BY
RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS, AND IF THIS MARKET DOES NOT
DEVELOP AND EXPAND, DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH WOULD ADVERSELY
IMPACT OUR REVENUES.

The optical networking market is new and characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. Because this market is new, it is difficult to
predict its potential size or future growth rate. During 1999-2000 expectations
for growth in bandwith requirements were overly optimistic and resulted in
significant overordering by carriers and systems providers. This overordering
has created significant excess inventories within the telecommunications
industry. The excess inventory has reduced visibility for component and
equipment suppliers as to the real demand for product within the industry. If
we cannot accurately forecast the demand for optical networking products, our
product development efforts may not
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be timed to our customers requirements and
our availability of existing products may not be matched to our customers
needs, either of which would adversely impact our results of operations.

Widespread adoption of optical networks is critical to our future success.
Potential end-user customers who have invested substantial resources in their
existing copper lines or other systems may be reluctant or slow to adopt a new
approach, like optical networks. Our success in generating revenues in this
emerging market will depend on, among other things:



| |  |  | maintaining and enhancing our relationships with our customers;                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | the education of potential end-user customers and network service providers about the
benefits of optical networks; and
|
| |  |  | our ability to accurately predict and develop our products to meet industry standards.                                 

If we fail to address changing market conditions, the sales of our
products may decline, which would adversely impact our revenues.

Risks Related to Our Business

OUR CURRENT NET REVENUES DO NOT SUPPORT THE COMPLEXITY OF OUR BUSINESS
INFRASTRUCTURE. OUR RESULTS OF OPERATIONS WILL CONTINUE TO BE ADVERSELY
AFFECTED IF WE ARE UNABLE TO SUCCESSFULLY RESTRUCTURE OUR OPERATIONS.

Our two business segments sell telecom products and photonic tools
products. We have distinct product lines within these segments that require
significant development resources and we manufacture our products in multiple
production facilities, including a large offshore plant in Shenzhen, China.
The complexity of our multiple product lines necessitates a business
infrastructure requiring substantially higher revenue levels than we are
currently achieving. As a result of the slowdown in the economy and excess
inventory at our customers, our order rates have declined and we have a limited
amount of order backlog. We are currently reviewing the products and services
we sell to customers, the locations in which we operate and the manner in which we go to market with our core product and
service offerings. Ultimately, we may decide to eliminate certain product or
service offerings through termination, sale or other disposition or to sustain
certain products and services at a minimum level where customer commitments
prevent us from eliminating the offering altogether. Any decision to eliminate
or limit our offering of a product or service could involve the expenditure of
capital, the realization of losses, a reduction in workforce, facility
consolidation, and/or the elimination of revenues along with the associated
costs, any of which could harm our financial condition and operating results.

IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET REDUCTIONS IN SALES VOLUMES AND THE AVERAGE SELLING
PRICES OF OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.

We have experienced decreases in sales volumes and the average selling
prices of our products, particularly our passive component products. We
anticipate that as products in the optical component and module market become
more commoditized, the average selling prices of our products will continue to
decrease in response to competitive pricing pressures, new product
introductions by us or our competitors or other factors. The optical component
and module market is experiencing extreme volatility as a result of lower
product demand, which will make our efforts to increase our sales volume
difficult. In addition, we are not currently experiencing manufacturing
efficiencies, as our facilities are largely underutilized. If we
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are unable to
offset the decrease in our average selling prices by increasing our sales
volumes or improving product mix, our net revenues and gross margins will
decline. In addition, to maintain or improve our gross margins, we must
increase our facility utilization and continue to reduce the manufacturing cost
of our products, and we must develop and introduce new products and product
enhancements with higher margins. If we cannot improve our gross margins, our
financial position may be harmed and our stock price may decline.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND SUCCESSFULLY INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS IN A TIMELY
MANNER.

Our future success depends on our ability to anticipate our customers
needs and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively transfer
production processes from research and development to manufacturing and
coordinate our efforts with the efforts of our suppliers to rapidly achieve
volume production. Even if we succeed in these efforts, our product development
may be delayed as a result of slowing customer demand. If we fail to
effectively transfer production processes, develop product enhancements or
introduce new products that meet the needs of our customers as scheduled, our
net revenues may decline. In addition, we have reduced, and expect to further
reduce, our research and development spending as part of our restructuring
measures, which may harm our ability to develop and new and enhanced products.
If we fail to introduce new products or develop enhanced products to meet
customer needs, our revenues will decline and our results of operations will be
harmed.

WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT
US FROM SUCCESSFULLY CONTINUING THE INTEGRATION OF ANY BUSINESSES WE HAVE
ACQUIRED.

Acquisitions involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of businesses
that we have acquired into our business has been and will continue to be a
complex, time consuming and expensive process. We must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices to be successful.
The financial performances of our acquisitions of JCA and Globe Y have been
substantially below projections made prior to these acquisitions and, as a
result, we have recorded significant impairment charges (see Note 10 of the
Notes to Consolidated Financial Statements  (Unaudited). We cannot guarantee
that in the long-term these acquisitions will result in sufficient revenues or earnings to justify our investment in, or expenses
related to, these acquisitions or that any synergies will develop. If we are
not successful in integrating acquired businesses or if expected earnings or
synergies do not materialize, we could be forced to attempt to resell or cease
operations of acquired businesses. In either event, we would likely incur
significant expenses as well as non-cash charges to write-off acquired assets,
which could seriously harm our financial condition and operating results.

ANY FUTURE ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR
FINANCIAL CONDITION.

As part of our business strategy, we may make strategic acquisitions of
complementary companies, products or technologies. In the event of any further
future acquisitions, we could:



| |  |  | issue stock that would dilute our current stockholders percentage ownership;
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | incur debt;                                                                  





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| |  |  | assume liabilities; or                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | incur expenses related to in-process research and development, amortization of goodwill
and other intangible assets.



| |  |  | These acquisitions also involve numerous risks, including:
| |  |  | ----------------------------------------------------------



| |  |  | problems combining the acquired operations, technologies or products;                      
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | unanticipated costs or liabilities;                                                        
|
| |  |  | diversion of managements attention from our core business;                                
|
| |  |  | adverse effects on existing business relationships with suppliers and customers;           
|
| |  |  | risks associated with entering markets in which we have no or limited prior experience; and
|
| |  |  | potential loss of key employees, particularly those of the acquired organizations.         

We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.

COMPETITION MAY INCREASE, WHICH COULD REDUCE OUR SALES AND GROSS MARGINS, OR
CAUSE US TO LOSE MARKET SHARE.

Competition in the optical component and module market in which we compete
is intense. We face competition from other large public companies, including
JDS Uniphase Corporation, Lucent Technologies and Nortel Networks Corporation,
many of which have longer operating histories and significantly greater
financial, technical, marketing and other resources than we have. As a result,
these competitors are able to devote greater resources than we can to the
development, promotion, sale and support of their products. In addition, the
market capitalization and cash reserves of several of our competitors are much
larger than ours, and, as a result, these competitors are much better
positioned than we are to acquire other companies in order to gain new
technologies or products that may displace our product lines. For example, JDS
Uniphase Corporation acquired E-Tek Dynamics in June 2000 and acquired SDL,
Inc. in February 2001. Such acquisitions could give our competitors a strategic
advantage. For example, if our competitors acquire any of our significant
customers, these customers may reduce the amount of products they purchase from
us. Alternatively, some of our competitors may spin-out new companies in the
optical component and module market. For example, Lucent Technologies has plans
to spin-off its microelectronics business, including Lucents optoelectronics
components and integrated circuits division, now known as Agere Systems, Inc.
These companies may compete more aggressively than their former parent
companies due to their greater dependence on our markets. In addition, many of
our potential competitors have significantly more established sales and
customer support organizations, much greater name recognition, more extensive
customer bases, more developed distribution channels and broader product
offerings than we have. These companies can leverage their customer bases and
broader product offerings and adopt aggressive pricing policies to gain market
share. Additional competitors may enter the market, and we are likely to
compete with new companies in the future. We expect to encounter potential
customers that, due to existing relationships with our competitors, are
committed to the products offered by these competitors. As a result of the
foregoing factors, we expect that competitive pressures may result in price
reductions, reduced margins and loss of market share.





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OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS
THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD
DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.

Some of our products are designed to be deployed in large and complex
optical networks. Because of the nature of these products, they can only be
fully tested for reliability when deployed in networks for long periods of
time. Our fiber-optic products may contain undetected defects when first
introduced or as new versions are released, and our customers may discover
defects in our products only after they have been fully deployed and operated
under peak stress conditions. We have experienced some field failures with our
telecom products, which has resulted in increased product returns,
requiring higher sales return allowances and adversely affecting our
net revenues. In
addition, our products are combined with products from other vendors. As a
result, should problems occur, it may be difficult to identify the source of
the problem. If we are unable to fix defects or other problems, we could
experience, among other things:



| |  |  | loss of customers;                                            
| | - |  | --------------------------------------------------------------
|
| |  |  | damage to our brand reputation;                               
|
| |  |  | failure to attract new customers or achieve market acceptance;
|
| |  |  | diversion of development and engineering resources; and       
|
| |  |  | legal actions by our customers.                               

The occurrence of any one or more of the foregoing factors could cause our
net revenues to decline.

THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUE AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CONTINUE TO CAUSE VOLATILITY IN
OUR STOCK PRICE.

The timing of our revenue is difficult to predict because of the economic
downturn and problems in our industry. In addition, length and variability of
the sales and implementation cycles for our products may impact timing of our
revenues. We do not recognize revenue until a product has been shipped to a
customer, all significant vendor obligations have been performed and collection
is considered probable. Customers often view the purchase of our products as a
significant and strategic decision. As a result, customers typically expend
significant effort in evaluating, testing and qualifying our products and our
manufacturing process. This customer evaluation and qualification process
frequently results in a lengthy initial sales cycle of up to one year or more.
In addition, some of our customers require that our products be subjected to
Telcordia qualification testing, which can take up to nine months or more.
While our customers are evaluating our products and before they place an order
with us, we may incur substantial costs and expenses to customize our products
to the customers needs. We may also expend significant management efforts,
increase manufacturing capacity and order long lead-time components or
materials prior to receiving an order. Even after this evaluation process, a
potential customer may not purchase our products. Because of the evolving
nature of the optical component and module market, we cannot predict the length
of these sales and development cycles. In addition, the timing of our revenue
has been affected by the slowdown in the U.S. economy, particularly in the
telecommunications industry, which has resulted in order cancellations and
extensions of product shipment dates by our customers. Our customers have
reduced their order volumes and our backlog has been sharply reduced. The long
sales cycles, coupled with the uncertain affects of the slowdown in the U.S.
economy, has caused and may continue to cause our
revenues and operating results to vary significantly and unexpectedly from
quarter to quarter, which could continue to cause volatility in our stock
price.





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WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE TURNOVER OF SENIOR
MANAGEMENT AND KEY PERSONNEL, WHICH COULD HARM OUR BUSINESS AND OPERATIONS.

In October 2001, we announced the appointment of R. Clark Harris, our Chairman of
the Board of Directors, as our new President and Chief Executive Officer
following the resignation of Kenneth Westrick from his position as President
and Chief Executive Officer. Our management team has not worked together for a
significant length of time and may not be able to work together effectively to
successfully implement our strategy. If the management team is unable to
accomplish our business objectives, our ability to grow our business could be
severely impaired.

WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING PERSONNEL, OUR ABILITY
TO DEVELOP AND SELL OUR PRODUCTS COULD BE HARMED.

Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel Our officers and key employees are not bound by employment agreements
for any specific term and these individuals may terminate their employment at
any time. In addition, we do not have key person life insurance policies
covering any of our employees.

We had approximately 1,100 employees at the end of the third quarter of 2001,
down from a peak of 2,100 in the first quarter of 2001. In October 2001, we
instituted a restructuring plan that includes further reductions in our
worldwide workforce. Under this plan, we expect to reduce our worldwide
workforce by an additional 35% by the end of 2002. Our ability to continue to
retain highly skilled personnel in light of these reductions in force and other
factors will be a critical factor in determining whether we will be successful.
Despite the economic downturn, competition for highly skilled personnel
continues to be intense. We may not be successful in retaining qualified
personnel to fulfill our current or future needs, which could adversely impact
our ability to develop and sell our products.

IF WE FAIL TO BALANCE OUR MANUFACTURING CAPACITY WITH THE DEMAND FOR OUR
PRODUCTS, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

We face a challenge in accurately balancing our manufacturing capacity
with the demand for our products. Throughout 2000 we aggressively expanded our
manufacturing capacity in both the U.S. and China, through the expansion of
facilities and the hiring of employees. As a result of the lower order volumes
by our customers, we have slowed the rate of production in our U.S. and China
factories.

In the first half of 2001, we closed our older Santa Clara facility and
transferred passive product development activities to our newer, larger
facility in San Jose. In China, we closed our smaller production facility in
Shenzhen and consolidated activities into our larger Shenzhen factory. We
intend to transfer more of our production to our facility in Shenzhen and
consolidate our U.S. manufacturing facilities in the next year, but these
efforts may not be sufficient enough, or occur quickly enough, to avoid
significant cash expenditures. The potential disruption caused by any future
consolidation of our U.S. manufacturing facilities could adversely impact our
results of operations.

Currently we operate facilities in San Jose, California, Camarillo,
California, Fremont, California, Middleton, Wisconsin and Shenzhen, China. The
rapid changes in our operations over the past year, combined with the
challenges of managing geographically-dispersed operations, have placed, and
will continue to place, a significant strain on our management systems and
resources. The failure to reduce the strain on our management systems and
resources could adversely impact our ability to manufacture and sell our
products, which could adversely impact our business or results of operations.





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WE MAY IN THE FUTURE, AND WE HAVE IN THE PAST BECOME INVOLVED IN COSTLY AND
TIME-CONSUMING LITIGATION THAT MAY SUBSTANTIALLY INCREASE OUR COSTS AND HARM
OUR BUSINESS.

We may from time to time become involved in various lawsuits and legal
proceedings. For example, the Company is a defendant in various putative
securities class actions filed in the United States District Court for the
Northern District of California. In addition, the Company is a defendant in a
patent infringement complaint filed in the United States District Court for the
District of Delaware. In response to this suit, we filed counterclaims,
including the assertion that the other party infringes two of our U.S. patents,
and are seeking damages and an injunction in connection with our counterclaims.
Litigation is subject to inherent uncertainties, and an adverse result in
these or other matters that may arise from time to time could have a material
adverse effect on the business, results of operations or financial condition of
the Company.

Any litigation to which we are subject could require significant
involvement of our senior management and may divert managements attention from
our business and operations. For more information about current legal
proceedings, see Part II  Other Information, Item 1  Legal Proceedings.

WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

For the nine months ended September 30, 2001, 37.6% of our net revenues
were from international sales, and for the fiscal year ended December 31, 2000,
30.7% of our net revenues were from international sales. Our international sales will be limited if
we cannot establish relationships with international distributors, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Additionally, our
international sales may be adversely affected if international economies
weaken. Even if we are able to successfully continue international operations,
we may not be able to maintain or increase international market demand for our
products. Our international operations are subject to risks including the
following:



| |  |  | greater difficulty in accounts receivable collection and longer collection periods;                          
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties and costs of staffing and managing foreign operations;                                          
|
| |  |  | the impact of recessions in economies outside the United States;                                             
|
| |  |  | unexpected changes in regulatory requirements;                                                               
|
| |  |  | sudden and unexpected reductions in demand in particular countries in response to
exchange rate fluctuations;
|
| |  |  | certification requirements;                                                                                  
|
| |  |  | reduced protection for intellectual property rights in some countries;                                       
|
| |  |  | potentially adverse tax consequences; and                                                                    
|
| |  |  | political and economic instability.                                                                          





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

ELECTRICAL BLACKOUTS AND OTHER BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT
OUR BUSINESS.

Our operations are vulnerable to interruption by fire, earthquake, power
loss, telecommunications failure and other events beyond our control. We do not
have a detailed disaster recovery plan and carry only a limited amount of
business interruption insurance to compensate us for losses that may occur. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power in the
state. Most of these
facilities currently do not have backup generators or alternate sources of
power in the event of a blackout. To date, we have not experienced any electrical blackouts. If blackouts interrupt our power supply, we
would be temporarily unable to continue operations at our affected facilities.
Any losses or damages incurred by us as a result of blackouts or other business
interruptions could impair our reputation, harm our ability to retain existing
customers and to obtain new customers, and could result in lost revenue, any of
which could substantially harm our business and results of operations.

Risks Related to Manufacturing Our Products

DELAYS, DISRUPTIONS OR QUALITY CONTROL PROBLEMS IN OUR MANUFACTURING OPERATIONS
COULD RESULT IN DELAYS IN SHIPMENTS OF PRODUCTS TO CUSTOMERS AND ADVERSELY
AFFECT OUR BUSINESS.

We may experience delays, disruptions or quality control problems in our
manufacturing operations, and, as a result, product shipments to our customers
could be delayed beyond the revised shipment schedules requested by our
customers, which would negatively impact our revenues, competitive position and
reputation. For example, we have, in the past, experienced a disruption in the
manufacture of some of our products due to changes in our manufacturing
processes, which resulted in reduced manufacturing yields and delays in the
shipment of our products. If we experience similar disruptions in the future,
it may result in lower yields or delays of our product shipments, which could
adversely affect our revenues, gross margins and results of operations.

OUR FAILURE TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS COULD
CAUSE US TO INCUR ADDITIONAL COSTS, HAVE EXCESS INVENTORIES OR HAVE
INSUFFICIENT MATERIALS TO BUILD OUR PRODUCTS, ANY OF WHICH COULD HARM OUR
RESULTS OF OPERATIONS.

We use rolling forecasts based on anticipated product orders to determine
our component requirements. It is very important that we predict both the
demand for our products and the lead times required to obtain the necessary
components and materials. Unfortunately, given the current uncertain market
conditions in the telecommunications industry and the economy in general, it is
very difficult to develop accurate forecasts of product demand. Lead times for
components and materials that we order vary significantly and depend on factors
such as specific supplier requirements, the size of the order, contract terms
and current market demand for the components or materials at a given time. If
we overestimate our component and material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
and material requirements, we may have inadequate inventory, which could
interrupt our manufacturing and delay delivery of our products to our
customers. Any of these occurrences would negatively impact our results of
operations. Order cancellations and lower order volumes by our customers have
created excess inventories due to our overestimation of component and material
requirements for our manufacturing facilities. Further, in order to avoid
additional excess material inventories we have incurred cancellation charges
associated with modifying existing purchase orders with our vendors. As a
result of
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these excess inventories and cancellation charges, we recorded
significant charges in the first nine months of 2001, which negatively impacted
our operating results. If we fail to accurately predict both the demand for our
products and the lead times required to obtain the necessary components and
materials in the future, we could incur additional inventory write-downs or
cancellation charges.

IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE DELAYED AND
OUR REVENUES MAY SUFFER.

The manufacture of our products involves complex and precise processes.
Our manufacturing costs are relatively fixed, and, thus, manufacturing yields
are critical to the results of our operations. Changes in our
manufacturing processes or those of our suppliers, or the use of defective
components or materials, could significantly reduce our manufacturing yields
and product reliability. In addition, we may experience manufacturing delays
and reduced manufacturing yields upon introducing new products to our
manufacturing lines. We are planning to transfer more of our production to our
manufacturing facility in Shenzhen, China and such product and process
transfers require precise coordination between our operations in both the U.S.
and China. Without this coordination we may experience manufacturing delays and
reduced manufacturing yields. We have in the past experienced
lower-than-targeted product yields, which have resulted in delays of customer
shipments, lost revenues and impaired gross margins. We may experience
lower-than-targeted product yields in the future which could adversely affect
our operating results.

OUR MANUFACTURING OPERATIONS IN CHINA SUBJECT US TO RISKS INHERENT IN DOING
BUSINESS IN CHINA, WHICH MAY HARM OUR MANUFACTURING CAPACITY AND OUR NET
REVENUES.

Currently, we operate one manufacturing facility located in Shenzhen,
China, and we intend to move more of our production capacity to this facility
over the next year. We recently closed our smaller leased facility as part of
our announced restructuring plan, and consolidated its operations into our
larger, owned facility. Our ability to operate in China may be adversely
affected by changes in the laws and regulations of the Peoples Republic of
China, such as those relating to taxation, import and export tariffs,
environmental regulations, land use rights, property and other matters. Our
facility is located on land leased from Chinas government by the Shenzhen
Libaoyi Industry Development Co., Ltd. pursuant to land use certificates and
agreements with terms of 50 years. Our assets and facilities located in China
are subject to the laws and regulations of China and our results of operations
in China are subject to the economic and political situation there.

We believe that our operation in Shenzhen, China is in compliance with
Chinas applicable legal and regulatory requirements. However, there can be no
assurance that Chinas central or local governments will not impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures. Chinas economy differs from the economies of
many countries in such respects as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position, among others.
In the past, Chinas economy has been primarily a planned economy subject to
state plans. Since 1978, Chinas government has been reforming its economic and
political systems. Reforms of this kind have resulted in significant economic
growth and social change. We cannot assure you that Chinas policies for
economic reforms will be consistent or effective. Our results of operations and
financial position may be harmed by changes in the political, economic or
social conditions in China and the U.S.-China political relations in general.

We plan to export substantially all the products manufactured at our
facility in China. Accordingly, upon application to and approval by the
relevant government authorities, we will not be subject to certain of Chinas
taxes and are exempt from customs duties on imported components or materials
and exported products. We are required to pay income tax in China, subject to
certain tax holidays. We may become subject to other taxes in China or may be
required to pay customs duties in the future. In the event that we





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are required
to pay other taxes in China or customs duties, our results of operations could
be materially and adversely affected.

To successfully meet our overall production goals, we will have to
coordinate and manage effectively between our facilities in the United States
and in China. We have limited experience in coordinating and managing
production facilities that are located on different continents or in the
transfer of manufacturing operations from one facility to another. Our failure
to successfully coordinate and manage multiple sites on different continents or
to transfer our manufacturing operations could seriously harm overall
production.

IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.

Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well
as each new manufacturing line, must pass through varying levels of
qualification with our customers. Additionally, most of our telecom
products require Telcordia qualifications testing. Customers may also require
that we be registered under international quality standards, such as ISO 9001.
This customer qualification process determines whether our manufacturing lines
meet the customers quality, performance and reliability standards. If there
are delays in qualification of our products, our customers may drop the product
from a long-term supply program, which would result in significant lost revenue
opportunity over the term of that program.

WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES
OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

We currently purchase several key components and materials used in the
manufacture of our products from single or limited source supplier. We may fail
to obtain required components in a timely manner in the future, or could
experience further delays from evaluating and testing the products of these
potential alternative suppliers. The recent softening of demand in the
telecommunications industry could adversely impact the financial condition of
our suppliers, many of whom have limited financial resources. We have in the
past, and may in the future, be required to provide advance payments in order
to secure key components or materials from financially limited suppliers.
Financial or other difficulties faced by these suppliers could limit the
availability of key components or materials. Additionally, financial
difficulties could impair our ability to recover advances made to these
suppliers. Any interruption or delay in the supply of any of these components
or materials, or the inability to obtain these components and materials from
alternate sources at acceptable prices and within a reasonable amount of time,
would impair our ability to meet scheduled product deliveries to our customers
and could cause customers to cancel orders.

Risks Related to Our Intellectual Property

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD SERIOUSLY
HARM OUR ABILITY TO USE OUR PROPRIETARY TECHNOLOGY TO GENERATE REVENUE.

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We cannot assure you that our patent applications will be approved,
that any patents that may issue will protect our intellectual property or that
third parties will not challenge any issued patents. Other parties may
independently develop similar or competing technology or design around any
patents that may be issued to us. Our contract with Agilent provides Agilent
the right to manufacture our products using our proprietary intellectual
property upon the occurrence of certain events specified in the agreements. The
contract contains a confidentiality provision designed to prevent
misappropriation of our intellectual property. However, we cannot be certain
that the steps we have taken





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will prevent the misappropriation of our
intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States.

WE ARE CURRENTLY DEFENDING A CLAIM THAT WE HAVE INFRINGED THE INTELLECTUAL
PROPERTY RIGHTS OF PHOTONETICS, INC. AND PHOTONETICS S.A., AND IF WE ARE
UNSUCCESSFUL IN DEFENDING THIS CLAIM OR FUTURE INTELLECTUAL PROPERTY CLAIMS, WE
MAY HAVE TO EXPEND A SUBSTANTIAL AMOUNT OF RESOURCES TO MAKE OUR PRODUCTS
NON-INFRINGING AND MAY HAVE TO PAY A SUBSTANTIAL AMOUNT IN DAMAGES.

On July 20, 2001, Photonetics, Inc. and Photonetics, S.A. filed a
complaint against the Company for patent infringement in the United States
District for the District of Delaware. Photonetics, Inc. and Photonetics, S.A.
claim that the Company infringes U.S. Patent No. 5,594,744 and seek preliminary
and injunctive relief and damages. Photonectics, Inc. and Photonetics, S.A.
allege that the Companys infringement is willful and seek enhanced damages and
attorneys fees. The Company filed its answer and counterclaims on September 10, 2001. In the answer,
the Company denied infringement of U.S. Patent No. 5,594,744 and asserted that
the patent was invalid and unenforceable. In a declaratory judgment
counterclaim, the Company claimed that U.S. Patent No. 5,594,744 is invalid,
unenforceable and not infringed. The Company also counterclaimed for patent
infringement of U.S. Patent Nos. 5,995,521 and 5,319,668 and seeks preliminary
and injunctive relief and damages. Additionally, the Company claims that
Photonetics, Inc. and Photonetics, S.A.s infringement of the patents is
willful and seeks enhanced damages and attorneys fees. On October 9, 2001,
Photonetics, Inc. and Photonetics, S.A. filed its reply to the Companys
counterclaims. Photonetics, Inc. and Photonetics, S.A. denied infringement of
U.S. Patent Nos. 5,995,521 and 5,319,668 and alleged that the patents were
invalid. Trial is scheduled for August 4, 2003.

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



| |  |  | stop selling, incorporating or using our products that use the disputed intellectual property;                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain from third parties a license to sell or use the disputed technology, which license may
not be available on reasonable terms, or at all; or
|
| |  |  | redesign our products that use the disputed intellectual property.                                                                               

IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE
MAY BE UNABLE TO COMPETE EFFECTIVELY.





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We regard substantial elements of our technology 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.
The 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 may be necessary to litigate to enforce our patents, copyrights, and
other intellectual property rights, to protect our trade secrets, to determine
the validity of and scope of the proprietary rights of others or to defend
against claims of infringement or invalidity. Such litigation can be time
consuming, distracting to management, expensive and difficult to predict. Our
failure to protect or enforce our intellectual property could have an adverse
effect on our business, financial condition, prospects and results of
operation.

For more information about current legal proceedings, see Part II  Other
Information, Item 1  Legal Proceedings.

NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS AND HARM OUR RESULTS OF OPERATIONS.

From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on
commercially reasonable terms, or at all. The inability to obtain any
third-party license required to develop new products and product enhancements
could require us to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
our ability to manufacture and sell our products. We are currently defending a
claim by Photonetics, and if we are unsuccessful in defending this claim, we
may have to expend a substantial amount of resources to make our products
non-infringing, which will harm our results of operations.

Risks Related to Our Corporate Governance

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF THIS WOULD BE
BENEFICIAL TO STOCKHOLDERS.

Provisions of our amended and restated certificate of incorporation,
bylaws, Delaware law and other corporate governance documents could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions include:



| |  |  | a Preferred Rights Agreement that grants existing stockholders additional rights in the event
a single holder acquired greater than 15% of our shares;                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a classified board of directors, in which our board is divided into three classes with
three-year terms with only one class elected at each annual meeting of stockholders, which
means that a holder of a majority of our common stock will need two annual meetings of
stockholders to gain control of the board;
|
| |  |  | a provision which prohibits our stockholders from acting by written consent without a meeting;                                                                                                                                                                                                                     
|
| |  |  | a provision which permits only the board of directors, the president or the chairman to call
special meetings of stockholders; and                                                                                                                                                                                 





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

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

Recent Accounting Pronouncements:

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the Board issued FAS 137, Accounting for
Derivative Instruments and Hedging Activities  Deferral of the Effective Date
of FASB Statement No. 133, which deferred the effective date of FAS 133 until
fiscal years beginning after June 15, 2000. The adoption of FAS 133 did not
have a significant impact on the Companys operating results or cash flows.

In July 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. These standards become
effective for fiscal
years beginning after December 15, 2001. Beginning in 2002, goodwill will no
longer be amortized, but will be subject to annual impairment tests. All other
intangible assets will continue to be amortized over their estimated useful
lives. Based on acquisitions completed as of June 30, 2001, application of the
non-amortization provisions of these rules is expected to result in a decrease
in the net loss of approximately $7.5 million per year starting with fiscal
year 2002.

The new rules also require business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and provide
that goodwill acquired after June 30, 2001 will not be amortized. Goodwill of
$24.5 million at September 30, 2001 will continue to be amortized through the
end of fiscal 2001. Beginning in 2002, the Company will test goodwill for
impairment under the new rules, applying a fair-value-based test.

In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which is effective for fiscal periods
beginning after December 15, 2001 and supersedes Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. FAS 144 provides a single
model for accounting and reporting the impairment and disposal of long-lived
assets. The statement also sets new criteria for the classification of assets
held-for-sale and changes the reporting of discontinued operations. The
Company will assess the impact of FAS 144 on its financial statements upon
adoption in fiscal 2002.




PART II. OTHER INFORMATION




ITEM 1. Legal Proceedings

On March 10, 2000, a former employee filed a lawsuit against the Company
in Santa Clara Superior Court alleging three causes of action for wrongful
termination in violation of public policy, breach of the covenant of good faith
and fair dealing and fraud. The claims stem from the termination of his
employment with the Company in February





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2000. The former employee sought
unspecified general and special damages, punitive damages, attorneys fees and
costs in the form of cash and shares of the Companys common stock. The Company
filed a counter-claim in August 2000 alleging fraud, negligent
misrepresentation, breach of contract and breach of the covenant of good faith
and fair dealing. In June 2001, the parties agreed to settle the case. A
confidential Settlement Agreement has been executed by both parties, and the
lawsuit has been dismissed with prejudice. The settlement did not have a
material impact on the Companys results of operations.

On March 12, 2001, a putative securities class action, captioned Mandel v.
New Focus, Inc., et. al.,Civil Action No. C-01-1020, was filed against New
Focus and several of its officers and directors in the United States District
Court for the Northern District of California. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks
unspecified damages on behalf of a purported class that purchased New Focus
common stock between January 31, 2001 and March 5, 2001. Substantially similar
actions, captioned Rosen v. New Focus, Inc., et. al.,Civil Action No.
C-01-1065; Solomon v. New Focus, Inc., et. al.,Civil Action No. C-01-2023;
Deutch v. New Focus, Inc., et. al.,Civil Action No. C-01-1123; Connors v. New
Focus, Inc., et. al.,Civil Action No. C-01-1148; Spanos v. New Focus, Inc.,
et. al., Civil Action No. C-01-1328; Patton v. New Focus, Inc., et. al.,Civil
Action No. C-01-1413, and Naiditch v. New Focus, Inc., et. al.,Civil Action
No. C-01-1689 have also been filed against New Focus and several of its
officers and directors in the United States District Court for the Northern
District of California. The Naiditchaction asserts a class period from October
25, 2000 to March 5, 20001. The cases have been consolidated, a lead plaintiff
has been appointed, and the defendants have moved to dismiss the consolidated
complaint. The Company believes it has meritorious defenses to the claims and
intends to contest the lawsuits vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the business, results of
operations or financial condition of the Company.

On April 10, 2001, a shareholder derivative action purportedly on behalf
of the Company, captioned Sherman v. Harris et. al.,Civil Action No. 18797-NC,
was filed in Delaware Chancery Court. The complaint alleges that the Companys
directors breached their fiduciary duties to the Company by engaging in alleged
wrongful conduct including conduct complained of in the securities litigation
described above. The Company is named solely as a nominal defendant against
whom the plaintiff seeks no recovery.

On June 26, 2001 another putative securities class action, captioned
Lanter v. New Focus, Inc. et al.,01-CV-5822, was filed against the firms that
underwrote New Focus initial public offering, New Focus and several of its
officers and directors in the United States District Court for the Southern
District of New York. The complaint alleges violations of Sections 11 and 15 of
the Securities Exchange Act of 1933 and Section 20(a) of the Securities
Exchange Act of 1934 against the Company, and seeks unspecified damages on
behalf of a purported class that purchased New Focus common stock between May
18, 2000 and June 11, 2001.





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On June 28, 2001 a similar complaint, captioned Pond Equities v. New
Focus, Inc. et al.,Civil Action No. 01-CV-5925, was filed in the United States
District Court for the Southern District of New York. The complaint is
substantially identical to the Lantercomplaint: it names the same defendants,
contains the virtually identical claims, and seeks unspecified damages on
behalf of a purported class of purchasers of common stock during an identical
class period. There have been subsequent lawsuits filed containing allegations
substantially identical to those in the Lanterand Pond Equitiescomplaints.
The cases are in the process of being consolidated. Similar actions asserting
virtually identical allegations have been filed against at least 130 other
companies. The Company believes that it has meritorious defenses to these
actions and intends to defend them vigorously. An unfavorable resolution of the
actions could have a material adverse effect on the business, results of
operations or financial condition of the Company.

On July 20, 2001, Photonetics, Inc. and Photonetics, S.A. filed a
complaint against the Company for patent infringement in the United States
District for the District of Delaware. Photonetics, Inc. and Photonetics, S.A.
claim that the Company infringes U.S. Patent No. 5,594,744 and seek preliminary
and injunctive relief and damages. Photonectics, Inc. and Photonetics, S.A.
allege that the Companys infringement is willful and seek enhanced damages and
attorneys fees. The Company filed its answer and counterclaims on September
10, 2001. In the answer, the Company denied infringement of U.S. Patent No.
5,594,744 and asserted that the patent was invalid and unenforceable. In a
declaratory judgment counterclaim, the Company claimed that U.S. Patent No.
5,594,744 is invalid, unenforceable and not infringed. The Company also
counterclaimed for patent infringement of U.S. Patent Nos. 5,995,521 and
5,319,668 and seeks preliminary and injunctive relief and damages.
Additionally, the Company claims that Photonetics, Inc. and Photonetics, S.A.s
infringement of the patents is willful and seeks
enhanced damages and attorneys fees. On October 9, 2001, Photonetics,
Inc. and Photonetics, S.A. filed its reply to the Companys counterclaims.
Photonetics, Inc. and Photonetics, S.A. denied infringement of U.S. Patent Nos.
5,995,521 and 5,319,668 and alleged that the patents were invalid. Trial is
scheduled for August 4, 2003.

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




ITEM 2. Changes in Securities and Use of Proceeds

On July 26, 2001, the Companys Board of Directors adopted a Shareholder
Rights Plan under which the Company declared a dividend of one Right for each
share of Common Stock outstanding. Prior to the Distribution Date referred to
below, the Rights will be evidenced by and trade with the certificates for the
Common Stock. After the Distribution Date, the Company will mail Rights
certificates to the stockholders and the Rights will become transferable apart
from the Common Stock. Rights will separate from the Common Stock and become
exercisable following (a) the tenth business day (or such later date as may be
determined by a majority of the Directors) after a person or group





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acquires
beneficial ownership of 15% or more of the Companys Common Stock or (b) the
tenth business day (or such later date as may be determined by a majority of
the Directors) after a person or group announces a tender or exchange offer,
the consummation of which would result in ownership by a person or group of 15%
or more of the Companys Common Stock. After the Distribution Date, each Right
will entitle the holder to purchase for $40.00 a fraction of a share of the
Companys Preferred Stock with economic terms similar to that of one share of
the Companys Common Stock.




ITEM 3. Defaults Upon Senior Securities  Not Applicable.




ITEM 4. Submission of Matters to a Vote of Security Holders  Not Applicable.




ITEM 5. Other Information

John Dexheimer, a member of the Companys Board of Directors and Dr.
Milton Chang, a former member of the Companys Board of Directors and a major
shareholder of the Company, have adopted plans under Rule 10b5-1 of the
Securities Exchange Act of 1934, as amended, for trading in shares of the
Companys common stock. No shares were sold under these plans during the
Companys third quarter. The plans adopted by Mr. Dexheimer, and Dr. Chang
provide for periodic stock sales subject to certain price levels, including a
minimum price floor below which trades will not be executed. In the case of Mr.
Dexheimer and Dr. Chang, the designated minimum price floors are significantly
higher than the Companys current stock price. Additional members of the Board
of Directors and Executive Officers of the Company may adopt similar trading
plans in the future.




ITEM 6. Exhibits and Reports on Form 8-K



|a)    |  | Exhibits                                                                                                                              
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------
|     
|*10.1 |  | Secured Full Recourse Promissory Note by and
between the Company and Kenneth E. Westrick and
Kirsten V. Westrick, dated July 12, 2001.
|     
|10.2  |  | Loan and Security Agreement by and between the
Company, and Kenneth E. Westrick and Kirsten V.
Westrick dated July 12, 2001.          



---

|* |  | Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
|- |  | ----------------------------------------------------------------------------------------------------



|b) |  | Reports on Form 8-K-
|-- |  | --------------------

Form 8-K filed on August 2, 2001 regarding Board of Directors
approval of the adoption of a Preferred Stock Rights Agreement.





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |                                               |                            
|----------------------- | --------------------------------------------- | ---------------------------
|                        | NEW FOCUS, INC.(Registrant)                  
|                       
|DATE: November 12, 2001 | BY:                                           | /s/   William L. Potts, Jr.
|                        |                                              
|                        | William L. Potts, Jr.
Chief Financial Officer





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Exhibit Index

|        |  |                                                                                                                                       
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                           
|*10.1   |  | Secured Full Recourse Promissory Note by and
between the Company and Kenneth E. Westrick and
Kirsten V. Westrick, dated July 12, 2001.
|10.2    |  | Loan and Security Agreement by and between the
Company, and Kenneth E. Westrick and Kirsten V.
Westrick dated July 12, 2001.          



---

|* |  | Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
|- |  | ----------------------------------------------------------------------------------------------------