ONI SYSTEMS CORP, S-1/A, 2000-05-24

ONI SYSTEMS CORP
S-1/A, 2000-05-24
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>

As filed with the Securities and Exchange Commission on May 24, 2000
Registration No. 333-32104
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------

AMENDMENT NO. 5
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ONI SYSTEMS CORP.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 3661 77046-9657
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification no.)
incorporation or
organization) ---------------
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
HUGH C. MARTIN
President, Chief Executive Officer and Chairman
ONI Systems Corp.
166 Baypointe Parkway
San Jose, California 95134-1621
(408) 965-2600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
HORACE L. NASH, ESQ. JOHN L. SAVVA, ESQ.
RICHARD L. DICKSON, ESQ. HARRY H. DEMAS, ESQ.
DAVID A. BELL, ESQ. Sullivan & Cromwell
STEVEN S. LEVINE, ESQ. 1888 Century Park East
Fenwick & West LLP Suite 2100
Two Palo Alto Square Los Angeles, California 90067-1725
Palo Alto, California 94306 (310) 712-6600
(650) 494-0600
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Amount Proposed Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Share Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.0001
par value.............. 9,200,000 $23.00 $211,600,000 $55,863
</TABLE>
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- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.

(2) Fees of $30,360, $8,501 and $17,002 were paid on March 10, 2000, April 26,
2000 and May 18, 2000, respectively.

---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion. Dated May 24, 2000.

[LOGO OF ONI SYSTEMS]

8,000,000 Shares

ONI Systems Corp.

Common Stock

-----------

This is an initial public offering of shares of common stock of ONI Systems
Corp.

Prior to this offering, there has been no public market for our common stock.
ONI Systems estimates that the initial public offering price per share will be
between $21.00 and $23.00. Our common stock has been approved for quotation on
the Nasdaq National Market under the symbol "ONIS".

See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of our common stock.

-----------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

-----------

<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Initial public offering price....................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to ONI Systems........................... $ $
</TABLE>

To the extent that the underwriters sell more than 8,000,000 shares, the
underwriters have the option to purchase up to an additional 1,200,000 shares
from ONI Systems at the initial public offering price, less the underwriting
discount.

-----------

The underwriters expect to deliver the shares in New York, New York on ,
2000.

Goldman, Sachs & Co.
Banc of America Securities LLC
Chase H&Q
Robertson Stephens

-----------

Prospectus dated , 2000.
<PAGE>

[INSIDE FRONT COVER ARTWORK]

At the top of the diagram the ONI Systems logo and the words "All-optical
networking equipment for metropolitan and regional service providers" appear.

Upper Half--An oval placed in the center of the diagram with figures inside
the oval.

Interior of the Oval--The oval is divided into three portions:

The right-hand portion of the oval is a schematic symbol used to represent
an optical cross- connect linking the metro network to the long haul network.
The words "To Long-haul Networks" appear below the schematic.

The center portion of the oval contains a multi-color ellipse or "ring"
with four ONLINE9000 boxes or "nodes" at approximately 12 o'clock, 3 o'clock,
6 o'clock and 9 o'clock on the ring The left-most node of the ring is shared
as the right-most node of the ring contained in the left portion of the oval.
The ring represents a ring-based fiber optic network. The words "Metro Core
Optical Fiber Ring" appear inside the ring. The ring is connected by two lines
(representing fiber links) to the optical cross-connect schematic in the
right-hand portion of the oval.

The left portion of the oval contains a multi-color ellipse or "ring" with
three ONLINE7000 boxes or "nodes" at approximately 12 o'clock, 6 o'clock and 9
o'clock on the ring, and a ONLINE7000 node at approximately 3 o'clock. The
right-most node of the ring is shared as the left-most node of the ring
contained in the center portion of the oval. The upper-most node of the ring
is connected to a diagram of a building representing the enterprises connected
to the communications network. The building is connected to a diagram of two
computer screens and one telephone representing the end users. The words
"Metro Access Optical Fiber Ring" appear inside the ring. The words "Typical
Metro Communications Network Using ONI Systems Equipment" appear below the
oval.

Lower Right Quadrant--A globe showing the North American continent and
portions of South America, Africa, Europe and Asia with a network of white
lines superimposed. The ovals in the upper half and lower half of the diagram
are each connected to one of the dots in the map-network (approximately in the
vicinity of San Francisco and New York, respectively) with trace lines
indicating that the ovals represent a representative node on the network.

Lower Half--A second smaller oval offset to the left of the diagram with
figures inside the oval.

Interior of the Oval--The oval is divided into the same three portions as
the oval contained in the upper half of the diagram, except that the three
portions of the oval are in reverse order of the three portions in the oval in
the upper half of the diagram and there are no interior labels.

At the bottom of the page is a legend showing the symbols that represent
the ONLINE9000, ONLINE7000, Enterprises, End Users, Long-haul Networks and
Optical Fiber Link.
<PAGE>

PROSPECTUS SUMMARY

You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus.

ONI Systems Corp.

We develop, market and sell communications networking equipment, based
entirely on optical technology, for metropolitan area and regional networks.
Our equipment uses pulses of light rather than electric current in the
transmission and routing of telephone, Internet and other data communications
in these networks. Our customers are communication service providers. Our
products enable them to relieve traffic bottlenecks in their metropolitan and
regional networks and to deliver new data communication services sought by
their subscribers. Our products help our customers to rapidly build high-
capacity metro networks that are flexible, easy to expand and capable of
supporting multiple services for end-users.

Internet usage has increased in terms of both the number of users and the
quantity of information transmitted. In response, communication service
providers have deployed optical technology to increase the transmission
capacity in long-distance networks and in the local area networks used by
enterprises. However, similar improvements have not been made to the metro
networks that bridge the gap between enterprise networks and long-distance
networks. To date, optical products available to metro network service
providers have been based on technologies which were originally designed to
serve long distance or enterprise networks, and are costly, difficult to expand
and difficult to manage in the metro environment.

Our first product, the ONLINE9000(TM), has been generally available since
January 2000. We expect our next product, the ONLINE7000(TM), to be available
by June 2000. These products incorporate our OPTX(TM) network operating system
and our OLMP(TM) inter-network communications protocol to manage and support a
diverse mix of service offerings by our customers.

The benefits of our products include:

. Multi-service capability. Our products allow service providers to
introduce and support a changing mix of services without deploying
dedicated equipment for each service type. Our products are also
compatible with existing services based on the synchronous optical
network standard.

. Manageability and flexibility. Our products enable real time end-to-end
management, surveillance, service activation, network inventory
management and billing within our OPTX network operating system.

. Cost effectiveness and scalability. Our products eliminate costly
optical-to-electrical conversions within a metro network, and the
scalability of our products allows service providers to build metro
networks in a pay-as-you-grow fashion.

. Rapid and efficient service restoration. Our products provide for rapid
restoration of mission critical services without the need to dedicate
network capacity carrying duplicated traffic for this capability.

3
<PAGE>

The following are key elements of our strategy:

. leverage our optical technology to achieve early design wins in metro
networks;

. work closely with service providers to identify and enable new revenue-
generating services for their end-users;

. extend our technology leadership through continued investment in research
and development;

. leverage our optical manufacturing expertise and relationships to reduce
costs and increase flexibility to meet demand;

. expand our direct sales and service and support capabilities worldwide;
and

. establish strategic alliances and pursue acquisitions to broaden our
product, service and technology portfolios.

Since commencing operations in December 1997, our expenses have
significantly exceeded our revenue as we have developed our products and
strategy. Through March 31, 2000, we incurred cumulative losses of $89.8
million. We expect to have large fixed expenses and to incur increasing sales,
research, manufacturing and administrative expenses, and we expect to operate
at a loss for a period of time. We expect to continue to need to raise capital
to fund losses and expansion. Our first product has been generally available
only since January 2000, so the likelihood of success of this and future
products is impossible to predict.

Corporate Information

We were incorporated in California on October 20, 1997 as Optical Networks,
Incorporated. In April 2000, we reincorporated in Delaware and changed our name
to ONI Systems Corp. Our principal executive offices are located at 166
Baypointe Parkway, San Jose, California 95134-1621. Our telephone number is
(408) 965-2600.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common stock offered............. 8,000,000 shares
Common stock to be outstanding
after this offering............. 123,877,066 shares
Use of proceeds.................. For general corporate purposes, including
working capital, capital expenditures and
potential acquisitions of, or investments in,
complementary technologies or businesses. See
"Use of Proceeds".
Proposed Nasdaq National Market
symbol.......................... ONIS
</TABLE>

At the request of ONI Systems, the underwriters are reserving up to 960,000
shares of common stock at the initial public offering price for sale to
individuals and entities designated by ONI Systems.

The number of shares of our common stock to be outstanding immediately after
this offering is based on the number of shares outstanding as of March 31, 2000
assuming the one-to-one conversion of preferred stock outstanding as of March
31, 2000 upon completion of this offering. The number of shares outstanding
after this offering includes:

. 1,101,928 shares of common stock into which the shares of Series H
preferred stock sold to Sun Microsystems, Inc. will automatically convert
upon completion of this offering, based on an assumed public offering
price of $22.00 per share;

. 181,818 shares of common stock issuable to Internet Initiative Japan Inc.
upon the closing of a private placement, concurrent with this offering,
based on an assumed private placement price of $22.00 per share; and

. 454,545 shares of common stock issuable to CCT Telecom Holdings Limited
upon the closing of a private placement, concurrent with this offering,
based on an assumed private placement price of $22.00 per share.

The number of shares to be outstanding excludes, as of March 31, 2000:

. 19,343,345 shares of common stock subject to options outstanding under
our stock incentive plans with a weighted average exercise price of $0.64
per share, and 1,377,819 shares of common stock available for future
grant under these plans; and

. 1,434,394 shares of common stock subject to outstanding warrants with a
weighted average exercise price of $2.72 per share.

In addition, from April 1, 2000 through May 15, 2000, we granted options to
purchase 2,680,000 shares of common stock, with a weighted average exercise
price of $8.02 per share. Of these shares, 1,000,000 shares will be subject to
an option that is outside of the stock plans described in this prospectus. In
connection with options granted from April 1, 2000 through May 15, 2000, we
have recorded a deferred stock compensation expense of approximately $16.2
million. In April 2000, we adopted our 2000 equity incentive plan, under which
7,000,000 shares of common stock will be available for future grant, and our
2000 employee stock purchase plan, under which 1,000,000 shares of common stock
will be available for future grant.

Unless otherwise indicated, all information contained in this prospectus
assumes no exercise of the underwriters' option to purchase additional shares
in this offering and gives effect to the automatic conversion of outstanding
shares of preferred stock into shares of common stock upon the closing of this
offering. The share and per share numbers presented in this prospectus have
been retroactively restated to give effect to all stock splits.

5
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
Period From
October 20, 1997 Year Ended Three Months
(Inception) to December 31, Ended March 31,
December 31, ----------------- -----------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenue................. $ -- $ 1,733 $ 3,034 $ 565 $ 3,633
Gross profit............ -- 525 2,002 140 783
Operating expenses...... 198 9,559 49,195 5,082 35,752
Operating loss.......... (198) (9,034) (47,193) (4,942) (34,969)
Net loss................ (199) (8,852) (46,572) (4,777) (34,167)
Basic and diluted net
loss per share......... (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.41)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257 11,919 18,043 13,542 24,219
Pro forma basic and
diluted net loss per
share.................. $(0.60) $(0.33)
Shares used in computing
pro forma basic and
diluted loss per share. 78,025 103,154
</TABLE>

Pro forma basic and diluted net loss per share has been calculated assuming
the conversion of all preferred stock outstanding at March 31, 2000 into common
stock, as if all shares had converted at the beginning of the year or, if
later, on the date of their issuance.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------
Pro Pro Forma Pro Forma
Actual Forma Series H As Adjusted
------- ------- --------- -----------
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents................ $50,307 $50,307 $ 70,307 $246,462
Working capital.......................... 59,101 59,101 79,101 255,256
Total assets............................. 95,869 95,869 115,869 292,024
Capital lease obligations, less current
portion................................. 295 295 295 295
Total stockholders' equity............... 78,699 78,699 98,699 274,854
</TABLE>

The pro forma Series H balance sheet data as of March 31, 2000 gives effect
to the May 2000 sale of 1,333,333 shares of Series H preferred stock to Sun
Microsystems in a private placement at a price of $15.00 per share. These
shares will automatically convert into 1,101,928 shares of common stock upon
the completion of this offering, based upon an assumed initial public offering
price of $22.00 per share.

The pro forma as adjusted balance sheet data as of March 31, 2000 gives
effect to:

. the sale of 8,000,000 shares of common stock in this offering at an
assumed initial public offering price of $22.00 per share, after
deducting an assumed underwriting discount and estimated offering
expenses;

. the sale of 181,818 shares of common stock to Internet Initiative Japan
in a private placement concurrent with this offering at an assumed
private placement price of $22.00 per share; and

. the sale of 454,545 shares of common stock issuable to CCT Telecom in a
private placement concurrent with this offering at an assumed private
placement price of $22.00 per share.

See note 1 of notes to our consolidated financial statements for a
description of the method that we used to compute our basic and diluted net
loss per share. See "Capitalization".

6
<PAGE>

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below and the other
information in this prospectus before deciding whether to invest in shares of
our common stock.

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

Through March 31, 2000 we incurred cumulative losses of $89.8 million, and
we expect to continue to incur losses in the future. If we do not become
profitable, the value of our stock will decrease. We have large fixed expenses,
and we plan to incur significant and increasing sales and marketing, research
and development, manufacturing, and general and administrative expenses. In
February 2000, we began to ship our first product, the ONLINE9000, and our
revenue to date has been limited. In order for us to become profitable, we will
need to generate and sustain higher revenue while maintaining reasonable cost
and expense levels.

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

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

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

The ONLINE9000 is our only currently available product and, if it is not
commercially successful, our revenue will not grow and we may not achieve
profitability.

If our potential customers do not adopt, purchase and successfully deploy
our ONLINE9000 product in large numbers, our revenue may not grow and our
business, financial condition and results of operations will be seriously
harmed. Since the market for our products is relatively new, future demand for
our products is uncertain and will depend on the speed of adoption of optical
networking, in general, and optical equipment in metro networks, in particular.
No communications service provider has fully deployed the ONLINE9000 in large
network environments, and they may choose not to do so. Even if service
providers do deploy our product fully, it may not operate as expected, which
could delay or prevent its adoption.

7
<PAGE>

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

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

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

Any failure of our future products to achieve market acceptance could harm
our business and financial results. For example, we are developing a new
product, the ONLINE7000, for metro access applications. We have devoted and
expect to continue to devote significant engineering and financial resources to
the development and marketing of the ONLINE7000. Unexpected technical
challenges could prevent us from successfully developing the ONLINE7000 in a
timely manner or at all. In addition, the ONLINE7000 could be more costly to
develop and test than we anticipate. Even if we are able to develop and
introduce the ONLINE7000, it may not achieve market acceptance if it does not
include features or performance desired by customers or if competitors develop
products that customers prefer.

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

We expect that substantially all of our revenue will depend on sales of our
products to a small number of customers and that our revenue will only grow if
these customers purchase substantial quantities of our products. We currently
have purchase agreements covering seven companies, four of which directly or
indirectly hold our equity securities. None of these companies is contractually
committed to purchase any minimum quantities of our products. If these
companies or future customers do not purchase large quantities of our products
for any reason, our ability to succeed would be harmed. The decision to
purchase substantial quantities of our products will depend, in part, on our
customers' and potential customers' desire and ability to introduce or expand
commercial services. We cannot be sure that any customer will introduce or
expand commercial services utilizing our products on a timely basis, if at all.
Any delay in introducing, or failure to introduce, these services would
seriously harm our revenue, results of operations and financial condition.

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

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

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

. failure of our products to perform as expected;

. difficulties in meeting customers' delivery requirements;

. introductions of new products by our competitors; and

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

8
<PAGE>

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

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

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

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

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

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

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

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

. tariffs, export controls and other trade barriers;

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

. difficulties and costs of staffing and managing foreign operations;

. certification requirements with which we may be unfamiliar; and

. reduced protection for intellectual property rights in some countries.

9
<PAGE>

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

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

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

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

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

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

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

We rely on contract manufacturers to complete most of the manufacturing of
optical assemblies for our products. If for any reason these manufacturers were
to stop satisfying our needs without providing us with sufficient warning to
procure an alternate source, our ability to sell our products would be harmed.
Except for our agreement with E-TEK Dynamics, Inc., we have no material long
term contracts with our manufacturers. As a result, our contract manufacturers
are not obligated to supply products to us for any specific period, in any
specific quantity or at any certain price, except as may be provided in a
particular purchase order.

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

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

We provide forecasts of our demand to our contract manufacturers and
component vendors up to six months prior to scheduled delivery of products to
our customers. If we overestimate our

10
<PAGE>

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

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

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

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

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

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

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

We are still a relatively small company and our success depends on growth.
At December 31, 1998, we had 63 employees, at December 31, 1999, we had 202
employees and at March 31, 2000, we had 326 employees. We plan to hire a
significant number of additional employees this year. Our growth has placed,
and we expect it to continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures, and will
need to continue to expand, train and manage our work force worldwide.

11
<PAGE>

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

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

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

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

Companies in our industry frequently claim that their competitors have
engaged in unfair hiring practices. As a result of these types of claims, we
may incur damages, lose potential employees or encounter disruptions in the
operation of our business. We have received claims of this kind in the past and
we may receive claims of this kind in the future. In October 1999, Nortel
Networks filed suit against us seeking, among other things, an injunction
against us and several of our employees that were formerly employed by Nortel
Networks, to prevent us from hiring additional Nortel Networks employees. In
addition, the former employer of one of our employees sought an injunction and
obtained a temporary restraining order against him, and the employee was
prevented from continuing to work for us. We could incur substantial costs,
including management time and attention, in defending ourselves and our
employees against these types of claims, regardless of their merits.

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

If our potential customers are not successful in building their
communications systems, promoting their products, including new revenue-
generating data services, receiving requisite approvals and accomplishing the
many other requirements for the success of their businesses, our growth will be
limited. Many factors in addition to the effectiveness of our products
influence the ultimate success of our customers, and we have no control over
these factors. In addition, we have limited ability to foresee the competitive
success of our customers and to plan accordingly.

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

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

12
<PAGE>

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

Our ONLINE9000 product, and its OPTX operating system and OLMP inter-network
communication protocol are technically advanced and highly complex and have
been deployed on only a limited basis. It is common for complex hardware and
software to have defects, some of which are significant, that are not
discovered in limited trials. The ONLINE9000, OPTX, OLMP and any future
products or releases can only be fully tested when deployed for an extended
period of time as part of networks that include equipment from other vendors.
Consequently, our customers may discover defects in our hardware or software
after deployment, and we could experience:

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

. loss of customers;

. damage to our reputation;

. diversion of development resources;

. increased service and warranty costs;

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

. increased insurance costs.

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

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

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

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

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

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

13
<PAGE>

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

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

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

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

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

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

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

. redesign those products that use the challenged technology.

If we are forced to take any of these actions, our business may be harmed.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type or may not be adequate to indemnify us for all
liability that may be imposed. For more information concerning our intellectual
property rights, see "Business--Intellectual Property".

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

Unlike many companies, we intend to expand our sales and marketing
activities, manufacturing activities and inventory faster than increases in
actual or forecasted revenue. If we achieve our growth targets, our working
capital needs will increase, so we may need to raise additional capital in
order to fund expansion. We may also need additional capital in order to
develop new services or

14
<PAGE>

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

Any acquisitions we make could disrupt our business and harm our financial
condition.

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

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

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

. responsibility for unanticipated liabilities;

. amortization expenses related to goodwill and other intangible assets;

. large and immediate write-offs;

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

. unanticipated costs;

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

. adverse effects on existing relationships with suppliers and customers;

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

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

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

As of March 31, 2000, our executive officers, directors and entities
affiliated with them beneficially owned approximately 37.3% of our outstanding
common stock. We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
34.4% of our outstanding common stock following the completion of this
offering. These stockholders, if acting together, would be able to influence
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This ability to exercise influence over all matters requiring
stockholder approval could prevent or significantly delay another company or
person from acquiring or merging with us. As a result, offers to acquire ONI
Systems which represent a premium over the available market price of our common
stock may be withdrawn or otherwise fail to be realized. See "Principal
Stockholders".

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

We have engaged in transactions with related parties, including loans to
executive officers. The ability of executive officers, directors and their
affiliated entities to exercise influence over all matters

15
<PAGE>

requiring stockholder approval could enable insiders to approve transactions
involving each other that might otherwise not be approved and which could
reduce the market price of our common stock. See "Related Party Transactions".

We expect to experience volatility in our share price which could negatively
affect your investment.

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

. changes in financial estimates by securities analysts;

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

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

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

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

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

There may be sales of a substantial amount of our common stock after this
offering that could cause our stock price to fall.

Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Immediately after
this offering, in addition to the shares offered by this prospectus,
approximately 849,636 shares may be resold without limitation; 180 days later,
an additional 101,125,721 shares may be resold; and a further 13,901,709 shares
may be resold at various times thereafter. Sales of a substantial number of
shares of our common stock after this offering could cause our stock price to
fall. In addition, the future sale of shares by existing stockholders could
impair our ability to raise capital through the sale of additional stock. See
"Shares Eligible for Future Sale".

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

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

. authorizing the issuance of preferred stock without stockholder approval;

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

16
<PAGE>

. prohibiting cumulative voting in the election of directors;

. prohibiting stockholders from calling stockholders meetings; and

. prohibiting stockholder actions by written consent.

These provisions and other provisions of Delaware law could make it more
difficult for a third party to acquire us, even if doing so would benefit our
stockholders. As a result, offers to acquire ONI Systems which represent a
premium over the available market price of our common stock may be withdrawn or
otherwise fail to be realized. For a further discussion of these provisions,
see "Description of Capital Stock--Anti-Takeover Provisions".

17
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. These forward-looking statements are not historical
facts, but rather are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. Words such as
"anticipates", "expects", "intends", "plans", "believes", "seeks" and
"estimates", and variations of these words and similar expressions, are
intended to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors, some of which are beyond our control and difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus.
These forward-looking statements reflect our view only as of the date of this
prospectus.

RECENT DEVELOPMENTS

In March 2000, we agreed to sell $4.0 million of common stock to Internet
Initiative Japan Inc. at the initial public offering price in a private
placement that will close concurrently with this offering. Internet Initiative
Japan will be granted the right to include these shares in future registered
offerings that we may file. We also entered into a trial system purchase
agreement with Internet Initiative Japan for our ONLINE9000 product in April
2000.

In April 2000, we agreed to sell $10.0 million of common stock to CCT
Telecom Holdings Limited at the initial public offering price in a private
placement that will close concurrently with this offering. CCT Telecom will be
granted the right to include these shares in future registered offerings that
we may file.

In May 2000, we sold 1,333,333 shares of Series H preferred stock to Sun
Microsystems, Inc. at a price per share of $15.00 for an aggregate purchase
price of $20.0 million in a private placement. Sun Microsystems was granted the
right to include these shares in future registered offerings that we may file.
The number of shares of common stock to be issued on conversion will be
computed using a 17.5% discount off of the per share initial public offering
price in this offering. Based on an assumed initial public offering price of
$22.00 per share, these shares of Series H preferred stock will automatically
convert into 1,101,928 shares of common stock upon the closing of this
offering.

18
<PAGE>

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 8,000,000 shares of
common stock that we are offering will be approximately $162.2 million, based
on an assumed initial public offering price of $22.00 per share, after
deducting an assumed underwriting discount and estimated offering expenses. If
the underwriters' option to purchase additional shares in this offering is
exercised in full, we estimate that our net proceeds will be approximately
$186.7 million. In addition, we expect to receive:

. $4.0 million net proceeds from the sale of shares of common stock in a
private placement to Internet Initiative Japan, concurrent with the
completion of this offering; and

. $10.0 million net proceeds from the sale of shares of common stock in a
private placement to CCT Telecom, concurrent with the completion of this
offering.

The principal purposes of this offering are to obtain additional capital, to
create a public market for our common stock, to enhance our ability to acquire
other businesses, products or technologies and to facilitate future access to
public equity markets. We intend to use the net proceeds for working capital,
capital expenditures and other general corporate purposes. We may also use a
portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business. We
currently have no commitments or agreements with respect to any acquisitions or
investments. We have not determined the amounts we plan to spend on any of the
uses described above or the timing of these expenditures. Pending our use of
the net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future.

19
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2000:

. on an actual basis;

. on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into common stock upon the closing
of this offering;

. on a further pro forma basis to reflect the May 2000 sale of 1,333,333
shares of Series H preferred stock to Sun Microsystems in a private
placement for a price of $15.00 per share, which, based on an assumed
public offering price of $22.00 per share, will convert into 1,101,928
shares of common stock; and

. on a pro forma as adjusted basis to reflect:

. the sale of 181,818 shares of common stock to Internet Initiative Japan
in a private placement, concurrent with this offering, based on an
assumed private placement price of $22.00 per share; and

. the sale of 454,545 shares of common stock issuable to CCT Telecom in a
private placement, concurrent with this offering, based on an assumed
private placement price of $22.00 per share.

In the period of its conversion, the beneficial conversion feature of the
Series H preferred stock will increase the net loss attributable to common
stockholders by approximately $4,242,000 and increase the basic and diluted net
loss per share.

<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------------
Pro
Forma Pro Forma
Actual Pro Forma Series H As Adjusted
-------- --------- -------- -----------
(in thousands, except share and per
share data)
<S> <C> <C> <C> <C>
Capital-lease obligations............ $ 466 $ 466 $ 466 $ 466
Stockholders' equity:
Preferred Stock, $0.0001 par value
per share, 80,309,408 shares
authorized, 79,194,900 shares
issued and outstanding, actual;
10,000,000 shares authorized and
no shares issued and outstanding,
pro forma, pro forma Series H or
pro forma as adjusted............. 8 -- -- --
Common stock, $0.0001 par value per
share, 159,690,592 shares
authorized, 34,943,875 shares
issued and outstanding, actual;
159,690,592 shares authorized,
114,138,775 shares issued and
outstanding, pro forma;
115,240,703 shares issued and
outstanding, pro forma Series H;
700,000,000 shares authorized,
123,877,066 shares issued and
outstanding, pro forma as
adjusted.......................... 4 12 12 13
Additional paid-in capital......... 268,176 268,176 288,176 464,330
Notes receivable from stockholders. (8,430) (8,430) (8,430) (8,430)
Services receivable from
stockholder....................... (49) (49) (49) (49)
Deferred stock compensation........ (91,220) (91,220) (91,220) (91,220)
Accumulated deficit................ (89,790) (89,790) (89,790) (89,790)
-------- -------- -------- --------
Total stockholders' equity....... 78,699 78,699 98,699 274,854
-------- -------- -------- --------
Total capitalization........... $ 79,165 $ 79,165 $ 99,165 $275,320
======== ======== ======== ========
</TABLE>

20
<PAGE>

The outstanding share information in the preceding table excludes:

. 1,434,394 shares of common stock issuable upon the exercise of
outstanding warrants with a weighted average exercise price of $2.72 per
share.

From April 1, 2000 through May 15, 2000, we granted options to purchase
2,680,000 shares of common stock with a weighted average exercise price of
$8.02 per share. Of these shares, 1,000,000 shares will be subject to an option
that is outside of the stock plans described in this prospectus. In April 2000,
we adopted our 2000 equity incentive plan, under which 7,000,000 shares of
common stock will be available for future grant, and our 2000 employee stock
purchase plan, under which 1,000,000 shares of common stock will be available
for future grant.

You should read this table together with "Management--Director
Compensation", "Management--Employee Benefit Plans", "Description of Capital
Stock", "Related Party Transactions" and notes 7, 9, 12 and 13 of the notes to
our consolidated financial statements.

21
<PAGE>

DILUTION

If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per
share of our common stock after this offering. Net tangible book value is equal
to total assets less intangible assets and total liabilities.

Our pro forma net tangible book value as of March 31, 2000 was $74.6
million, or approximately $0.65 per share assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value per share is determined by dividing the pro forma
number of outstanding shares of common stock into our net tangible book value.

After giving effect to the receipt of:

. the estimated net proceeds from this offering based upon an assumed
initial public offering price of $22.00 per share and after deducting an
assumed underwriting discount and estimated offering expenses;

. net proceeds of $20.0 million from the May 2000 sale of Series H
preferred stock in a private placement to Sun Microsystems;

. net proceeds of $4.0 million we expect to receive from the sale of common
stock in a private placement to Internet Initiative Japan, concurrent
with this offering; and

. net proceeds of $10.0 million we expect to receive from the sale of
common stock in a private placement to CCT Telecom, concurrent with this
offering;

our pro forma net tangible book value as of March 31, 2000 would have been
approximately $270.8 million, or $2.19 per share. This represents an immediate
increase in pro forma net tangible book value of $0.17 attributable to the
Series H investor and $1.37 attributable to new investors, or a total increase
of $1.54 per share to existing stockholders, and an immediate dilution in net
tangible book value of $19.81 per share to new investors purchasing shares at
the initial public offering price. The following table illustrates the per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $22.00
Pro forma net tangible book value per share as of March 31,
2000.......................................................... $0.65
Increase in pro forma net tangible book value per share
attributable to the Series H investor......................... 0.17
Increase in pro forma net tangible book value per share
attributable to new investors................................. 1.37
-----
Pro forma as adjusted net tangible book value per share after
offering...................................................... 2.19
------
Dilution per share to new investors............................ $19.81
======
</TABLE>

The following table summarizes as of March 31, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid to us by
existing stockholders and by investors purchasing shares of our common stock in
this offering, before deducting the underwriting discount and our estimated
offering expenses:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 114,138,775 92.1% $134,884,904 39.1% $ 1.18
Series H investor....... 1,101,928 0.9 19,999,995 5.8 18.15
New investors........... 8,636,363 7.0 189,999,986 55.1 22.00
----------- ----- ------------ -----
Total................. 123,877,066 100.0% $344,884,885 100.0%
=========== ===== ============ =====
</TABLE>

22
<PAGE>

As of March 31, 2000, there were options outstanding to purchase a total of
19,343,345 shares of our common stock, with a weighted average exercise price
of $0.64 per share and warrants outstanding to purchase a total of 1,434,394
shares of our common stock with a weighted average exercise price of $2.72 per
share. From April 1, 2000 through May 15, 2000, we granted options to purchase
2,680,000 shares of common stock with a weighted average exercise price of
$8.02 per share. Of these shares, 1,000,000 shares will be subject to an option
that is outside of the stock plans described in this prospectus. To the extent
that any options or warrants are exercised, there will be further dilution to
new public investors. See "Capitalization", "Management--Employee Benefit
Plans", "Description of Capital Stock", "Related Party Transactions" and notes
7, 9, 12 and 13 of the notes to our consolidated financial statements.

23
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)

The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes to our financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
consolidated statement of operations data set forth below for the period from
October 20, 1997 (inception) to December 31, 1997, and for the fiscal years
ended December 31, 1998 and 1999, and the consolidated balance sheet data as of
December 31, 1998 and 1999 have been derived from our consolidated financial
statements, which have been audited by KPMG LLP, independent auditors, and are
included elsewhere in this prospectus. The consolidated statement of operations
data for the periods ended March 31, 1999 and 2000, and the balance sheet data
as of March 31, 2000, are unaudited but include all adjustments, consisting
only of normal recurring adjustments, which are considered necessary for a fair
presentation of the data. The historical results are not necessarily indicative
of results to be expected for any future period. For an explanation of the
determination of the shares used to compute net loss per share and pro forma
net loss per share, see note 1(r) of our notes to consolidated financial
statements.

<TABLE>
<CAPTION>
Year Ended Three Months
Period From December 31, Ended March 31,
October 20, 1997 ----------------- -----------------
Consolidated Statements of (Inception) to
Operations Data December 31, 1997 1998 1999 1999 2000
- -------------------------- ----------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................... $ -- $ 1,733 $ 3,034 $ 565 $ 3,633
Cost of revenue.......... -- 1,208 1,032 425 2,850
------ ------- -------- ------- --------
Gross profit........... -- 525 2,002 140 783
------ ------- -------- ------- --------
Operating expenses:
Research and
development, excluding
deferred stock
compensation
amortization amounts ... 39 4,009 25,400 2,850 12,037
Sales and marketing,
excluding deferred
stock compensation
amortization amounts.... 21 649 4,557 426 3,002
General and
administrative,
excluding deferred
stock compensation
amortization amounts ... 49 1,591 4,756 510 2,556
Amortization of deferred
stock compensation...... 89 3,310 11,422 1,296 13,612
Common stock warrant
expense ................ -- 2,891 -- 4,545
In-process research and
development............. -- -- 170 -- --
------ ------- -------- ------- --------
Total operating
expenses.............. 198 9,559 49,195 5,082 35,752
------ ------- -------- ------- --------
Operating loss......... (198) (9,034) (47,193) (4,942) (34,969)
Interest income (expense),
net...................... (1) 183 623 181 868
Other income (expense),
net...................... -- -- -- (14) (63)
------ ------- -------- ------- --------
Loss before income
taxes................. (199) (8,851) (46,570) (4,775) (34,164)
Income taxes.............. -- 1 2 2 3
------ ------- -------- ------- --------
Net loss............... $ (199) $(8,852) $(46,572) $(4,777) $(34,167)
====== ======= ======== ======= ========
Basic and diluted net loss
per share................ $(0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.41)
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................... 257 11,919 18,043 13,542 24,219
Pro forma basic and
diluted net loss per
share.................... $ (0.60) $ (0.33)
Shares used in computing
pro forma basic and
diluted net loss per
share ................... 78,026 103,154
</TABLE>

<TABLE>
<CAPTION>
December 31, December 31, March 31,
Balance Sheet Data 1998 1999 2000
- ------------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $19,092 $ 80,023 $50,307
Working capital.......................... 19,627 81,758 59,101
Total assets............................. 21,312 100,942 95,869
Capital lease obligations, less current
portion................................. 79 367 295
Total stockholders' equity............... $20,565 $ 91,728 $78,699
</TABLE>

24
<PAGE>

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

Overview

We develop, market and sell optical networking equipment specifically
designed to address the bandwidth and service limitations of metropolitan and
regional networks. From our inception in October 1997 through November 1999,
our operating activities consisted primarily of research and development. We
also formed and expanded our administrative, marketing, sales, manufacturing
and customer service and support organizations and commenced sales and
marketing activities. In January 2000, we released our first product, the
ONLINE9000, which is a combined hardware and software product for optical
transmission and routing of voice, Internet and other data communication
services.

In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In December 1997, we were spun
out of Optivision and Optivision distributed its holdings of our common stock
and half of its holdings of our preferred stock to Optivision shareholders.
Optivision also retained 4,000,000 shares of our Series A preferred stock. In
connection with the spin-out, we have reserved, and are obligated to issue,
233,468 shares of our common stock upon the exercise of warrants to purchase
capital stock of Optivision. We will not receive any proceeds from the exercise
of these warrants. In January 1998, all of the shares of our Series A preferred
stock were converted into Series B preferred stock on a one-to-one basis. In
January 1998, Optivision sold 2,666,667 shares of our preferred stock to our
initial venture investors. In March 1998, we repurchased all of our outstanding
stock owned by Optivision, consisting of 1,333,333 shares of our Series B
preferred stock, for an aggregate purchase price of $1.0 million. Optivision
does not currently own any shares of ONI Systems. See "Related Party
Transactions--Optivision Spin-out" and note 5 of notes to our consolidated
financial statements.

In June 1999, we acquired all of the outstanding common shares of Object-
Mart, Inc. in exchange for 4,569,276 shares of our common stock and
approximately $3.2 million in cash. Object- Mart was located in San Jose,
California, and provided software products and services to software equipment
manufacturers in the telecommunications industry. The combination was accounted
for using the purchase method and, accordingly, the results of operations of
Object-Mart have been included in our consolidated financial statements since
June 29, 1999. Upon consummation of this acquisition, we recorded goodwill of
$5.7 million that is to be amortized over a period of two years. As of March
31, 2000, the remaining unamortized goodwill was $3.5 million.

Since our inception, we have incurred significant losses, and as of March
31, 2000, we had an accumulated deficit of $89.8 million. We have not achieved
profitability on a quarterly or annual basis. We expect to incur significant
sales and marketing, research and development and general and administrative
expenses and, as a result, will need to generate significant revenue to achieve
and maintain profitability.

On January 31, 2000, we announced general availability of our first product,
the ONLINE9000, which we began to ship in February 2000. In March 2000, we
recognized revenue from sales of this product to four customers. For the three
months ended March 31, 2000, sales to Williams Communications, Inc., COLT
Telecom plc, Marietta Fibernet and StorageNetworks, Inc. accounted for 33%,
30%, 23% and 14% of revenue, respectively. Sales to COLT Telecom, which is
based in the United Kingdom, are denominated in United States Dollars. While we
will continue to seek to diversify and grow our customer base, we anticipate
that our operating results for any given period may depend on a small number of
customers. In April 2000, we entered into a limited trial system purchase
agreement with Internet Initiative Japan Inc. and an OEM relationship with
Lucent Technologies, Inc. We plan to introduce new products, including the
ONLINE7000, and product enhancements, although we may be unsuccessful in these
efforts.

25
<PAGE>

We primarily market and sell our products through our direct sales force and
marketing organization. We are expanding our direct sales force to sell to
potential customers outside of North America and Europe. However, in those
markets where it is difficult to maintain a direct sales force, we may rely on
resellers for distribution of our product. For example, in April 2000, we
entered into an OEM relationship with Lucent Technologies that expires on
December 31, 2001. Under the terms of our agreement, Lucent Technologies has
the exclusive right to sell some of our products in China for a period of 12
months.

Our policy is to recognize revenue at the time of shipment unless we have
future obligations or customer acceptance is required, in which case all or a
portion of revenue is deferred until these obligations are met or the customer
accepts the product. Services revenue consists primarily of training and
installation services and associated revenue is recognized as the services are
performed. To date, we have not been obligated to provide installation services
to our customers. We provide a limited warranty on our products. Estimated
expenses for warranty obligations are recorded at the time revenue is
recognized.

Our cost of revenue consists of raw materials, direct labor, manufacturing
overhead and amounts paid to third-party manufacturers. Our manufacturing
operations are generally outsourced, and accordingly a significant portion of
our cost of revenue consists of payments to third-party contract manufacturers.
We conduct supply chain management, production engineering, documentation
control, quality assurance and final assembly at our assembly facility in San
Jose, California. We currently purchase many of our electronic and optical
components through purchase orders. In order to help us maintain our supply of
components, especially optical components, we intend to enter into long-term
supply agreements with vendors. For example, in March 2000, we entered into an
agreement with E-TEK Dynamics, Inc., under which E-TEK Dynamics will supply
optical components and module integration services to us at least through
December 31, 2001.

Research and development expenses consist primarily of salaries and related
expenses for research and development personnel, fees paid to outside
consultants, non-recurring engineering charges and prototype costs related to
design, development, testing and enhancement of our products. We expense all of
our research and development costs as they are incurred. We believe that
research and development is critical to our strategic objectives, and we devote
substantial resources to the development of new products and product features.
We also believe that to meet our customers' evolving needs, we will need to
fund investments in several development projects simultaneously. As a result,
we expect our research and development expenses to increase in absolute dollars
in the future.

Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in marketing, sales, and customer service and support
functions, as well as costs associated with trade shows, promotional activities
and public relations. We expect that sales and marketing expenses will increase
substantially in absolute dollars as we continue to build and expand our direct
sales, marketing, and customer service and support organizations in the United
States and internationally.

General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, legal, facilities and human resources
personnel, recruiting expenses, professional fees and other corporate expenses.
We expect general and administrative expenses to increase in absolute dollars
as we add personnel, improve and expand our information system infrastructure
and incur additional expenses as we grow and operate as a public company.
Nortel Networks has initiated litigation against us involving both employment-
related and intellectual property-related claims. We expect that the costs of
defending these lawsuits will be substantial, and that management time and
attention will be diverted to them, regardless of their merit. We entered into
a lease for a new facility in May 2000. We paid the deposit required to secure
this facility, approximately $1.3 million, and the first month's rent,
approximately $700,000, at the time that the lease was signed. The lease term
is for a period of 120 months, commencing on February 1, 2001. The expected
rent will be approximately $7.9 million for the first year, $8.2 million for
the second

26
<PAGE>

year, $10.6 million for the third year and $11.0 million for the fourth year.
Thereafter, the base rent will increase by 4% per year.

In 1998, we recorded total deferred stock compensation of approximately $8.4
million in connection with stock sales and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of sale or grant.
Options granted are typically subject to a four-year vesting period. We are
amortizing the deferred stock compensation over the vesting periods of the
applicable options and the repurchase periods for restricted stock purchases.
The period over which deferred stock compensation is amortized is determined
separately for each 25% portion of the total award, in accordance with
Financial Accounting Standards Board Interpretation No. 28. The result of this
accounting treatment is that approximately 59% of the unearned deferred
compensation will be amortized in the first year, 25% in the second year, 12%
in the third year and 4% in the fourth year following the date of the grant. We
amortized $3.3 million of deferred stock compensation in the year ended
December 31, 1998. For the year ended December 31, 1999 and for the quarter
ended March 31, 2000, we recorded approximately $41.7 million, and $66.7
million, respectively, in additional deferred stock compensation for stock
options granted at prices subsequently deemed to be below fair value on the
date of grant. We amortized a total of approximately $11.4 million and $13.6
million of deferred stock compensation in the year ended December 31, 1999 and
the quarter ended March 31, 2000, respectively. Approximately $35.5 million and
$91.2 million of deferred stock compensation related to all prior issuances
remained to be amortized over four years as of December 31, 1999 and March 31,
2000, respectively.

In May 2000, we granted to Chris A. Davis, our new Executive Vice President,
Chief Financial and Administrative Officer, an option to purchase 1,000,000
shares of common stock outside of the stock plans described in this prospectus
with an exercise price of $4.00 per share. This grant will result in additional
deferred stock compensation of $10.0 million, which will be amortized over four
years from the date of grant. In connection with options to purchase an
additional 1,680,000 shares of common stock at a weighted average exercise
price of $10.41 per share, granted from April 1, 2000 through May 15, 2000, we
have an additional deferred compensation expense of $6.2 million.

Results of Operations

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

In addition, we expect to experience seasonality in the sales of our
products. Historically, the telecommunications equipment market has experienced
increased sales in the first and fourth quarter of the year due in part to
purchasers' budgetary cycles. In addition, we expect that sales may decline
during summer months, particularly in European markets which we expect to
represent a substantial portion of the market for our products for the
foreseeable future. These seasonal variations in our sales may lead to
fluctuations in our quarterly operating results.

Comparison of Three Months Ended March 31, 1999 and 2000

Net Revenue

Net revenue increased by $3.1 million, or 543%, from $565,000 for the three
months ended March 31, 1999 to $3.6 million for the three months ended March
31, 2000. All of the net revenue for the three months ended March 31, 2000 was
from sales of our ONLINE9000 product. Net revenue

27
<PAGE>

recorded for the three months ended March 31, 1999 was from government research
and development contracts. The government research and development contracts
were completed in June 1999.

Cost of revenue

Cost of revenue increased by $2.4 million, or 572%, from $425,000 for the
three months ended March 31, 1999 to $2.8 million for the three months ended
March 31, 2000. As a percentage of net revenue, cost of revenue for the three
months ended March 31, 2000 was 78%, compared to 75% for the three months ended
March 31, 1999. We believe the comparison of these two periods is not
meaningful, because our revenue for the three months ended March 31, 1999, and
the related cost of revenue, were from governmental research and development
contracts. Cost of revenue as a percentage of revenue for the three months
ended March 31, 2000 are higher than they are anticipated to be in the future,
due to the high cost of initial start-up of production, including the increase
in personnel and the low volume of sales.

We expect to develop additional products in the future such that the product
mix of our sales may vary. Correspondingly, we expect the quarterly gross
profit percentages to fluctuate in accordance to the product mix of related
quarterly sales.

Research and development expense

Research and development expense was $2.8 million for the three months ended
March 31, 1999, and increased by 322% to $12.0 million for the three months
ended March 31, 2000, representing 56% and 34% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. The
increase in quarterly research and development expense is primarily due to the
significant expansion of our research and development department, particularly
attributable to the increase of engineering staff. As of March 31, 1999, we had
approximately 51 research and development employees and approximately 147 as of
March 31, 2000.

Sales and marketing expense

Sales and marketing expense was $426,000 for the three months ended March
31, 1999, and increased by 605% to $3.0 million for the three months ended
March 31, 2000, representing 8% and 8% of total quarterly operating expenses
for the three months ended March 31, 1999 and 2000, respectively. This increase
in quarterly sales and marketing expense is primarily due to the higher number
of sales and marketing personnel in the quarter ended March 31, 2000 as
compared to that of March 31, 1999. As of March 31, 1999, we had approximately
four sales and marketing personnel, and 59 as of March 31, 2000.

General and administrative expense

General and administrative expense was $510,000 for the three months ended
March 31, 1999, and increased by 401% to $2.6 million for the three months
ended March 31, 2000, representing 10% and 7% of the total quarterly operating
expenses for the three months ended March 31, 1999 and 2000, respectively. This
increase in quarterly general and administrative expense primarily reflects
personnel increases. As of March 31, 1999, we had 12 general and administrative
employees and 52 as of March 31, 2000.

Amortization of deferred stock compensation

Amortization of deferred stock compensation was $1.3 million for the three
months ended March 31, 1999, and increased by 950% to $13.6 million for the
three months ended March 31, 2000. This increase in quarterly amortization of
deferred stock compensation was primarily a result of higher deferred stock
compensation expense, which increased from $5.2 million as of December 31, 1998
to $35.5 million as of December 31, 1999.

28
<PAGE>

Common stock warrant expense

In February 2000, in connection with the signing of a purchase and license
agreement with FMR Corp. for the purchase of our products by KVH Industries
Inc. and MetroRED Telecommunicaciones S.A., we issued a warrant to purchase
223,000 shares of common stock at an exercise price of $0.91 per share. FMR,
KVH Industries and MetroRED are not obligated to purchase any of our products
as a condition to FMR exercising the warrant. We believe that, given our early
stage of development at the time of the negotiation and issuance of the
warrant, the issuance of this warrant was a cost of establishing a relationship
with this potential customer. The value of $3.0 million ascribed to the warrant
was estimated using the Black-Scholes option valuation model with the following
assumptions:

. no expected dividend yield;

. risk free interest rate of 5.50%;

. expected volatility of 70%; and

. contractual term of seven years.

Given that there are no future performance obligations to exercise this
warrant, the warrant was expensed in the three months ended March 31, 2000.

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

. no expected dividend yield;

. risk free interest rate of 5.50%;

. expected volatility of 70%; and

. contractual term of four years.

The warrant was expensed in the three months ended March 31, 2000.

Interest income (expense), net

Interest income (expense), net increased by $687,000, or 380%, from $181,000
for the three months ended March 31, 1999 to $868,000 for the three months
ended March 31, 2000. The increase was primarily due to the interest income
earned on proceeds from sales of preferred stock.

Comparison of Year Ended December 31, 1998 and 1999

Although we were incorporated on October 20, 1997, we did not effectively
commence operations until January 1998 when we completed our first preferred
stock financing. As a result, we believe that our results of operations prior
to 1998 are not meaningful.

Revenue

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

29
<PAGE>

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

Cost of revenue

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

Research and development

Research and development expenses were $4.0 million in 1998 and increased by
534% to $25.4 million in 1999, representing 41.9% of total operating expenses
in 1998 and 51.6% of total operating expenses in 1999. The increase in research
and development expenses was primarily related to the increase in the number of
personnel and an increase in engineering and prototype expenses related to the
design, development and testing of our ONLINE9000 product. At December 31,
1998, we had a total of approximately 43 research and development employees
and, at December 31, 1999, we had approximately 110 research and development
employees.

Sales and marketing

Sales and marketing expenses were $649,000 in 1998 and increased by 602% to
$4.6 million in 1999, representing 6.8% of total operating expenses in 1998 and
9.3% of total operating expenses in 1999. The increase in sales and marketing
expenses was primarily related to the increase in the number of personnel,
including the establishment of a direct sales force and customer service and
support team, as well as costs associated with tradeshows, promotional
activities and public relations. At December 31, 1998, we had a total of three
sales and marketing employees, and at December 31, 1999, we had approximately
21 sales and marketing employees.

General and administrative

General and administrative expenses were $1.6 million in 1998 and increased
by 198.9% to $4.8 million in 1999, representing 16.6% of total operating
expenses in 1998 and 9.7% of total operating expenses in 1999. The increase in
general and administrative expenses was primarily related to the increase in
personnel and increased legal, information systems, facilities and consulting
services associated with our growing business activities. At December 31, 1998,
we had a total of approximately 12 general and administrative employees, and at
December 31, 1999, we had approximately 30 general and administrative
employees.

Amortization of deferred stock compensation

In connection with grants of stock options and sales of stock to employees
with exercise or sales prices subsequently determined to be below the deemed
fair value of our common stock on the dates of grant or sale, we recorded
amortization of deferred stock compensation of $3.3 million in 1998 and
$11.4 million in 1999, an increase of 245.0%. As of December 31, 1999, our
unamortized deferred stock compensation was $35.5 million, of which
approximately $21.6 million will be amortized in 2000. In addition, we have
granted additional stock options in 2000 that will result in a substantial
increase in deferred stock compensation and amortization expense.

Common stock warrant expense

In December 1999, in connection with the signing of a purchase and license
agreement with COLT Telecom plc, we issued a warrant to purchase 500,000 shares
of common stock at an exercise price of $0.91 per share. COLT is not obligated
to purchase any of our products as a condition to exercising the warrant. We
believe that, given our early stage of development at the time

30
<PAGE>

of the negotiation and issuance of the warrant, the issuance of this warrant
was a cost of establishing a relationship with this potential customer. The
value of $2.9 million ascribed to the warrant was estimated using the Black-
Scholes option valuation model with the following assumptions:

. no expected dividend yield;

. risk free interest rate of 5.50%;

. expected volatility of 70%; and

. contractual term of six years.

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

Interest income (expense), net

Interest income (expense), net, includes interest income from our cash
investments net of interest expense related to our lease financing obligations
and amortization of warrants issued in conjunction with our equipment lease and
credit facilities. We had interest income, net, of $183,000 in 1998 and
$623,000 in 1999, an increase of 241.0%. The increase was primarily due to the
interest income earned on proceeds from preferred stock issuances.

Income taxes

Income taxes for 1998 and 1999 consisted of minimum state taxes. As of
December 31, 1999, we had net operating loss carryforwards for federal and
California income tax purposes of $34.0 million and research credit
carryforwards of approximately $1.1 million. The federal carryforwards will
expire at various dates from 2012 through 2019. Utilization of the net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations contained in Section 382 of the Internal Revenue
Code. There is sufficient uncertainty regarding the reliability of the deferred
tax assets that we have recorded a full valuation allowance.

Liquidity and Capital Resources

From inception through December 31, 1999, we financed our operations
primarily through private sales of convertible preferred stock, for net
proceeds of approximately $122.9 million, and common stock, for net proceeds of
approximately $329,000. We raised an additional $2.0 million from the sale of
preferred stock and $783,000 from the sale of common stock during the three
months ended March 31, 2000.

The following table describes the preferred stock issuances that have funded
our operations from inception through March 31, 2000:

<TABLE>
<CAPTION>
Date Consideration Price per Preferred
Closed Series ($ million) Share Shares Sold
------ ------ ------------- --------- -----------
<S> <C> <C> <C> <C>
12/97-3/98 B $ 4.3 $0.24 18,128,843
12/97-3/98 C $ 2.0 $0.75 2,733,332
4/98 D $ 4.4 $0.88 4,969,148
12/98-5/99 E $23.8 $0.91 26,284,024
9/99 F $15.0 $1.82 8,249,468
12/99-3/00 G $76.9 $6.32 12,163,418
</TABLE>

In 1997, we were spun-out from Optivision, Inc. In connection with this
spin-out, Optivision, Inc. retained, among other equity issuances, 4,000,000
shares of Series A preferred stock. All Series A

31
<PAGE>

preferred stock subsequently converted into Series B preferred stock. In 1998,
Optivision sold two-thirds of its Series B holdings, and we repurchased the
remaining one-third of its Series B holdings. Optivision does not currently own
any of our shares.

In connection with an equipment lease financing arrangement, we issued
warrants to purchase a total of 68,062 shares of Series B convertible preferred
stock at $0.88 per share. The warrants expire on the earlier of February 10,
2009, or five years from this offering. No warrants had been exercised as of
March 31, 2000.

We used $29.6 million in cash in operating activities in 1999, an increase
of $23.8 million, or 409%, from the $5.8 million used in 1998. The increase was
primarily due to the increase in our net loss of $37.7 million, an increase in
inventory of $9.6 million and other working capital of $9.5 million, offset by
increased amortization of deferred stock compensation and common stock warrants
of $11.0 million, and depreciation and amortization of $2.5 million. We used
$21.0 million in cash in operating activities in the three months ended March
31, 2000, an increase of $18.4 million, or 703%, from the $2.6 million used in
the three months ended March 31, 1999. The increase was primarily due to the
increase in our net loss of $29.4 million, an increase of inventory of $11.1
million and a decrease of other working capital of $3.3 million, offset by
increased amortization of deferred stock compensation of $12.3 million,
amortization of common stock warrants of $4.5 million and depreciation and
amortization of $1.7 million.

We used $6.6 million in cash in investing activities in 1999, an increase of
$5.6 million, or 550%, from the $1.0 million used in 1998. The increase was
primarily related to the purchase of property and equipment and the net cash
portion of our acquisition of Object-Mart of $1.7 million. We used $11.4
million in cash in investing activities in the three months ended March 31,
2000, an increase of $11.0 million from the $385,000 used in the three months
ended March 31, 1999. The increase was due to the purchase of property and
equipment, primarily engineering and test equipment.

We generated $97.1 million in cash from financing activities in 1999, an
increase of $71.2 million, or 275%, from the $25.9 million generated in 1998,
primarily from the private sales of convertible preferred stock and issuance of
common stock. We have used leases to partially finance capital purchases of
property and equipment. We had $119,000 in capital lease obligations
outstanding at December 31, 1998 and $533,000 at December 31, 1999. We
generated $2.7 million in cash from investing activities in the three months
ended March 31, 2000, a decrease of $4.6 million from the $7.3 million
generated in the three months ended March 31, 1999. The decrease was primarily
due to a reduction in proceeds from preferred stock financings of $5.3 million,
offset by an increase in proceeds from the issuance of common stock of
$744,000.

At December 31, 1999, cash and cash equivalents totaled $80.0 million, an
increase of $60.9 million, or 319%, from the balance of $19.1 million at
December 31, 1998. The increase was due to the receipt of $97.1 million,
primarily from the sale of convertible preferred stock, offset by $29.6 million
of cash used in operating activities and $6.6 million of cash used in investing
activities. At March 31, 2000, cash and cash equivalents totaled $50.3 million,
a decrease of $29.7 million from December 31, 1999. The decrease was due to the
use of $21.0 million in operating activities and $11.4 million in investing
activities offset by the receipt of $2.7 million, primarily from the sale of
preferred stock.

As of December 31, 1999, we had entered into a line of credit that allowed
us to borrow up to $2,000,000 and $1,000,000, respectively. We had not borrowed
any amounts under these agreements as of December 31, 1999, and they both
expired in February 2000, unutilized.

We have a lease financing facility for $1.5 million, of which $467,000 had
been drawn as of December 31, 1999. This facility with a 7.51% annual interest
charge expires in December 2002.

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Our capital requirements depend on numerous factors, including:

. the resources we devote to developing, manufacturing, marketing, selling
and supporting our products;

. market acceptance of our products and the timing and extent of sales of
our products; and

. the timing and extent of capital expenditures required to establish our
international operations.

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

In March 2000, we agreed to sell $4.0 million of common stock to Internet
Initiative Japan Inc. at the initial public offering price in a private
placement that will close concurrent with this offering. Internet Initiative
Japan will be granted the right to include these shares in future registered
offerings that we may file. We also entered into a trial system purchase
agreement with Internet Initiative Japan for our ONLINE9000 product in April
2000.

In April 2000, we agreed to sell $10.0 million of common stock to CCT
Telecom Holdings Limited at the initial public offering price in a private
placement that will close concurrent with this offering. CCT Telecom will be
granted the right to include these shares in future registered offerings that
we may file.

In May 2000, we sold 1,333,333 shares of Series H preferred stock to Sun
Microsystems, Inc. at a price of $15.00 per share for an aggregate purchase
price of $20.0 million in a private placement. These preferred shares will
convert into 1,101,928 shares of common stock upon the completion of this
offering, based on an assumed initial public offering price of $22.00 per
share. The number of common shares to be issued on conversion will be computed
using a 17.5% discount off of the initial public offering price. In the period
of conversion, this beneficial conversion feature will increase the net loss
attributable to common stockholders by approximately $4,242,000 and increase
the basic and diluted net loss per share.

Effect of Year 2000

The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. This problem
could result in miscalculations, data corruption, system failures or
disruptions of operations.

As of March 31, 2000, we had not experienced any significant disruptions in
our business related to year 2000 issues, nor do we expect to experience any
year 2000 related disruption in the operation of our systems.

We are not aware of any of the companies to which we have shipped our
ONLINE9000 product experiencing any year 2000 related problems with our product
or their ability to deploy our product. In addition, we have not received
notice from any of our contract manufacturers or our other suppliers that they
have experienced any year 2000 problems with the parts supplied by them or that
would

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affect their ability to supply products and services to us. Although most year
2000 problems should have become evident on or shortly after January 1, 2000,
additional year 2000 related problems may become evident. We will continue to
monitor our mission critical equipment and computer applications and those of
our suppliers and vendors throughout the year, in an effort to ensure that any
late year 2000 matters that may arise are promptly addressed.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We do not currently use derivative financial instruments for speculative
trading or hedging purposes. In addition we maintain our cash equivalents in
money market funds. Accordingly, we are not a party to financial instruments or
contracts, and do not have investments, that expose us to material interest
rate risk.

Exchange Rate Sensitivity

Currently, all of our sales and expenses are denominated in United States
Dollars. Therefore, we have not engaged in any foreign exchange hedging
activities to date. We do expect to conduct transactions in foreign currencies
in the future, so we may engage in foreign exchange hedging activities at that
time.

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". The new standard establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. Statement of Financial
Accounting Standards 133 will be effective for our fiscal year ending December
31, 2001. We do not expect Statement of Financial Accounting Standards 133 to
have a material effect on our financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which summarizes views of the Commission staff in
applying generally accepted accounting principles to revenue recognition in
financial statements. We believe that our current revenue recognition
principles comply with this bulletin.

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BUSINESS

Overview

We develop, market and sell optical communications networking equipment
specifically designed to address the bandwidth and service limitations of
metropolitan area and regional networks, which we refer to as metro networks.
Communication service providers can cost-effectively deploy our products to
relieve the growing traffic bottleneck in these networks and offer new revenue-
generating data services. By installing our equipment, service providers can
rapidly build high-capacity metro networks that are flexible, scalable, and
able to support multiple services on a single platform.

Industry Background

Increased Demand for Network Capacity

Rapid growth in the popularity of the Internet and in the number of
Internet-based applications and services has fueled dramatic growth in the
volume of data traffic. According to Ryan, Hankin & Kent, Internet traffic will
increase from 350,000 terabytes, or trillions of bytes, per month at the end of
1999 to over 15,000,000 terabytes per month during 2003. This growth will
increase demand for capacity in the public communications network. This
capacity is usually measured in bits of data per second and is commonly known
as bandwidth. Bandwidth improvements make it possible for communication service
providers to offer new revenue-generating services such as remote data storage
and local area network extensions to their customers. As these new bandwidth-
intensive services are introduced and gain commercial acceptance, additional
network bandwidth and optical infrastructure will be required.

Evolution of Optical Networking

The existing communications network infrastructure was designed and built to
carry voice calls, based on standards such as the synchronous optical
networking standard. The rapid adoption of the Internet and the resulting
growth of data traffic are driving service providers toward deploying equipment
and networks designed, built and optimized for both data and voice traffic.
Given the scope of existing and projected Internet traffic, many communication
service providers are designing and installing networks based on optical
technology, which generally enables greater capacity and higher transmission
speed.

Optical networking technology transmits data using pulses of light over
optical fiber, rather than pulses of electricity over copper wires. Advances in
optical technology allow transmission of multiple signals on a single strand of
optical fiber, each signal using a different wavelength of light. Technology
currently enables transmission of up to 160 different wavelengths on a single
fiber. This means that today a service provider using appropriate technology
can multiply the transmission capacity of its existing fibers 160 times.

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

Long-haul networks. Long-haul networks connect the communications networks
of metropolitan areas around the world. These networks move large amounts of
data and voice traffic point-to-point over long distances. The focus of
companies designing equipment for this segment has been to provide as much
bandwidth as possible between any two points.

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

Metro access networks. Metro access networks connect end-users such as
enterprises and individuals to the metro core network. These networks are the
points at which traffic enters and exits the public communications network.
Metro access networks are complex because they must manage a wide variety of
services to meet the needs of end-users.

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

Metro Network Bottleneck

Optical technologies were first deployed in long-haul networks, where the
capacity constraints of the existing infrastructure were first encountered and
the simple architecture and homogeneous traffic made it technically feasible
and cost effective. Over time, enterprise networks have also benefited from the
deployment of new optical technology, including high-speed data communication
services such as gigabit ethernet and fibre channel.

To date, optical solutions specifically designed to address the challenges
faced by metro core and access networks have not been available, which has
impeded the growth of bandwidth in metro networks.

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

Challenges Facing Metro Core and Metro Access Network Service Providers

Communication service providers seeking to develop and introduce next
generation services to their customers face significant challenges that are not
adequately addressed by current metro solutions, including:

Enabling emerging service offerings and supporting existing
services. Communication service providers that serve regions and metropolitan
areas endeavor to offer business enterprises and consumers a variety of high-
speed connectivity services, such as:

. access to the public switched telephony network, for voice and fax
service;

. Internet access for data services, including high-speed digital
subscriber lines;

. access to offsite data facilities, for data backup and storage; and

. extension of the local area network to multiple locations within the
metro area.

In addition, service providers seek to offer next generation services to
create new revenue- generating opportunities. Most current solutions require
dedicated equipment and interfaces that are unique for each particular service
and transmission rate. Given the dominance of data traffic, next generation
equipment must be specifically designed for efficient transmission of data
traffic and delivery of emerging services, while accommodating voice traffic.
This equipment must also support an unpredictable and changing mix of service
offerings on a single platform.

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<PAGE>

Manageability and Flexibility. As the introduction of new services increases
network complexity, service providers will require software and systems that
allow for easy and effective end-to-end management of data and voice services.
Since the metro network must constantly adapt to changes in the number and
location of users, the equipment must be flexible enough to accommodate
bandwidth deployment, where needed and when needed.

Low cost and scalability. Service providers need solutions that are cost-
effective to deploy initially and easily scale to handle rapid growth. To
expand their existing networks, they must add new equipment to their previously
deployed infrastructure, which is costly, utilizes the limited space in metro
service providers' facilities inefficiently and increases the complexity of
network management. Service providers seek new systems that can replace
existing systems at a price point that will allow revenue from new services to
provide a return on deployment costs and can be deployed in a pay-as-you-grow
fashion.

Reliability. Because the applications carried over metro networks are
critical to enterprises and users, rapid restoration of service is a key
requirement for all metro networks. Communication service providers require
equipment that meets existing reliability standards, while improving
reliability for higher bandwidth applications.

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

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

The ONI Systems Solution

We develop, market and sell optical networking equipment that enables
communication service providers to offer new revenue-generating services while
fully supporting existing voice and data services. Our data-optimized, scalable
solution increases available bandwidth in metropolitan areas and delivers end-
to-end manageability and rapid restoration for all services. Our family of
products consists of the ONLINE9000 for metro core networks, the ONLINE7000,
which we expect to be available by June 2000 for metro access networks, our
OPTX network operating system and our OLMP inter-network communications
protocol.

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Our product offerings provide the following benefits to communication
service providers:

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

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

. real-time control of bandwidth allocation as needed, where needed and
when needed;

. real-time surveillance of network performance;

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

. point-and-click activation of services.

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

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

The ONI Systems Strategy

The key elements of our strategy are to:

Leverage our optical approach to achieve early design wins in metro core and
metro access networks.

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

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

We intend to continue to develop and provide solutions that will enable our
customers to deliver emerging revenue-generating services to end-users. We
believe the demand for new services is a key driver of our customers' growth
and we intend to ensure that our hardware and software architectures continue
to offer the performance and flexibility to allow rapid introduction of new
services. We intend to work closely with our customers to help them identify
new services that they can deliver using our products.

Extend technology leadership.

Our optical architecture and dynamic network operating system are key
elements of our technology leadership. We believe that these elements can be
incorporated into future product offerings for other segments of the
communications network. We intend to extend our technology leadership and to
develop new product offerings and future product enhancements through continued
investment in research and development.

Leverage optical manufacturing expertise.

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

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

We intend to expand our direct sales capability into global markets. We
believe that sales efforts on a customer-by-customer basis are most effective
because deployment of communications equipment involves careful technical
evaluation, multiple levels of decision making and significant investments by
our customers. While we may consider indirect sales channels where appropriate,
we intend to continue to focus our sales and distribution efforts on direct
sales. We have developed a direct sales organization in North America and
Europe and are expanding that sales force as well as developing direct sales
forces for Asia and Latin America. In addition to our existing teams in the
United States, we are also establishing service and support teams
internationally to support our major customers.

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

We intend to establish strategic alliances with complementary technology
suppliers in order to leverage our technology leadership in providing optical
networking solutions. We believe that alliances with companies that provide
complementary products to enable new services will bring our customers greater
value. In addition, we intend to pursue acquisitions that will enable us to
broaden our product, service and technology portfolios.

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Optical Architecture

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

. combination and separation of
multiple optical channels;

. per channel and grouped
wavelength routing;

. real-time flexible adding or
dropping of optical channels;

. switching and routing around
optical fiber failure or
equipment failure;

. signal amplification; and

. supervisory channels for
performance monitoring.

[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]

Centered in the diagram are a stack of six long rectangles representing
functional layers within our ONLINE9000 or ONLINE7000 products. Superimposed
over the rectangles is a flow chart representing movement of the optical
signals through the functional layers.

From top to bottom:

The words "Interface to Client Equipment" appear above the top-most (or first)
rectangle in the stack. The portion of the flowchart shown in this rectangle
are squares representing interfaces to the client equipment.

The portion of the flowchart shown in each of the second and fourth rectangle
are trapezoids representing combination and separation of optical signals on
the signal. The words "Multiplexing, Demultiplexing" appear to the left of
these rectangles.

The portion of the flowchart shown in each of the third and fifth rectangle is
a smaller rectangle representing optical switching of the signal. The word
"Switching" appears in the flowchart rectangle. The word "Switching" appears to
the right of the third and fifth rectangle in the stack.

The portion of the flowchart shown in the sixth rectangle are triangles
representing amplification of signals to and from the network. The word
"Amplifiers" appears in the center of this rectangle. The words "To Fiber
Network" appear below the bottom-most rectangle of the stack.

[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' ALL-OPTICAL
ARCHITECTURE]

Our OPTX operating system software architecture integrates network design
tools, operations management software and end-to-end service management and
activation systems, as shown in the diagram below. This integrated environment
enables automated transfer of data through open interfaces to craft and
management terminals as well as local administrative networks for the
communications service provider.

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Built with software infrastructure based on the XML standard, OPTX also
provides standards-based CORBA interfaces to the service provider's operations
support systems and network-wide service applications, including service
ordering and activation, and inventory systems. Our OPTX architecture enables
information exchange with data switching and routing equipment through our OLMP
inter-network communications protocol. OPTX helps provide comprehensive and
integrated network design, operations and service management capabilities by
managing networks built with our ONLINE9000 product.

[BEGIN DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX
ARCHITECTURE]

The center of the diagram is a large square. The name "OPTX" appears in the
upper right corner of the square. Below this word appear three upright
rectangles. The words "Network Design Application" appear in the left
rectangle. The words "Network Configuration Application" appear in the center
rectangle. The words "Network Operation Application" appear in the right
rectangle. Below these rectangles occupying the bottom quarter of the square is
a rectangle with the words "Embedded Software" inside.

Above the main square is an ellipse with the words "Operations Support Systems
(Network Management, Service Management)" inside. To the left of the main
square is an upright ellipse with the words "Graphical User Interface and
Users" inside. To the right of the main square is an upright ellipse with the
words "Client Equipment" inside. Each of these ellipses is connected to the
main square by a two-way arrow. The name OLMP appears directly above the two-
way arrow connecting the main square and the right-hand ellipse.

[END DESCRIPTION OF GRAPHIC--DIAGRAM DEPICTING ONI SYSTEMS' OPTX ARCHITECTURE]

Products

ONLINE9000

The ONLINE9000 is designed for metropolitan area and regional networks and
delivers cost-effective, scalable capacity for the metro communications service
provider. It provides restoration faster than the synchronous optical network
standard of 50 milliseconds and supports dynamic optical add-drop capabilities
on all deployed channels. To help service providers deploy large networks, the
ONLINE9000 includes optical amplifiers to extend transmission distances. The
ONLINE9000 can be used in conventional ring network topologies and can
transport a variety of traffic patterns, including mesh. We intend in the
future to develop products that can be used in ring-mesh and mesh network
topologies. In its base configuration, the ONLINE9000 includes the following
key features:

. 33 protected or 66 unprotected channels;

. line-based optical rerouting of channels in the event of optical fiber
failure;

. a universal optical architecture supporting multiple bit rates and
protocols, including OC-3, OC-12, OC-48, OC-192, gigabit ethernet and
fibre channel;

. client interfaces currently supporting OC-3, OC-12, OC-48, gigabit
ethernet, fibre channel and, expected in the third calendar quarter of
2000, OC-192; and

. integrated optical amplifiers with sophisticated power management
capabilities.

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ONLINE7000

We have recently introduced the ONLINE7000, which we anticipate will be
available by June 2000. The ONLINE7000 is designed to provide metro service
providers with a cost-effective solution for metro access applications.
Integrated monitoring and surveillance capabilities will ensure managed
operation from the operator's perspective across metro core and metro access
networks. The ONLINE7000 shares the same management and operating system as the
ONLINE9000 and can be deployed as an extension of the ONLINE9000.

The ONLINE7000 includes many functions of synchronous optical network and
data multiplexers. This capability will allow the carrier to deploy multiple
synchronous optical network or native-format data services using a single
wavelength. The ONLINE7000 is scalable up to 33 protected or 66 unprotected
channels. In its base configuration, key features of the ONLINE7000 will
include:

. optional optical and electrical rerouting of channels in the event of
optical fiber failure, expected to be released in June 2000;

. a 199 shelf form factor suitable for metro access networks, expected to
be released in July 2000; and

. the ability to add or drop multiple synchronous optical network or data
channels to or from a single wavelength, expected to be released in
October 2000.

OPTX Operating System

Our OPTX optical network operating system provides a unified environment for
metro core and metro access service providers to manage diverse networking
resources and hardware and software systems. Analogous to the operating systems
of personal computers, OPTX manages all resources in the transmission network,
including transmission systems, connections, protection resources and
terminals, and allocates resources to various users and applications, based on
user preferences. OPTX brings the ability to manage, arbitrate and dynamically
control network-wide resources to metro network service providers. Multiple
application programmer interfaces within OPTX link to other management systems
and applications. The OPTX architecture and infrastructure makes extensive use
of the XML standard to enable interaction with other network management
equipment without developing dedicated interfaces. The key features of the OPTX
operating system include:

. OPTXNET, an integrated optical network design tool that provides
automatic optical link analysis, link optimization and configuration for
each node in the network;

. Network and service management interface and applications, including
surveillance, service activation and ordering systems and network
inventory reports; and

. CORBA-based interfaces to the service provider's network operations
support systems.

OLMP (Optical Link Management Protocol)

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

Customers

Our target customers include communication service providers such as
regional Bell operating companies, competitive local exchange carriers, long-
distance carriers with local operations, cable

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operators, Internet service providers, and foreign telephone companies. We have
entered into agreements under which the following communication service and
equipment providers may, but are not obligated to, purchase our products: COLT
Telecom plc, KVH Industries Inc., Lucent Technologies, Inc., Marietta Fibernet,
MetroRED Telecommunicaciones S.A., StorageNetworks, Inc. and Williams
Communications, Inc. We have also entered into a limited trial system purchase
agreement with Internet Initiative Japan Inc.

In addition, we have shipped the ONLINE9000 to Marietta Fibernet,
StorageNetworks and Williams Communications in the United States, COLT Telecom
in the United Kingdom, Internet Initiative Japan in Japan and Lucent
Technologies for deployment in China.

Sales and Marketing

In North America and Europe, we have developed a direct sales force and in
some limited circumstances may join with other communications equipment
providers to bid on major proposals. Our direct sales force consists of sales
teams made up of an account manager, systems engineers and technical support
and training personnel. Each team is assigned responsibility for specific
geographic territories and specific customers within each territory. We are
continuing to expand our existing direct sales force and are developing a
direct sales force to sell to potential customers outside North America and
Europe.

In some international regions where it is difficult or expensive to maintain
a direct sales force, we may rely on resellers for distribution of our
products. For example, in April 2000, we entered into an OEM relationship with
Lucent Technologies that expires on December 31, 2001. Under the terms of our
agreement, Lucent Technologies has the exclusive right to sell some of our
products in China for a period of 12 months.

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

Customer Service and Support

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

Research and Development

We believe that to be successful we must continue to enhance our existing
products and develop new products that maintain technological competitiveness.
We have assembled a team of approximately 165 highly skilled optical hardware
and software engineers, manufacturing and test engineers and system and network
architects. Research and development expenses were $4.0 million for the year
ended December 31, 1998 and $25.4 million for the year ended December 31, 1999.
We will continue to make substantial investments in research and development.

Our product development process is driven by market demand and a close
collaboration between our product marketing, sales and product development
organizations. Our product development process begins with a detailed set of
specifications prepared by our product management organization.

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We also incorporate feedback from our customers in the product development
process. In addition, we participate in industry and standards organizations
where appropriate and incorporate information from these contacts throughout
the product development process.

Manufacturing and Supply

We conduct supply chain management, production engineering, documentation
control and quality assurance at our assembly facility in San Jose, California.
We outsource most of the manufacturing of optical modules used in our products,
and we complete the final assembly of these optical modules at our facilities.
The majority of our electronic manufacturing and assembly is outsourced.
Currently, we use a number of manufacturing vendors for electronic assemblies
while E-TEK Dynamics, Inc. performs the majority of our outsourced optical
assembly.

This approach to manufacturing allows us to:

. reduce the capital equipment expenditures that would be required for a
turnkey manufacturing operation;

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

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

. respond to market demand flexibly.

We currently purchase many of our electrical and optical components through
purchase orders. In order to help us maintain a supply of components, and
specifically optical components, we intend to use long term supply agreements
with vendors. For example, in March 2000, we entered into an agreement with E-
TEK Dynamics, under which E-TEK Dynamics will supply optical components and
module integration services to us through at least December 31, 2001. We are
required to purchase at least half of our requirements of the optical
components covered by this agreement from E-TEK Dynamics.

Competition

Competition in the metro communications networking equipment market is
intense. Our existing and potential competitors are numerous and include
established companies such as Alcatel, CIENA, Cisco Systems, Juniper Networks,
Lucent Technologies, Nortel Networks, Siemens, Sycamore Networks and Tellabs. A
number of private companies have recently announced plans for new products to
address the same problems that our products address and have attracted
substantial amounts of venture capital funding. Many of these companies,
particularly the large public companies, have substantially greater financial,
marketing and development resources than we have, which puts us at a
competitive disadvantage. Many of them have existing relationships with
communication service providers, which will make it more difficult for us to
sell our products to those customers. Some competitors may seek to use
intellectual property rights to limit our ability to compete. For example,
Nortel Networks claims that we infringe some of its patents.

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

. provide extremely high network reliability;

. provide high performance capabilities;

44
<PAGE>

. scale easily and efficiently with minimum disruption to the network;

. interoperate with existing network designs and equipment vendors;

. reduce the complexity of the network by decreasing the need for multiple
layers of equipment; and

. provide a cost-effective solution for service providers.

While our first product has only been generally available since January
2000, we believe that positive factors pertaining to our competitive position
include our technology, the expertise of our research and development
personnel, our manufacturing expertise and our intellectual property rights. We
believe that negative factors pertaining to our competitive position include
our relative newness in the market and the fact that some of our competitors
have large financial resources available to promote sales of their products and
to develop products more directly competitive with ours. If we are unable to
compete successfully against our current and future competitors, we could
experience price reductions, reduced gross margins and loss of market share,
any one of which could materially harm our business, operating results and
financial condition.

Intellectual Property

Our success and ability to compete depends on our ability to develop
technological expertise internally. We rely on a combination of patent,
copyright, trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We have been issued six patents in
the United States. However, only two of these patents are currently significant
to our products. In addition, we currently have 16 patent applications pending
in the United States and internationally. These patents relate to optical
architecture, hardware, software and management systems. Issued patents may not
protect our intellectual property or may be challenged by third parties. In
addition, others may independently develop similar or competing technology or
design around our patents.

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

ONI Systems(TM), ONI(TM), our logo, ONLINE9000(TM), ONLINE7000(TM),
OPTX(TM), OPTXNET(TM), OLMP(TM), Dynamic Transport System(TM) and DTS(TM) are
trademarks of ONI Systems. All other names or trademarks appearing in this
prospectus are the property of their holders.

Employees

As of March 31, 2000, we had a total of 326 employees:

. 147 in research and development;

. 41 in sales and marketing;

. 18 in customer service and support;

. 68 in manufacturing; and

. 52 in finance and administration.

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

45
<PAGE>

Facilities

Our headquarters are currently located in a leased facility in San Jose,
California, consisting of approximately 53,000 square feet under a lease that
expires in 2002. We also lease a facility of approximately 58,000 square feet
in San Jose, California, under a lease that expires in 2006, and a facility of
approximately 1,500 square feet in Raleigh, North Carolina, under a short-term
lease. We expect to require additional space within the next 12 months. We
entered into a lease for a new facility in May 2000. The lease will expire in
2011. The new facility is initially approximately 346,000 square feet, and will
expand to approximately 445,000 square feet in January 2003. We intend to move
our headquarters to this new facility in the first quarter of 2001.

Legal Proceedings

In October 1999, Nortel Networks filed suit in the Superior Court for the
Province of Quebec, District of Montreal, Canada against us and several of our
employees who were former employees of Nortel Networks. The suit seeks an
injunction to prevent us from hiring additional Nortel Networks employees and
to prohibit the use of Nortel Networks' trade secrets by us. In October 1999
and November 1999, temporary orders were issued prohibiting the former Nortel
Networks employees from soliciting current Nortel Networks' employees and from
using specified Nortel Networks trade secrets. The temporary orders were
renewed on several occasions, by court order following agreement of the parties
to such renewal, and remain effective through September 5, 2000.

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

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

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

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

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

46
<PAGE>

MANAGEMENT

Executive Officers, Directors and Significant Employees

Our executive officers, directors and significant employees, and their ages
and positions as of May 1, 2000, are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers
and Directors:
Hugh C. Martin................ 46 President, Chief Executive Officer and
Chairman of the Board of Directors
Chris A. Davis................ 49 Executive Vice President, Chief Financial
and Administrative Officer
Hon Wah Chin.................. 45 Chief Technology Officer
William R. Cumpston........... 38 Senior Vice President, Engineering and
Operations
Michael A. Dillon............. 41 Vice President, General Counsel and
Secretary
Robert J. Jandro.............. 44 Executive Vice President, Worldwide Sales
and Marketing
Andrew W. Page................ 34 Vice President, Corporate Development
Matthew W. Bross.............. 39 Director
Kevin R. Compton.............. 41 Director
Jonathan D. Feiber............ 42 Director
James F. Jordan............... 60 Director
Gregory B. Maffei............. 39 Director
Significant Employees:
Kenneth H. Calhoun............ 34 Vice President, Product Marketing
Martin Desroches.............. 35 Vice President, Operations
William S. Jarvis............. 37 Vice President, Worldwide Sales
Rohit Sharma.................. 31 Vice President, Optical Hardware Development
</TABLE>

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

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

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

47
<PAGE>

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

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

Robert J. Jandro has served as Executive Vice President, Worldwide Sales and
Marketing of ONI Systems since March 2000. Mr. Jandro served as Group Vice
President of Oracle Corporation, a database software company, from May 1999 to
March 2000. From 1994 to May 1999, he served as Oracle's Vice President, North
America Communications and Vice President, United States Central Region, Latin
America and Canada. He holds an M.B.A. from the Kellogg Graduate School of
Management at Northwestern University and a B.S. in Business from the
University of Missouri, St. Louis.

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

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

Kevin R. Compton has served as a director of ONI Systems since January 1998.
Mr. Compton has served as a general partner at Kleiner Perkins Caufield & Byers
since 1990. Mr. Compton serves on the boards of directors of 360networks Inc.,
Active Software, Inc., Citrix Systems, Inc., Corsair Communications, Inc.,
Rhythms NetConnections Inc. and VeriSign, Inc.

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

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

48
<PAGE>

Gregory B. Maffei has served as a director of ONI Systems since February
2000. Mr. Maffei has served as Chief Executive Officer and as a member of the
board of directors of 360networks Inc., a communications service provider,
since December 1999. From 1993 to December 1999, Mr. Maffei served in various
capacities with Microsoft Corporation, a software company, most recently as
Senior Vice President, Finance and Administration, and Chief Financial Officer.
He serves on the board of directors of Avenue A, Inc., Expedia, Inc. and
Starbucks Corporation. He holds an M.B.A. from Harvard University Graduate
School of Business and a B.A from Dartmouth College.

Kenneth H. Calhoun has served as Vice President, Product Marketing of ONI
Systems since February 1999 and served as Senior Director, Product Marketing of
ONI Systems from August 1998 to February 1999. He served as Senior Manager,
Account Marketing and Senior Manager, Product Marketing at Nortel Networks
Corporation, a telecommunications company, from March 1997 to August 1998. Mr.
Calhoun served as Senior Manager and Manager, Broadband Product Planning with
Fujitsu Network Communications, Inc. from September 1995 to March 1997. He
holds a Ph.D. in Electrical Engineering and a B.S. in Electrical Engineering
from the Georgia Institute of Technology.

Martin Desroches has served as Vice President, Operations of ONI Systems
since October 1999. Mr. Desroches served as Senior Manager, High Speed Optics
Operations for Nortel Optoelectronics, an optical components company, from
September 1998 to October 1999. He served as Senior Manager and Manager, OC-192
Manufacturing Engineering for Nortel Networks from June 1994 to September 1998.
He holds a B.S. in Electrical Engineering from the University of Sherbrooke.

William S. Jarvis has served as Vice President, Worldwide Sales of ONI
Systems since May 1999. Mr. Jarvis served as Sales Vice President for NEC
America, a telecommunications company, from October 1996 to May 1999 and
Director of Sales for NEC America from January 1995 to January 1996. He holds
an M.B.A. from Santa Clara University and a B.S. in Business Administration
from San Jose State University.

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

Board Composition

Our board currently consists of six members. Each director is elected for a
period of one year at our annual meeting of stockholders and serves until the
next annual meeting or until his successor is duly elected and qualified.

Our bylaws provide that, following this offering, our board of directors
will be divided into three classes as nearly equal in size as possible with
staggered three-year terms. The classification of our board of directors could
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from acquiring, control of ONI Systems.

Board Committees

Our board of directors has two committees:

Compensation Committee. The current members of our compensation committee
are Messrs. Compton and Feiber. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers. The compensation committee also administers our stock plans.

49
<PAGE>

Audit Committee. The current members of our audit committee are Messrs.
Jordan, Feiber and Maffei. Our audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.

Members serve on these committees until their resignation or until otherwise
determined by our board.

Compensation Committee Interlocks and Insider Participation

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

Director Compensation

Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings. The following directors have been granted stock
awards or options to purchase our common shares. In March 1998 and November
1998, we granted stock awards to purchase 360,000 shares and 180,000 shares of
common stock to Mr. Jordan for $0.08 and $0.09 per share, respectively, which
he purchased in full. In November 1999, we granted an option to purchase
180,000 shares of common stock to Mr. Bross at an exercise price of $0.91 per
share. In December 1999, we granted an option to purchase 1,215,834 shares of
common stock to Mr. Martin at an exercise price of $1.25 per share in
connection with his services as President and Chief Executive Officer. In March
2000, we granted an option to purchase 120,000 shares of common stock to Mr.
Maffei at an exercise price of $3.20 per share.

Members of the board who are not employees of ONI Systems, or any parent,
subsidiary or affiliate of ONI Systems, will be eligible to participate in the
2000 equity incentive plan. The option grants under the plan are automatic and
nondiscretionary, and the exercise price of the options is the fair market
value of the common stock on the date of grant.

Each non-employee director who becomes a member of the board on or after the
effective date of the registration statement of which this prospectus forms a
part will be granted an option to purchase 80,000 shares of common stock. Also,
each non-employee director who became a member of the board prior to the
effective date of the registration statement of which this prospectus forms a
part and who did not receive an option grant will receive an option to purchase
80,000 shares. Immediately following each annual meeting of stockholders, each
eligible director will automatically be granted an additional option to
purchase 40,000 shares of common stock if the director has served continuously
as a member of the board since the date of the prior annual meeting. The board
of directors may make discretionary supplemental grants to an eligible director
who has served for less that one year from the date of that director's initial
grant. The options have ten-year terms. They will terminate three months
following the date the director ceases to be a director or a consultant or 12
months following termination due to death or disability. All options granted
under the 2000 equity incentive plan will become exercisable over a four year
period at a rate of 25% after one year and 2.083% per month thereafter so long
as he or she continues as a member of the board or as a consultant. In the
event of our dissolution or liquidation or a change in control transaction,
options granted to directors under the plan will become 100% vested and
exercisable in full.

50
<PAGE>

Executive Compensation

The following table presents compensation information for our fiscal year
ended December 31, 1999 paid to or accrued for our Chief Executive Officer and
each of our executive officers whose salary and bonus was more than $100,000.
The compensation table includes long-term awards granted in 1999. The
compensation table excludes other compensation in the form of perquisites and
other personal benefits that constituted less than 10% of the total annual
salary and bonus for the named executive officer in the fiscal year ended
December 31, 1999.

The table includes compensation information for Terrence J. Schmid, our
former Chief Financial Officer and Vice President, Finance and Administration,
who resigned effective April 28, 2000.

The table does not include compensation information for three executive
officers who commenced employment after December 31, 1999. These three officers
would have been among the five most highly compensated executive officers had
they been employees of ONI Systems in 1999. Chris A. Davis, our Executive Vice
President, Chief Financial and Administrative Officer, commenced employment
with ONI Systems on May 1, 2000. Ms. Davis' salary on an annualized basis for
2000 is $400,000, which does not include a $300,000 bonus received upon
commencement of employment. Robert J. Jandro, our Executive Vice President,
Worldwide Sales and Marketing, commenced employment with ONI Systems on March
1, 2000. Mr. Jandro's salary on an annualized basis for 2000 is $295,000, which
does not include a $200,000 bonus payable upon the satisfaction of established
performance goals. Andrew W. Page, our Vice President, Corporate Development,
commenced employment with ONI Systems on February 29, 2000. Mr. Page's salary
on an annualized basis for 2000 is $300,000, which does not include a $30,000
bonus received upon commencement of employment.

Summary Compensation Table for 1999

<TABLE>
<CAPTION>
Long-Term
Compensation Awards
---------------------
Annual
Compensation Restricted Securities
---------------- Stock Underlying
Name and Principal Positions Salary Bonus Awards Options
---------------------------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Hugh C. Martin......................... $270,001 $ -- -- 1,215,834
President and Chief Executive Officer

Terrence J. Schmid..................... 173,335 -- -- 320,000
Chief Financial Officer and Vice
President, Finance and Administration
Hon Wah Chin........................... 182,820 -- -- 200,000
Chief Technology Officer

William R. Cumpston.................... 191,666 85,000 -- 800,000
Senior Vice President, Engineering and
Operations
</TABLE>

51
<PAGE>

Option Grants in 1999

The following table sets forth grants of stock options in 1999 to the
executive officers named in the summary compensation table above.

All options granted generally vest over four years, either:

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

. at the rate 2.083% of the shares subject to the option each month.

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

Estimated values are computed by

. multiplying the number of shares of common stock subject to a given
option by the assumed initial public offering price of $22.00 per share,
and

. subtracting from that result the aggregate option exercise price.

Potential realizable values are computed by

. multiplying the number of shares of common stock subject to a given
option by the assumed initial public offering price of $22.00 per share,

. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rates shown in the table for the entire
ten-year term of the option, and

. subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are mandated by
the rules of the Securities and Exchange Commission and do not represent
our estimate or projection of future common stock prices.

The percentage of total options granted to employees in 1999 is based on
options to purchase a total of 19,269,998 shares of common stock of ONI Systems
granted to employees during 1999.

Mr. Schmid resigned as our Chief Financial Officer and Vice President,
Finance and Administration effective April 28, 2000.

<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percentage of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Expiration Estimated ----------------------------
Name Granted in 1999 Per Share Date Value 5% 10%
- ---- ---------- ------------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hugh C. Martin.......... 1,215,834 6.31% $1.25 12/21/09 $25,228,556 $ 42,050,448 $67,858,533

Terrence J. Schmid...... 120,000 0.62 0.09 3/4/09 2,629,200 4,289,482 6,836,680
200,000 1.04 1.25 12/21/09 4,150,000 6,917,136 11,162,467

Hon Wah Chin............ 100,000 0.52 0.09 7/15/09 2,191,000 3,574,568 5,697,233
100,000 0.52 1.25 12/21/09 2,075,000 3,458,568 5,581,233

William R. Cumpston..... 300,000 1.56 0.09 3/4/09 6,573,000 10,723,705 17,091,700
200,000 1.04 0.91 9/15/09 4,218,000 6,985,136 11,230,467
300,000 1.56 1.25 12/21/09 6,225,000 10,375,705 16,743,700
</TABLE>

52
<PAGE>

Option Grants in 2000

The following table sets forth grants of stock options to new executive
officers since December 31, 1999:

<TABLE>
<CAPTION>
Potential Realizable Value
Number of at Assumed Annual Rates
Securities Exercise of Stock Price Appreciation
Underlying Price for Option Term
Options Per Expiration Estimated ---------------------------
Name Granted Share Date Value 5% 10%
- ---- ---------- -------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Chris A. Davis.......... 1,000,000 $ 4.00 5/3/10 $18,000,000 $ 31,835,682 $ 53,062,334
Robert J. Jandro........ 900,000 3.20 3/1/10 16,920,000 29,372,114 48,476,101
Andrew W. Page.......... 300,000 3.20 3/1/10 5,640,000 9,790,705 16,158,700
50,000 10.00 5/3/10 600,000 1,291,784 2,353,117
</TABLE>

Aggregated Option Exercises in the Fiscal Year Ended December 31, 1999

The following table presents the number of shares acquired and the value
realized upon exercise of stock options during the fiscal year ended December
31, 1999.

The value realized equals the fair market value of the purchased shares on
the option exercise date, less the exercise price paid for those shares. None
of the individuals named in the table below held any options at December 31,
1999. The shares acquired upon exercise of those options will be subject to
repurchase by ONI Systems, at the original exercise price paid per share, if
the optionee ceases service with ONI Systems before those shares have vested.

Mr. Schmid resigned as our Chief Financial Officer and Vice President,
Finance and Administration effective April 28, 2000.

In March 2000, Mr. Jandro acquired 900,000 shares of common stock on the
exercise of an option and Mr. Page acquired 300,000 shares of common stock on
the exercise of an option. Neither Mr. Jandro or Mr. Page had any value
realized on their respective option grants. To date, Ms. Davis has not
exercised any options.

<TABLE>
<CAPTION>
Number of
Shares
Acquired on Value
Name Exercise Realized
---- ----------- --------
<S> <C> <C>
Hugh C. Martin........................................ 1,215,834 $ --

Terrence J. Schmid.................................... 320,000 98,400
Hon Wah Chin.......................................... 200,000 82,000

William R. Cumpston................................... 1,300,000 656,000
</TABLE>

Employee Benefit Plans

1997 Stock Option Plan. As of March 31, 2000, options to purchase 318,088
shares of common stock were outstanding under our 1997 stock option plan. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.03 per share. The board of directors terminated this plan in April 1998,
and no options have been granted under it since that time. Termination did not
affect any outstanding options, all of which will remain outstanding and
subject to the terms of our 1997 stock option plan and stock option agreement
until exercise or until they terminate or expire by their terms. Options
granted under our 1997 stock option plan are subject to terms substantially
similar to those described below with respect to options granted under our 2000
equity incentive plan.

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<PAGE>

1998 Equity Incentive Plan. As of March 31, 2000, options to purchase
18,039,257 shares of common stock were outstanding under our 1998 equity
incentive plan and 1,029,653 shares of common stock remained available for
issuance upon the exercise of options that may be granted in the future. The
options outstanding as of March 31, 2000 had a weighted average exercise price
of $0.63 per share. Our 1998 equity incentive plan will terminate upon this
offering, at which time our 2000 equity incentive plan will become effective.
As a result, no options will be granted under our 1998 equity incentive plan
after this offering. However, termination will not affect any outstanding
options under our 1998 equity incentive plan, all of which will remain
outstanding and subject to the terms of our 1998 equity incentive plan and
stock option agreement until exercise or until they terminate or expire by
their terms. Options granted under our 1998 equity incentive plan are subject
to terms substantially similar to those described below with respect to options
granted under our 2000 equity incentive plan.

1999 Equity Incentive Plan. As of March 31, 2000, options to purchase
986,000 shares of common stock were outstanding under our 1999 equity incentive
plan and 348,166 shares of common stock remained available for issuance upon
the exercise of options that may be granted in the future. The options
outstanding as of March 31, 2000 had a weighted average exercise price of $0.96
per share. Our 1999 equity incentive plan will terminate upon this offering, at
which time our 2000 equity incentive plan will become effective. As a result,
no options will be granted under our 1999 equity incentive plan after this
offering. However, termination will not affect any outstanding options under
our 1999 equity incentive plan, all of which will remain outstanding and
subject to the terms of our 1999 equity incentive plan and stock option
agreement until exercise or until they terminate or expire by their terms.
Options granted under our 1999 equity incentive plan are subject to terms
substantially similar to those described below with respect to options granted
under our 2000 equity incentive plan.

2000 Equity Incentive Plan. Our 2000 equity incentive plan will become
effective on the date of this prospectus and will serve as the successor to our
1998 equity incentive plan and our 1999 equity incentive plan. We have reserved
7,000,000 shares of common stock to be issued under this plan. In addition,
shares under our 1997 stock option plan, 1998 equity incentive plan and 1999
equity incentive plan not issued or subject to outstanding grants on the date
of this prospectus and any shares issued under these plans that are forfeited
or repurchased by us or that are issuable upon exercise of options that become
unexercisable for any reason without having been exercised in full will be
available for grant and issuance under our 2000 equity incentive plan. Shares
will again be available for grant and issuance under our 2000 equity incentive
plan that:

. are subject to issuance upon exercise of an option granted under our 2000
equity incentive plan that cease to be subject to the option for any
reason other than exercise of the option;

. have been issued upon the exercise of an option granted under our 2000
equity incentive plan that are subsequently forfeited or repurchased by
us at the original purchase price;

. are subject to an award granted under a restricted stock purchase
agreement under our 2000 equity incentive plan that are subsequently
forfeited or repurchased by us at the original issue price; or

. are subject to a stock bonus granted under our 2000 equity incentive plan
that terminates without shares being issued.

On each January 1, the aggregate number of shares reserved for issuance
under our 2000 equity incentive plan will increase automatically by a number of
shares equal to 5% of our outstanding shares on December 31 of the preceding
year. Our board of directors or compensation committee may reduce the amount of
the increase in any particular year.

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

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

Our 2000 equity incentive plan will provide for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees of ONI Systems or of a parent or subsidiary of ONI Systems. All other
awards other than incentive stock options may be granted to employees,
officers, directors and consultants of ONI Systems or any parent or subsidiary
of ONI Systems, provided the consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The exercise price of incentive stock options must be at least
equal to the fair market value of our common stock on the date of grant. The
exercise price of incentive stock options granted to 10% stockholders must be
at least equal to 110% of that value. The exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of our common
stock on the date of grant.

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

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

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

2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan
will become effective on the first day on which price quotations are available
for our common stock on the Nasdaq National Market. We have initially reserved
1,000,000 shares of common stock under this plan. On each January 1, the
aggregate number of shares reserved for issuance under our 2000 employee stock
purchase plan will increase automatically by a number of shares equal to 1% of
our outstanding shares on December 31 of the preceding year. Our board of
directors or compensation committee may reduce the amount of the increase in
any particular year. The aggregate number of shares reserved for issuance under
our 2000 employee stock purchase plan may not exceed 10,000,000 shares.

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

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

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

Except for the first offering period, each offering period under our 2000
employee stock purchase plan will be for two years and consist of four six-
month purchase periods. Offering periods and purchase periods will begin on
February 1 and August 1 of each year. The first offering period is expected to
begin on the first business day on which price quotations for common stock are
available on the Nasdaq National Market. However, because the first day on
which price quotations for our common stock will be available on the Nasdaq
National Market may not be February 1 or August 1, the length of the first
offering period may be more or less than two years, and the length of the first
purchase period may be more or less than six months.

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

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

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

401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who
are at least 21 years old are generally eligible to participate. Participants
may make pre-tax contributions to the plan of up to 15% of their

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<PAGE>

eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. There are no matching contributions under the plan. Contributions by
the participants to the plan, and the income earned on these contributions, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.

Employment-Related Agreements

Hugh C. Martin. In January 1998, we entered into an at-will employment
agreement with Mr. Martin. Mr. Martin initially received a base salary of
$200,000 per year. Mr. Martin's current salary is $280,000 per year. He is also
eligible to receive an annual performance bonus of up to 25% of his salary,
which was guaranteed at $50,000 in 1998. In addition, we granted Mr. Martin a
stock award to purchase 8.5% of our total capital stock, subject to vesting
requirements. We also granted Mr. Martin a stock award to purchase 1.5% of our
total capital stock, which vested according to attainment of 1998 and 1999
milestones. In the event of a change in control of ONI Systems, 50% of the
then-unvested shares subject to Mr. Martin's stock award will become fully
vested.

Terrence J. Schmid. In February 1998, we entered into an at-will employment
agreement with Mr. Schmid. Mr. Schmid resigned as our Chief Financial Officer
and Vice President, Finance and Administration effective April 28, 2000. Mr.
Schmid initially received a base salary of $140,000 per year. He was eligible
to receive an annual performance bonus of up to 15% of his base salary, which
was guaranteed at $20,000 in 1998. In connection with this agreement, Mr.
Schmid purchased 533,332 shares of common stock, subject to vesting
requirements.

In March 2000, we entered into a separation agreement with Mr. Schmid in
connection with his resignation. Under the terms of this agreement, we agreed
to make a severance payment of $90,000 which was equal to six months of Mr.
Schmid's final salary. We also agreed to waive our repurchase rights with
respect to up to 106,662 shares of common stock.

Chris A. Davis. In April 2000, we entered into an at-will employment
agreement with Ms. Davis. Ms. Davis' initial and current salary is $400,000 per
year. She received a signing bonus of $300,000. We also agreed to allow Ms.
Davis to choose any one of these three alternatives:

. an option to purchase 1,100,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant;

. an option to purchase 1,000,000 shares of common stock at an exercise
price per share of $4.00; or

. an option to purchase 1,000,000 shares of common stock at an exercise
price per share equal to the fair market value of common stock on the
date of grant together with loan forgiveness in an amount up to
$2,125,000 per year for four years if Ms. Davis chooses to exercise this
option immediately with a promissory note.

She chose the second alternative. Her option is subject to vesting. Ms. Davis
will be permitted to pay for the exercise of these options with a promissory
note. In the event of a change of control of ONI Systems and an involuntary or
constructive termination without cause of Ms. Davis' employment with us or our
successor, 50% of the then-unvested shares subject to Ms. Davis' stock option
will become fully vested.

We have also agreed to loan, or guaranty a loan, of up to $3.0 million for
the purchase of a principal residence by Ms. Davis. The loan will be secured by
the residence and have a term of one year at an interest rate equal to the
lowest legal rate. The loan must be repaid within 90 days of the termination of
her employment.

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If we terminate Ms. Davis' employment without cause, she will be entitled to
receive six months of her then-current salary, benefits and vesting of options.
She will receive at least six months vesting if her employment is terminated
within the first year of her employment.

Hon Wah Chin. In June 1998, we entered into an at-will employment agreement
with Mr. Chin. Mr. Chin initially received a base salary of $160,000 per year.
Mr. Chin's current salary is $200,000 per year. He is also eligible to receive
an annual performance bonus, which was guaranteed at $40,000 in 1998. In
addition, we granted Mr. Chin a stock award to purchase 674,000 shares of
common stock, subject to vesting requirements. In the event of a change in
control of ONI Systems, 50% of the then-unvested shares subject to Mr. Chin's
stock award and 50% of any other then unvested securities granted to Mr. Chin
by us will become fully vested.

If we terminate Mr. Chin's employment without cause, he will be entitled to
receive six months of his then-current salary, benefits and vesting of options.

William R. Cumpston. In August 1998, we entered into an at-will employment
agreement with Mr. Cumpston. Mr. Cumpston initially received a base salary of
$175,000 per year. Mr. Cumpston's current salary is $225,000 per year. He also
received a signing bonus of $45,000 and is eligible to receive an annual
performance bonus of at least $40,000. In addition, we granted Mr. Cumpston an
option to purchase 500,000 shares of common stock, subject to vesting
requirements.

Michael A. Dillon. In October 1999, we entered into an at-will employment
agreement with Mr. Dillon. Mr. Dillon's initial and current salary is $200,000
per year. In addition, Mr. Dillon received a signing bonus of $50,000 and we
granted Mr. Dillon an option to purchase 300,000 shares of our common stock,
subject to vesting requirements. We also granted Mr. Dillon an option to
purchase an additional 20,000 shares of common stock, which is not subject to
any vesting requirements. In the event of a change in control of ONI Systems,
25% of the then-unvested shares subject to Mr. Dillon's stock option and 25% of
the then-unvested shares of any other securities granted to Mr. Dillon by us
will become fully vested.

If we terminate Mr. Dillon's employment without cause during his first 12
months of employment, he will be entitled to receive six months of his then-
current salary, benefits and vesting of options.

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

If we terminate Mr. Jandro's employment without cause during his first 12
months of employment, he will be entitled to receive six months of his base
salary.

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

Indemnification of Directors and Executive Officers and Limitation of Liability

Our certificate of incorporation and bylaws provide that a director shall
not be personally liable for monetary damages resulting from breach of his
fiduciary duty as a director, except for liability:

. for any breach of the director's duty of loyalty to us or our
stockholders;

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. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

. for any transaction from which the director derived an improper personal
benefit.

Our bylaws provide that:

. we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;

. we may indemnify our employees and agents as set forth in the Delaware
General Corporation Law, subject to very limited exceptions;

. we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding;

. we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and

. the rights conferred in the bylaws are not exclusive.

In addition to the indemnification required in our certificate of
incorporation and bylaws, before the completion of this offering, we entered
into indemnity agreements with each of our current directors and executive
officers. These agreements provide for the indemnification of our officers and
directors for all expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact that they are
or were our agents. We also intend to obtain directors' and officers' insurance
to cover our directors, officers and some of our employees for liabilities,
including liabilities under securities laws. We believe that these
indemnification provisions and agreements and this insurance are necessary to
attract and retain qualified directors and officers.

The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against
directors and officers as required by these indemnification provisions. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification by us is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.

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RELATED PARTY TRANSACTIONS

Other than compensation agreements and other arrangements, which are
described as required in "Management", and the transactions described below,
since we were formed, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:

. in which the amount involved exceeded or will exceed $60,000; and

. in which any director, executive officer, holder of more than 5% of our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.

Optivision Spin-Out

In October 1997, Optical Networks, Incorporated, our California predecessor,
was formed as a subsidiary of Optivision, Inc. In exchange for assets related
to the optical development business and related liabilities, Optivision
received 11,565,752 shares of our common stock and 8,000,000 shares of our
Series A preferred stock. In addition to the shares of capital stock delivered
to Optivision, we executed and delivered a $90,000 promissory note in favor of
Optivision that was subsequently cancelled by Optivision upon payment.

In December 1997, we were spun out of Optivision and Optivision distributed
some of its holdings of our common stock and preferred stock to Optivision
shareholders. Holders of Optivision common stock and Series A preferred stock
received one share of our common stock for every share of Optivision common
stock or Series A preferred stock held, for an aggregate of 11,565,752 shares.
Holders of Optivision Series B preferred stock received one share of our Series
A preferred stock for every share of Optivision Series B preferred stock held,
for an aggregate of 4,000,000 shares. Optivision also retained 4,000,000 shares
of our Series A preferred stock. In January 1998, all of the shares of our
Series A preferred stock were converted into Series B preferred stock on a one-
for-one basis.

In connection with the spin-out, we have reserved, and are obligated to
issue for no additional consideration, shares of our common stock upon the
exercise of the warrants to purchase capital stock of Optivision. In October
1997, ADC Telecommunications, Inc., a holder of Optivision Series B preferred
stock, entered into an agreement with Optivision that granted ADC registration,
information and other rights related to the Series A preferred stock
distributed to ADC as part of the spin-out. These rights were amended upon
conversion of its Series A preferred stock to Series B preferred stock.

In January 1998, as a condition to the closing of our Series B and C
financings, we entered into agreements with Optivision granting us certain
additional assets, related liabilities and a license to technology and
assigning technology to us. In July 1998, we completed an agreement with
Optivision, under which it transferred contracts between the United States
government and Optivision to us.

In January 1998, Optivision sold 2,666,667 shares of our Series B preferred
stock to Kleiner Perkins Caufield & Byers and its affiliates and Mohr, Davidow
Ventures and its affiliates, for an aggregate purchase price of $2.0 million.
In March 1998, we repurchased the remaining shares of our stock owned by
Optivision, consisting of 1,333,333 shares of our Series B preferred stock, for
an aggregate purchase price of $1.0 million. Optivision does not currently own
any shares of ONI Systems.

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Preferred Stock Financings

Since our inception, we have issued shares of preferred stock in private
placement transactions involving related parties as follows:

. from December 1997 to March 1998, we sold 18,128,843 shares of Series B
preferred stock for approximately $0.24 per share, issued 8,000,000
shares of Series B preferred stock upon conversion of all outstanding
shares of Series A preferred stock and repurchased 1,333,333 shares of
Series B preferred stock;

. from December 1997 to March 1998, we sold 2,733,332 shares of Series C
preferred stock for approximately $0.75 per share;

. from December 1998 to May 1999, we sold 26,284,024 shares of Series E
preferred stock for approximately $0.91 per share;

. in September 1999, we sold 8,249,468 shares of Series F preferred stock
for approximately $1.82 per share; and

. from December 1999 to March 2000, we sold 12,163,418 shares of Series G
preferred stock for approximately $6.32 per share.

Purchasers of our preferred stock include, among others, the following
executive officers, directors and holders of more than 5% of our outstanding
stock or entities affiliated with them. The following table presents the number
of shares and price per share for each of these purchasers. The number of total
shares on an as-converted basis reflects a one-to-one conversion to common
stock ratio for each share of Series B, Series C, Series E, Series F and Series
G preferred stock. Mr. Compton, a director of ONI Systems, is also a general
partner of Kleiner Perkins Caufield & Byers. Mr. Compton disclaims beneficial
ownership of shares held by Kleiner Perkins and affiliates except to the extent
of his interest in Kleiner Perkins and affiliates. Mr. Feiber, a director of
ONI Systems, is also a general partner of Mohr, Davidow Ventures. Mr. Feiber
disclaims beneficial ownership of shares held by Mohr, Davidow Ventures and
affiliates except to the extent of his interest in Mohr, Davidow Ventures and
affiliates. The shares held by Williams Communications, Inc. include 142,460
shares of Series G preferred stock held by Mr. Bross. Mr. Bross is a director
of ONI Systems and serves as Senior Vice President and Chief Technology Officer
of Williams Communications. Mr. Bross disclaims beneficial ownership of shares
held by Williams Communications and Williams Communications disclaims benefical
ownership of the shares held by Mr. Bross.

<TABLE>
<CAPTION>
Total
Series B Series C Series E Series F Series G Common Stock
Purchaser Preferred Preferred Preferred Preferred Preferred Equivalent
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield
& Byers and affiliates
(Kevin R. Compton)..... 9,824,680 666,666 1,917,808 1,256,668 -- 13,665,822
Mohr, Davidow Ventures
and affiliates
(Jonathan D. Feiber)... 9,824,680 666,666 1,917,808 1,256,668 1,266,322 14,932,144
Hon Wah Chin............ -- -- 44,000 33,000 8,000 85,000
Michael A. Dillon....... -- -- -- -- 4,000 4,000
Andrew W. Page.......... -- -- -- -- 150,000 150,000
Williams Communications
(Mathew W. Bross)...... -- -- -- -- 1,725,364 1,725,364
James F. Jordan......... -- 1,333,334 -- -- -- 1,333,334
Gregory B. Maffei....... 160,000 160,000
Price per share......... $0.24 $0.75 $0.91 $1.82 $6.32
</TABLE>

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Registration Rights

We have entered into an investors' rights agreement with each of the
purchasers of preferred stock set forth above. Under this agreement, these and
other stockholders are entitled to registration rights with respect to their
shares of common stock issuable upon conversion of their preferred stock upon
the closing of this offering. Following this offering, holders of 80,827,487
shares of our common stock will be entitled to registration rights with respect
to the shares of common stock, based on an assumed private placement price of
$22.00 per share. See "Description of Capital Stock--Registration Rights".

Loans to Executive Officers and Directors in Connection with Exercise of
Options

In connection with the option exercises described under "Management--
Director Compensation" and "Management--Executive Compensation", the following
executive officers and directors delivered promissory notes, each with a five-
year term, in the amounts and bearing interest as indicated below:

In December 1999, we made a loan to Hugh C. Martin, our Chairman, President
and Chief Executive Officer, in connection with his exercise of an option to
acquire 1,215,834 shares of common stock, for an aggregate purchase price of
$1,519,793. The loan is evidenced by a promissory note in the principal amount
of $1,519,793, with interest compounded annually on the unpaid balance at a
rate of 6.20% per year.

In November and December 1999, we made two loans to Terrence J. Schmid, our
former Chief Financial Officer and Vice President, Finance and Administration,
in connection with his exercise of options to acquire 120,000 shares and
200,000 shares, respectively, of common stock, for an aggregate purchase price
of $260,800. The loans are evidenced by a promissory note in the principal
amount of $10,800, with interest compounded annually on the unpaid balance at a
rate of 6.08% per year, and a promissory note in the principal amount of
$250,000, with interest compounded annually on the unpaid balance at a rate of
6.20% per year.

In November 1999, we made three loans to William R. Cumpston, our Senior
Vice President, Engineering and Operations, in connection with his exercise of
options to acquire 1,000,000 shares of common stock, for an aggregate purchase
of $254,000. The loans are evidenced by a promissory note in the principal
amount of $45,000, with interest compounded annually on the unpaid balance at a
rate of 6.08% per year, a promissory note in the principal amount of $182,000,
with interest compounded annually on the unpaid balance at a rate of 6.08% per
year and a promissory note in the principal amount of $27,000, with interest
compounded annually on the unpaid balance at a rate of 6.08% per year. In
December 1999, we made another loan to Mr. Cumpston, in connection with his
exercise of an option to acquire 300,000 shares of common stock, for an
aggregate purchase price of $375,000. The loan is evidenced by a promissory
note in the principal amount of $375,000, with interest compounded annually on
the unpaid balance at a rate of 6.20% per year.

In November 1999, we made a loan to Hon Wah Chin, our Chief Technical
Officer, in connection with his exercise of options to acquire 100,000 shares
of common stock, for an aggregate purchase price of $9,000. The loan is
evidenced by a promissory note in the principal amount of $9,000, with interest
compounded annually on the unpaid balance at a rate of 6.08% per year. In
December 1999, we made another loan to Mr. Chin in connection with his exercise
of an option to acquire 100,000 shares of common stock, for an aggregate
purchase price of $125,000. The loan is evidenced by a promissory note in the
principal amount of $125,000, with interest compounded annually on the unpaid
balance at a rate of 6.20% per year.

In November 1999, we made a loan to Michael A. Dillon, our Vice President
and General Counsel, in connection with his exercise of an option to acquire
300,000 shares of common stock, for a purchase price of $273,000. The loan is
evidenced by a promissory note in the principal amount of $273,000, with
interest compounded annually on the unpaid balance at a rate of 6.08% per year.
In

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February 2000, we made another loan to Mr. Dillon in connection with his
exercise of an option to acquire 70,000 shares of common stock. The loan is
evidenced by a promissory note in the principal amount of $87,500, with
interest compounded annually at a rate of 6.56% per year.

In March 2000, we made a loan to Robert J. Jandro, our Executive Vice
President, Worldwide Sales and Marketing, in connection with his exercise of an
option to acquire 900,000 shares of common stock, for a purchase price of
$2,880,000. The loan is evidenced by a promissory note in the principal amount
of $2,880,000, with interest compounded annually on the unpaid balance at a
rate of 6.80% per year.

In March 2000, we made a loan to Andrew W. Page, our Vice President,
Corporate Development, in connection with his exercise of an option to acquire
300,000 shares of common stock for a purchase price of $960,000. The loan is
evidenced by a promissory note in the principal amount of $960,000, with
interest compounded annually on the unpaid balance at a rate of 6.80% per year.

Sales of Restricted Common Stock and Any Related Loans to Executive Officers
and Directors

We made the following additional sales of securities to executive officers
and directors. Unless otherwise noted:

. shares vest over a four-year period and we have a repurchase option for
unvested shares;

. in the event of a change of control of ONI Systems, our repurchase
option will lapse as to 50% of the then-unvested shares; and

. the associated promissory notes have five-year terms.

In January 1998, Hugh C. Martin, our Chairman, President and Chief Executive
Officer, purchased 4,066,540 shares of common stock for $0.005 per share. Mr.
Martin paid for the shares with a promissory note in the principal amount of
$19,696 with interest compounded annually on the unpaid balance at a rate of
6.13% per year due on the earlier of ten years from issuance or 180 days
following termination of employment.

In January 1998, Hugh C. Martin purchased 717,624 shares of common stock for
$0.005 per share. Mr. Martin paid for the shares with a promissory note in the
principal amount of $3,476 with interest compounded annually on the unpaid
balance at a rate of 6.13% per year due on the earlier of ten years from
issuance or 180 days following termination of employment. The shares under the
agreement vest based on achievement of 1998 milestones and 1999 milestones. The
milestones were achieved and our repurchase option has lapsed.

In February 1998, Terrence J. Schmid, our former Chief Financial Officer and
Vice President, Finance and Administration, purchased 533,332 shares of our
common stock for $0.08 per share. Mr. Schmid paid for the shares with a
promissory note in the principal amount of $40,000 with interest compounded
annually on the unpaid balance at a rate of 5.93% per year due on the earlier
of ten years from issuance or 210 days following this offering.

In November 1998, Hon Wah Chin, our Chief Technical Officer, purchased
674,000 shares for $0.09 per share. Mr. Chin paid for the shares with a
promissory note in the principal amount of $59,413 with interest compounded
semi-annually on the unpaid balance at a rate of 4.46% per year.

In December 1999, Michael A. Dillon, our Vice President, General Counsel and
Secretary, purchased 20,000 shares for $0.91 per share. Mr. Dillon paid for the
shares with a promissory note in the principal amount of $18,200 with interest
compounded annually on the unpaid balance at a rate of 6.20% per year. We have
no repurchase right for these shares.

63
<PAGE>

Persons or Entities Related to Our Officers and Directors

In addition to the sales of securities previously described, we have entered
into agreements with affiliates of our officers and directors.

Williams Communications, Inc. is a stockholder of ONI Systems. Mathew W.
Bross, one of our directors, serves as Senior Vice President and Chief
Technology Officer of Williams Communications, Inc. In March 2000, we entered
into a purchase and license agreement with Williams Communications, in which
Williams Communications may, but is not obligated to, purchase $30.0 million of
our products. The agreement also provides that Williams Communications will
purchase $1,215,506 of our products during the first quarter of calendar year
2000. The agreement expires June 30, 2001, unless earlier terminated by the
parties. In December 1999, we also executed a redemption and repurchase
agreement with Williams Communications, which provides us with the right to
repurchase, if Williams Communications fails to purchase $30.0 million of our
products and services by June 30, 2001, at $6.32 per share, the shares of
Series G preferred stock owned by Williams Communications, which are
convertible into 1,582,904 shares of common stock. The agreement also provided
Williams Communications with the right to require us to redeem the shares held
by it at $8.50 per share, which right lapsed upon completion of lab trials for
our ONLINE9000 product in March 2000.

64
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table presents information as to the beneficial ownership of
common stock as of March 31, 2000 and as adjusted to reflect the sale of common
stock in this offering by:

. each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;

. each of our directors;

. each of our named executive officers; and

. all of our directors and executive officers as a group.

Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of March 31, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each listed
stockholder is c/o ONI Systems Corp., 166 Baypointe Parkway, San Jose,
California 95134-1621.

The percentage of common stock outstanding as of March 31, 2000 is based on
114,138,775 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock. The
percentage of common stock outstanding following this offering is based on
123,877,066 shares of common stock outstanding assuming an initial public
offering price of $22.00 per share.

<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Beneficially Owned
---------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
Jonathan D. Feiber (1)............ 14,932,144 13.1 12.1
Mohr, Davidow Ventures and
affiliates
Kevin R. Compton (2).............. 13,665,822 12.0 11.0
Kleiner Perkins Caufield & Byers
and affiliates
Hugh C. Martin (3)................ 5,999,998 5.3 4.8
Matthew W. Bross (4).............. 1,905,364 1.7 1.5
Williams Communications, Inc.
James F. Jordan (5)............... 1,873,334 1.6 1.5
William R. Cumpston (6)........... 1,252,000 1.1 1.0
Hon Wah Chin (7).................. 954,000 * *
Terrence J. Schmid (8)............ 277,050 * *
Gregory B. Maffei (9)............. 280,000 * *
All executive officers and
directors
as a group (12 persons) (10)..... 42,606,662 37.3 34.4
</TABLE>
- --------
* Represents beneficial ownership of less than 1%

(1) Represents 12,709,218 shares held by held by Mohr, Davidow Ventures V,
L.P., 1,266,322 shares held by Mohr, Davidow Ventures V-L, L.P. and
956,604 shares held by Mohr, Davidow Ventures V, L.P. as nominee for MDV
Entrepreneurs' Network Fund II (A), L.P. and MDV Entrepreneurs' Network
Fund II (B), L.P. and the shares represented exclude 346,348 shares held
by the Mohr Family Trust UTA dated 8/5/1985, 10,000 shares held by the
Sarah H. Mohr Trust UTA dated 9/19/97, and 10,000 shares held by the Hope
A. Mohr Trust

65
<PAGE>

UTA dated 9/19/97. Mohr, Davidow Ventures disclaims beneficial ownership
of the shares held by the Mohr Family Trust, the Sarah H. Mohr Trust and
the Hope A. Mohr Trust and these trusts disclaim beneficial ownership of
the shares held by the Mohr, Davidow Ventures entities. Jonathan
D. Feiber, a director of ONI Systems, is also a general partner of Mohr,
Davidow Ventures. Mr. Feiber disclaims beneficial ownership of shares held
by Mohr, Davidow Ventures and affiliates except to the extent of his
interest in Mohr, Davidow Ventures and affiliates. The address of Mohr,
Davidow Ventures and Mr. Feiber is 2775 Sand Hill Road, Suite 240,
Menlo Park, California 94025.

(2) Represents 12,709,828 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P., 614,350 shares held by KPCB VIII Founders Fund and 341,644
shares held by KPCB Information Sciences Zaibatsu Fund II. Kevin R.
Compton, a director of ONI Systems, is also a general partner of Kleiner
Perkins Caufield & Byers. Mr. Compton disclaims beneficial ownership of
shares held by KPCB and affiliates except to the extent of his interest
in KPCB and affiliates. The address of Kleiner Perkins Caulfield & Byers
and Mr. Compton is 2750 Sand Hill Road, Menlo Park, California 94025.

(3) Represents 5,886,998 shares held by Mr. Martin, 45,000 shares held by the
Hugh C. Martin 2000 Grantor Retained Annuity Trust under agreement dated
March 23, 2000, 45,000 shares held by the Moira C. Martin 2000 Grantor
Retained Annuity Trust under agreement dated March 23, 2000 and 3,000
shares held by The Martin Family 2000 Irrevocable Trust under agreement
dated March 23, 2000. Includes 1,863,831 shares subject to a repurchase
right that lapses at a rate of 84,719 shares per month until January
2002. Includes 1,139,844 shares subject to a repurchase right that lapses
at a rate of 25,329 shares per month until December 2003.

(4) Represents 142,460 shares held by Matthew W. Bross Revocable Trust and
1,582,904 shares held by Williams Communications, Inc. Mr. Bross serves
as Senior Vice President and Chief Technology Officer of Williams
Communications and disclaims beneficial ownership of shares held by it.
Includes 180,000 shares subject to a repurchase right that lapses as to
45,000 shares in November 2000 and lapses at a rate of 3,750 shares per
month thereafter until November 2003.

(5) Includes 180,000 shares held by Mr. Jordan subject to a repurchase right
that lapses at a rate of 7,500 shares per month until March 2002.
Includes 90,000 shares subject to a repurchase right that lapses at a
rate of 5,000 shares per month until October 2001.

(6) Represents 1,190,000 shares held by Mr. Cumpston, 30,000 shares held by
the William R. Cumpston 2000 Grantor Annuity Trust under agreement dated
February 21, 2000, 30,000 shares held by Christine S. Cumpston 2000
Grantor Annuity Trust under agreement dated February 21, 2000 and 2,000
shares held by The Cumpston Children's 2000 Trust under agreement dated
February 21, 2000. Includes 312,500 shares subject to a repurchase right
that lapses at a rate of 10,416 shares per month until September 2002.
Includes 212,500 shares subject to a repurchase right that lapses at a
rate of 6,250 shares per month until January 2003. Includes 200,000
shares subject to a repurchase right that lapses as to 50,000 shares in
September 2000 and lapses at a rate of 4,166 shares per month until
September 2003. Includes 281,250 shares subject to a repurchase right
that lapses at a rate of 6,250 shares per month until December 2003.

(7) Includes 379,125 shares held by Mr. Chin subject to a repurchase right
that lapses at a rate of 14,041 shares per month until June 2002.
Includes 100,000 shares subject to a repurchase right that lapses as to
25,000 shares in July 2000 and lapses at a rate of 2,083 shares per month
thereafter until July 2003. Includes 93,750 shares subject to a
repurchase right that lapses at a rate of 2,083 shares per month until
December 2003.

66
<PAGE>

(8) Reflects our repurchase on April 28, 2000 of all unvested shares of common
stock held by Mr. Schmid.

(9) Includes 120,000 shares held by Mr. Maffei subject to a repurchase right
that lapses as to 40,000 shares in March 2001 and lapses at a rate of
3,333 shares per month thereafter until March 2003.

(10) Includes shares held by entities affiliated with directors as described in
notes 1, 2 and 4 and shares issuable upon exercise of options exercisable
within 60 days of March 31, 2000. Excludes 1,000,000 shares subject to an
option which we granted to Chris A. Davis, our Executive Vice President,
Chief Financial and Administrative Officer. Also excludes shares held by
Mr. Schmid, our former Chief Financial Officer and Vice President, Finance
and Administration.

67
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Immediately following the closing of this offering, our authorized capital
stock will consist of:

. 700,000,000 shares of common stock, $0.0001 par value per share; and

. 10,000,000 shares of preferred stock, $0.0001 par value per share.

As of March 31, 2000, and assuming the conversion of all outstanding
preferred stock into common stock, there were outstanding:

. 114,138,775 shares of common stock held by approximately 480
stockholders, of which 10,096,968 shares were subject to our right of
repurchase;

. options to purchase 19,343,345 shares of common stock; and

. warrants to purchase 1,434,394 shares of common stock.

The number of shares of common stock outstanding as of March 31, 2000 does
not include:

. 1,101,928 shares of common stock into which the shares of Series H
preferred stock sold to Sun Microsystems in May 2000 will automatically
convert upon completion of this offering, based on an assumed public
offering price of $22.00 per share;

. 181,818 shares of common stock issuable to Internet Initiative Japan upon
the closing of a private placement, concurrent with this offering, based
on an assumed private placement price of $22.00 per share; and

. 454,545 shares of common stock issuable to CCT Telecom upon the closing
of a private placement, concurrent with this offering, based on an
assumed private placement price of $22.00 per share.

Common Stock

Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts that our board of directors may determine.

Voting rights. Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation. In addition, our certificate of incorporation and
bylaws require the approval of two-thirds, rather than a majority, of the
shares entitled to vote for certain matters. For a description of these
matters, see "--Anti-Takeover Provisions".

Cisco Systems, Inc., a holder of preferred stock that will convert into
4,969,148 shares of common stock upon the closing of this offering, is subject
to voting restrictions that provide that Cisco and its affiliates must vote, in
certain transactions, all shares owned by them in the same proportion as other
shares voted in the same class in a class vote, or in the same proportion as
all shares voted in a vote in which common stock and preferred stock vote
together as a single class. These transactions include mergers,
reorganizations, ONI Systems being acquired, or an underwritten public offering
of our securities. In addition, Cisco may not exercise any dissenter's or
appraisal rights. These restrictions have no termination date.

No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.

Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of ONI Systems, the holders of our common stock are entitled to
share ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.

68
<PAGE>

Preferred Stock

Upon the closing of this offering, each outstanding share of our preferred
stock will be converted into shares of common stock. See notes 9 and 13 of
notes to our consolidated financial statements for a description of preferred
stock.

Following this offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. Our
board of directors can also increase or decrease the number of shares of any
series, but not below the number of shares of that series then outstanding,
without any further vote or action by the stockholders. Our board of directors
may authorize the issuance of preferred stock with voting or conversion rights
that could adversely affect the voting power or other rights of the holders of
the common stock. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of ONI Systems and might adversely affect the market price of
our common stock and the voting and other rights of the holders of common
stock. We have no current plan to issue any shares of preferred stock.

Warrants

Warrants to purchase 1,434,394 shares of common stock were outstanding as of
March 31, 2000. All warrants to purchase preferred stock will automatically
convert into warrants to purchase a like number of shares of common stock upon
the closing of this offering.

In December 1999, we issued to a customer a warrant to purchase 500,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until six years from the date
of the warrant agreement.

In February 1999, we issued to an equipment finance company warrants to
purchase 277,926 shares of Series B preferred stock at an exercise price of
$0.88 per share. If not sooner exercised, these warrants will remain
outstanding for the lesser of five years after the completion of this offering
or ten years from the date of the warrant agreements.

In February 2000, we issued to a customer a warrant to purchase 223,000
shares of common stock at an exercise price of $0.91 per share. If not sooner
exercised, this warrant will remain outstanding until five years from the date
of the warrant agreement.

In March 2000, we issued to our outside counsel a warrant to purchase
200,000 shares of common stock at an exercise price of $15.00 per share. If not
sooner exercised, this warrant will remain outstanding until March 2004.

In connection with our spin-out from Optivision in December 1997, we are
obligated to issue 233,468 shares of common stock to an equipment finance
company upon the exercise by the finance company of its warrants to purchase
capital stock of Optivision. See "Related Party Transactions--Optivision Spin-
out". We will not receive any proceeds from the exercise of these warrants. If
not sooner exercised, 88,890 shares subject to the warrants will remain
outstanding until January 2002 and 144,578 shares subject to the warrants will
remain outstanding until September 2003.

Registration Rights

Following this offering, the holders of 80,827,487 shares of common stock,
based upon an assumed initial public offering price of $22.00 per share, will
be entitled to rights with respect to the registration of these shares under
the Securities Act, as described below.

Demand registration rights. At any time after six months following the
expiration of the lock-up agreements in connection with this offering, the
holders of at least 50% of the shares having registration

69
<PAGE>

rights can request that we register all or a portion of their shares, so long
as such registration covers at least 33% of their shares or the total offering
price of the shares to the public is at least $5.0 million. See "Share Eligible
for Future Sale--Lock-up Agreements". We will only be required to file two
registration statements in response to their demand registration rights if both
registration statements have been declared effective. We may postpone the
filing of a registration statement for up to 120 days if we determine that the
filing would be seriously detrimental to us and our stockholders.

Piggyback registration rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in the registration statement. The managing underwriter of any
underwritten offering will have the right to limit the number of shares
registered by these holders to be included in the registration statement due to
marketing reasons.

Form S-3 registration rights. The holders of the shares having registration
rights can request that we register their shares if we are eligible to file a
registration statement on Form S-3 or any successor form and if the total price
of the shares offered to the public is at least $1.0 million. We may postpone
the filing of a Form S-3 registration statement for up to 120 days once in a 12
month period if we determine that the filing would be seriously detrimental to
us and our stockholders. We may also postpone the filing of a Form S-3
registration statement if within the preceding six months, we have already
effected a registration on Form S-3.

We will pay all expenses incurred in connection with the registrations
described above, except that we will not be required to pay for expenses
incurred under exercise of stockholders' demand registration rights if the
holders of these rights subsequently withdraw their request for registration.

Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.

In addition to these registration rights, holders of warrants exercisable
for 1,156,468 shares of common stock will have registration rights for the
shares of common stock issuable upon the exercise of their warrants. See "--
Warrants".

Anti-Takeover Provisions

The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or preventing another person
from acquiring control of ONI Systems.

Delaware Law

We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets with any interested stockholder, meaning a stockholder
who, together with affiliates and associates, owns or, within three years prior
to the determination of interested stockholder status, did own 15% or more of
the corporation's outstanding voting stock, unless:

. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;

. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or

. on or subsequent to that date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.

This section may have an anti-takeover effect with respect to transactions
not approved in advance by the board of directors, including discouraging
attempts to acquire us that might result in a premium over the market price for
the shares of stock held by stockholders.

70
<PAGE>

Charter and Bylaw Provisions

Our certificate of incorporation and bylaws provide that:

. following the completion of this offering, no action may be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and stockholders may not act by
written consent;

. following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
will be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the election
and removal of directors and ability of stockholders to take action;

. stockholders may not fill vacancies on the board, unless the board of
directors determines by resolution that any of these vacancies will be
filled by the stockholders;

. following the completion of this offering, our board of directors will be
divided into three classes, each serving staggered three-year terms,
which means that only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms. For more information on the
classification of our board, please see "Management--Board Composition";
and

. we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.

California Foreign Corporation Law

Section 2115 of the California Corporations Code provides that under some
circumstances several provisions of the California Corporations Code may be
applied to foreign corporations qualified to do business in California
notwithstanding the law of the jurisdiction where the corporation is
incorporated. These corporations are referred to in this prospectus as quasi-
California corporations. Section 2115 applies to foreign corporations that
have more than half of their voting stock held by stockholders residing in
California and more than half of their business deriving from California,
measured on or after the 135th day of the corporation's fiscal year. If we
were determined to be a quasi-California corporation, we would have to comply
with California law with respect to, among other things, elections of
directors and distributions to stockholders. Under the California Corporations
Code, a corporation is prohibited from paying dividends unless:

. the retained earnings of the corporation immediately prior to the
distribution equal or exceed the amount of the proposed distribution; or

. the assets of the corporation, exclusive of specific non-tangible assets,
equal or exceed 1 1/4 times its liabilities, exclusive of specific
liabilities, and the current assets of the corporation at least equal its
current liabilities. If the average pre-tax net earnings of the
corporation before interest expense for the two years preceding the
distribution were less than the average interest expense of the
corporation for those year, however, the current assets of the
corporation must exceed 1 1/4 times its current liabilities.

Following this offering, we will be exempt from the application of Section
2115 if our voting stock is held by more than 800 stockholders of record.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.

Listing

Our common stock has been approved for listing on the Nasdaq National
Market under the trading symbol "ONIS".

71
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale
will have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.

Upon the completion of this offering, we will have 123,877,066 shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option, no exercise of outstanding options or warrants and an initial
public offering price of $22.00 per share. Of the outstanding shares, all of
the shares sold in this offering will be freely tradable, except that any
shares held by our affiliates, as that term is defined in Rule 144 promulgated
under the Securities Act, may only be sold in compliance with the limitations
described below. The remaining 115,877,066 shares of common stock will be
deemed restricted securities as defined under Rule 144. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:

<TABLE>
<CAPTION>
Number of
Shares Comment
--------- -------
<C> <S>
849,636 After the date of this prospectus, freely tradable shares sold
in this offering and shares saleable under Rule 144(k) that are
not subject to the 180-day lock-up.

101,125,721 After 180 days from the date of this prospectus, the 180-day
lock-up terminates and these shares are saleable under Rule 144
(subject in some cases to volume limitations), Rule 144(k) or
Rule 701 (subject in some cases to a right of repurchase by ONI
Systems).

9,707,206 On December 22, 2000, these shares are saleable under Rule 144.

1,009,180 On December 24, 2000, these shares are saleable under Rule 144.

1,108,032 On December 30, 2000, these shares are saleable under Rule 144.

339,000 On March 9, 2001, these shares are saleable under Rule 144.

1,101,928 On May 9, 2001, these shares are saleable under Rule 144.

636,363 One year after the closing of this offering, these shares are
saleable under Rule 144.
</TABLE>

Some of the shares in the table above, including shares held by executive
officers and directors, listed as not being saleable until 180 days after the
date of this prospectus may become salable at a sooner date, as described
further below.

Lock-up Agreements

ONI Systems and holders of approximately 99.1% of our common stock,
including each of our officers and directors, have agreed, subject to specified
exceptions, not to, without the prior written consent of Goldman, Sachs & Co.,
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any shares of our common stock or options to acquire shares of our
common stock during the 180-day period following the date of this offering.
Goldman, Sachs & Co. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Underwriting".

72
<PAGE>

Except for shares held by executive officers, the 180-day restriction will
expire as to 10% of the shares subject to the restriction, or 8,477,114 shares,
on the later of September 6, 2000 or the 90th day after the date of this
prospectus, if the reported last sale price of our common stock on the Nasdaq
National Market for 20 of the 30 trading days ending on the last trading day
preceding that date is at least twice the initial public offering price per
share. The 180-day restriction will also expire as to an additional 25% of the
shares subject to the restriction, or 25,281,430 shares, on the date that is
two days after we have made our financial statements for the fiscal quarter
ending September 30, 2000 publicly available, if the reported last sale price
of our common stock on the Nasdaq National Market for 20 of the 30 trading days
ending on the last trading day preceding that date is at least twice the
initial public offering price per share. We adopted an insider trading policy
under which employees are prohibited from selling shares from the 30th day
prior to the end of each quarter until the second day following the release of
financial results for the quarter. As a result, the release of shares held by
them under lock-up agreements may be delayed until our insider trading policy
permits such sales.

Rule 144

In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, who has beneficially owned
shares that are restricted securities as defined in Rule 144 for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus, a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our common stock,
which will be approximately 1,238,771 shares immediately after this offering,
or the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed. In
addition, a person who is not deemed to have been an affiliate at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
would commence on the date of transfer from the affiliate.

Rule 701

In general, under Rule 701 of the Securities Act, any of our employees,
officers, directors, consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell those shares in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period contained in
Rule 144. However, all shares issued under Rule 701 are subject to lock-up
agreements and will only become eligible for sale at the expiration of such
agreements.

Stock Options

As of March 31, 2000, options to purchase a total of 19,343,345 shares of
common stock were outstanding. We intend to file a Form S-8 registration
statement under the Securities Act to register all shares of common stock
subject to outstanding options, all shares of our common stock issued upon
exercise of stock options and all shares of our common stock issuable under our
stock option and employee stock purchase plans. Accordingly, shares of our
common stock issued under these plans will be eligible for sale in the public
markets, subject to vesting restrictions and the lock-up agreement described
above. See "Management--Employee Benefit Plans".

Registration Rights

Following this offering, subject to specified blackout periods, holders of
80,827,487 shares of outstanding common stock, based on an assumed private
placement price of $22.00 per share, will

73
<PAGE>

have two demand registration rights with respect to their shares of our common
stock, subject to the 180-day lock-up arrangement described above, to require
us to register their shares of our common stock under the Securities Act, or
rights to participate in any future registration of securities by us. If the
holders of these registrable securities request that we register their shares,
and if the registration is effected, these shares will become freely tradable
without restriction under the Securities Act. Any sales of securities by these
stockholders could have a material adverse effect on the trading price of our
common stock. See "Description of Capital Stock--Registration Rights".

74
<PAGE>

UNDERWRITING

ONI Systems and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
some conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Banc of
America Securities LLC, Chase Securities Inc. and FleetBoston Robertson
Stephens Inc. are the representatives of the underwriters.

<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co................................................
Banc of America Securities LLC.....................................
Chase Securities Inc...............................................
FleetBoston Robertson Stephens Inc. ...............................
---------
Total............................................................ 8,000,000
=========
</TABLE>

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,200,000 shares from ONI Systems to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by ONI Systems. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.

<TABLE>
<CAPTION>
Paid by ONI Systems
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.

ONI Systems and its directors, officers, employees and other stockholders
have agreed with the underwriters not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. and except as described in
"Shares Eligible for Future Sale". This restriction does not apply to any
issuances under ONI Systems' existing employee benefit plans. See "Shares
Eligible for Future Sale" for a discussion of transfer restrictions.

75
<PAGE>

Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among ONI Systems and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be ONI Systems' historical performance, estimates of the
business potential and earnings prospects of ONI Systems, an assessment of the
management of ONI Systems and the consideration of the above factors in
relation to market valuation of companies in related businesses.

ONI Systems' common stock has been approved for quotation on the Nasdaq
National Market under the symbol "ONIS".

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of this underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.

At the request of ONI Systems, the underwriters are reserving up to 960,000
shares of common stock for sale at the initial public offering price to
individuals designated by ONI Systems who have expressed an interest in
purchasing the shares of common stock in the offering through a directed share
program. The number of shares available for sale to the general public in the
pubic offering will be reduced to the extent these persons purchase these
reserved shares. Any shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered hereby.

The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.

ONI Systems estimates that its share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.5
million.

ONI Systems has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

Chase Venture Capital Associates, L.P., an entity affiliated with Chase
Securities Inc., beneficially owns 3,287,672 shares of Series E preferred stock
and 329,978 shares of Series F preferred stock. Paul Johnson, a managing
director of FleetBoston Robertson Stephens Inc., one of the underwriters,
beneficially owns 54,796 shares of Series E preferred stock and 54,996 shares
of Series F preferred stock.

76
<PAGE>

VALIDITY OF COMMON STOCK

The validity of the issuance of the shares of common stock offered by this
prospectus will be passed upon for ONI Systems by Fenwick & West LLP, Palo
Alto, California. As of the date of this prospectus, Fenwick & West LLP and its
affiliates beneficially own or have the right to purchase an aggregate of
309,996 shares of our common stock. The validity of the issuance of the shares
of common stock offered by this prospectus will be passed upon for the
underwriters by Sullivan & Cromwell, Los Angeles, California.

EXPERTS

The consolidated financial statements and related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999 and for the
period from October 20, 1997 (inception) to December 31, 1997, and for each of
the years in the two year period ended December 31, 1999 and the financial
statements of Object-Mart, Inc. as of, and for the year ended, December 31,
1998 and for the six month period ended June 29, 1999, have been included in
this registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or
document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. The registration statement, including exhibits and schedules,
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., at the Public Reference Room, 450
Fifth Street, N.W. Washington, D.C. 20549 and copies of all or any part of it
may be obtained from that office after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.

We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial data for the first three
quarters of each year.

77
<PAGE>

ONI SYSTEMS CORP.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
ONI Systems Corp. Consolidated Financial Statements
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Cash Flows................................... F-5
Consolidated Statements of Stockholders' (Deficit) Equity............... F-6
Notes to Consolidated Financial Statements.............................. F-9

Object-Mart, Inc. Financial Statements
Independent Auditors' Report............................................ F-26
Balance Sheet........................................................... F-27
Statements of Operations................................................ F-28
Statements of Cash Flows................................................ F-29
Statements of Shareholders' Equity...................................... F-30
Notes to Financial Statements........................................... F-31

Unaudited Pro Forma Combined Condensed Statement of Operations
Introduction to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-36
Unaudited Pro Forma Combined Condensed Statement of Operations.......... F-37
Notes to Unaudited Pro Forma Combined Condensed Statement of
Operations............................................................. F-38
</TABLE>

F-1
<PAGE>

Independent Auditors' Report

The Board of Directors
ONI Systems Corp.:

We have audited the accompanying consolidated balance sheets of ONI Systems
Corp. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the period
from October 20, 1997 (inception) to December 31, 1997 and for each of the
years in the two-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ONI Systems
Corp. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the period from October 20, 1997 (inception) to December 31,
1997 and for each of the years in the two-year period ended December 31, 1999
in conformity with generally accepted accounting principles.

/s/ KPMG LLP

Mountain View, California
March 9, 2000, except for Note 13
which is as of May 9, 2000

F-2
<PAGE>

ONI SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, March 31, 2000
------------------------- --------------------------
1998 1999 Actual Pro Forma
----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $19,091,688 $ 80,022,591 $ 50,307,041 $ 50,307,041
Accounts receivable... 1,092,853 163,434 3,928,630 3,928,630
Inventory............. -- 9,648,856 20,783,774 20,783,774
Prepaid expenses and
other current
assets............... 110,503 770,979 956,609 956,609
----------- ------------ ------------ ------------
Total current
assets............. 20,295,044 90,605,860 75,976,054 75,976,054
Property and equipment. 1,016,698 5,314,990 15,796,067 15,796,067
Other assets........... 500 24,246 20,678 20,678
Intangibles............ -- 737,500 526,250 526,250
Goodwill............... -- 4,259,879 3,549,899 3,549,899
----------- ------------ ------------ ------------
Total assets........ $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============

LIABILITIES AND STOCK-
HOLDERS'
EQUITY
----------------------

Current liabilities:
Accounts payable...... $ 201,647 $ 2,594,555 $ 6,014,071 $ 6,014,071
Accrued liabilities... 426,365 6,086,784 10,570,313 10,570,313
Deferred revenue...... -- -- 119,490 119,490
Current portion of
capital lease
obligations.......... 40,002 166,612 170,905 170,905
----------- ------------ ------------ ------------
Total current
liabilities........ 668,014 8,847,951 16,874,779 16,874,779
Capital lease
obligations, less
current portion....... 79,322 366,704 295,378 295,378
----------- ------------ ------------ ------------
Total liabilities... 747,336 9,214,655 17,170,157 17,170,157
----------- ------------ ------------ ------------
Commitments and
contingencies

Stockholders' equity:
Convertible preferred
stock, $0.0001 par
value per share;
61,786,664 shares
authorized at
December 31, 1998
and 80,309,408
shares authorized at
December 31, 1999
and March 31, 2000;
50,580,190,
78,855,900 and
79,194,900 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively;
aggregate
liquidation
preference of
$28,770,616,
$125,955,511 and
$128,127,590 at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--no shares
issued and
outstanding.......... 5,058 7,885 7,919 --
Common stock, $0.0001
par value per share;
112,000,000 shares
authorized at
December 31, 1998
and
159,690,592 shares
authorized at
December 31, 1999
and March 31, 2000;
18,001,248,
31,279,590 and
34,943,875 shares
issued and
outstanding at
December 31, 1998
and 1999 and March
31, 2000,
respectively; pro
forma--700,000,000
shares authorized;
114,138,775 shares
issued and
outstanding.......... 1,800 3,128 3,494 11,413
Additional paid-in
capital.............. 34,955,432 186,781,010 268,175,930 268,175,930
Notes receivable from
stockholders......... (122,585) (3,824,079) (8,429,521) (8,429,521)
Services receivable
from stockholder..... -- (85,164) (48,663) (48,663)
Deferred stock com-
pensation............ (5,223,575) (35,532,165) (91,220,282) (91,220,282)
Accumulated deficit... (9,051,224) (55,622,795) (89,790,086) (89,790,086)
----------- ------------ ------------ ------------
Total stockholders'
equity............. 20,564,906 91,727,820 78,698,791 78,698,791
----------- ------------ ------------ ------------
Total liabilities
and stockholders'
equity........... $21,312,242 $100,942,475 $ 95,868,948 $ 95,868,948
=========== ============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Period from
October 20,
1997
(inception) to Year ended December 31, Three months ended March 31
December 31, ------------------------- -----------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 1,732,730 $ 3,033,995 $ 564,726 $ 3,632,636
Cost of revenue....... -- 1,207,897 1,032,144 424,327 2,849,902
--------- ----------- ------------ ------------- --------------
Gross profit........ -- 524,833 2,001,851 140,399 782,734
--------- ----------- ------------ ------------- --------------
Operating expenses:
Research and
development,
excluding deferred
stock compensation
amortization amounts. 38,865 4,008,489 25,399,728 2,849,849 12,037,295
Sales and marketing,
excluding deferred
stock compensation
amortization
amounts.............. 20,430 649,176 4,557,245 425,939 3,001,883
General and
administrative,
excluding deferred
stock compensation
amortization
amounts.............. 49,060 1,590,847 4,755,582 510,336 2,556,173
Amortization of
deferred stock
compensation*........ 89,249 3,310,368 11,421,739 1,296,281 13,612,293
Common stock warrant
expense.............. -- -- 2,890,500 -- 4,544,842
In-process research
and development...... -- -- 170,000 -- --
--------- ----------- ------------ ------------- --------------
Total operating
expenses........... 197,604 9,558,880 49,194,794 5,082,405 35,752,486
--------- ----------- ------------ ------------- --------------
Operating loss...... (197,604) (9,034,047) (47,192,943) (4,942,006) (34,969,752)
Interest income
(expense), net......... (1,452) 182,705 622,972 180,582 867,653
Other income (expense),
net.................... -- -- -- (13,998) (62,692)
--------- ----------- ------------ ------------- --------------
Loss before income
taxes.............. (199,056) (8,851,342) (46,569,971) (4,775,422) (34,164,791)
Income taxes............ -- 826 1,600 1,600 2,500
--------- ----------- ------------ ------------- --------------
Net loss............ $(199,056) $(8,852,168) $(46,571,571) $ (4,777,022) $ (34,167,291)
========= =========== ============ ============= ==============
Basic and diluted net
loss per share......... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.41)
========= =========== ============ ============= ==============
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 257,017 11,918,628 18,043,188 13,541,715 24,218,985
========= =========== ============ ============= ==============
- ------------
* Amortization of
deferred stock
compensation:
Cost of revenue....... $ -- $ -- $ -- $ -- $ 1,628,464
Research and
development.......... 32,012 2,509,473 8,142,230 986,721 7,348,967
Sales and marketing... 16,828 160,179 1,583,211 77,390 2,463,575
General and
administrative....... 40,409 640,716 1,696,298 232,170 2,171,287
--------- ----------- ------------ ------------- --------------
$ 89,249 $ 3,310,368 $ 11,421,739 $ 1,296,281 $ 13,612,293
========= =========== ============ ============= ==============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Period from
October 20,
1997 Three months ended March
(inception) to Year ended Year ended 31
December 31, December 31, December 31, -------------------------
1997 1998 1999 1999 2000
-------------- ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(199,056) $(8,852,168) $(46,571,571) $(4,777,022) $(34,167,291)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation and
amortization....... -- 289,265 2,806,047 116,502 1,788,101
Amortization of
deferred stock
compensation....... 89,249 3,310,368 11,421,739 1,296,281 13,612,293
Loss on disposal of
property and
equipment.......... -- -- 164,094 -- 33,508
Value of leased
facilities received
in exchange for
preferred stock.... -- -- 97,336 -- 36,501
Purchased in-process
research and
development........ -- -- 170,000 -- --
Amortization of debt
financing costs.... -- -- 54,572 13,997 29,181
Common stock warrant
expense............ -- -- 2,890,500 -- 4,544,842
Stock-based
compensation for
non-employees...... -- -- 73,065 -- 200,773
Changes in operating
assets and
liabilities:
Accounts receivable. (91,162) (1,001,691) 1,569,976 521,649 (3,765,196)
Inventory........... -- -- (9,648,856) -- (11,134,918)
Prepaid expenses and
other current
assets............. -- (111,003) (533,915) (207,681) (211,243)
Accounts payable.... 29,440 172,207 2,392,876 358,306 3,419,516
Other accrued
liabilities........ 43,760 382,605 5,527,511 61,192 4,483,529
Deferred revenue.... -- -- -- -- 119,490
--------- ----------- ------------ ----------- ------------
Net cash used in
operating
activities....... (127,769) (5,810,417) (29,586,626) (2,616,776) (21,010,914)
--------- ----------- ------------ ----------- ------------
Cash flows used in
investing activities:
Purchase of property
and equipment........ -- (1,016,205) (4,858,824) (384,581) (11,381,456)
Acquisition of
Object-Mart, net of
cash acquired........ -- -- (1,744,645) -- --
--------- ----------- ------------ ----------- ------------
Net cash used in
investing
activities....... -- (1,016,205) (6,603,469) (384,581) (11,381,456)
--------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Repayment of short-
term borrowings...... -- (130,000) -- -- --
Proceeds from
issuance of notes.... 130,000 -- -- -- --
Payments under
capital lease
obligations.......... -- (13,651) (52,589) (9,520) (67,033)
Proceeds from
issuance of
preferred stock, net
of issuance costs.... -- 27,015,177 96,889,288 7,220,898 1,960,701
Repurchase of
preferred stock...... -- (1,000,000) -- -- --
Payment on
stockholder notes ... -- -- 12,000 -- --
Proceeds from
issuance of common
stock................ 10,000 34,553 272,299 39,292 783,152
--------- ----------- ------------ ----------- ------------
Net cash provided
by financing
activities....... 140,000 25,906,079 97,120,998 7,250,670 2,676,820
--------- ----------- ------------ ----------- ------------
Net increase in
cash and cash
equivalents...... 12,231 19,079,457 60,930,903 4,249,313 (29,715,550)
Cash and cash
equivalents at
beginning of
year/period........... -- 12,231 19,091,688 19,091,688 80,022,591
--------- ----------- ------------ ----------- ------------
Cash and cash
equivalents at end of
year/period........... $ 12,231 $19,091,688 $ 80,022,591 $23,341,001 $ 50,307,041
========= =========== ============ =========== ============
Supplemental
disclosures of cash
flow information:
Interest paid during
year/period.......... $ -- $ 4,065 $ 15,747 $ -- $ --
========= =========== ============ =========== ============
Noncash investing and
financing
activities:
Equipment recorded
under capital
leases............. $ -- $ 132,975 $ 466,581 $ -- $ --
========= =========== ============ =========== ============
Contribution of
property and
equipment by common
stockholder........ $ 14,716 $ 142,067 $ -- $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock upon exercise
of options in
exchange for notes
receivable......... $ -- $ 122,585 $ 3,713,494 $ -- $ 4,605,442
========= =========== ============ =========== ============
Issuance of
preferred stock in
exchange for leased
facilities......... $ -- $ -- $ 182,500 $ -- $ --
========= =========== ============ =========== ============
Issuance of common
stock in connection
with Object-Mart,
Inc. acquisition... $ -- $ -- $ 5,874,677 $ -- $ --
========= =========== ============ =========== ============
Issuance of warrants
in connection with
debt financing..... $ -- $ -- $ 203,581 $ 203,581 $ --
========= =========== ============ =========== ============
Issuance of common
stock for future
services........... $ 190,875 $ 8,432,317 $ 41,730,329 $ 2,324,092 $ 66,696,890
========= =========== ============ =========== ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

ONI SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998, 1999 and
(unaudited) three month period ended March 31, 2000

<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
------------------ ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ----------- ------------ ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
October 20, 1997
(inception)..... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock.... -- -- 11,565,752 1,157 23,559 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 190,875 -- -- (190,875) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 89,249 --
Issuance of
Series A
preferred stock. 8,000,000 -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (199,056)
---------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1997............ 8,000,000 -- 11,565,752 1,157 214,434 -- -- (101,626) (199,056)
Issuance of
common stock for
notes
receivable...... -- -- 5,991,496 599 121,986 (122,585) -- -- --
Exercise of
stock purchase
rights for cash. -- -- 440,000 44 27,343 -- -- -- --
Exercise of
options for
cash............ -- -- 4,000 -- 7,166 -- -- -- --
Contribution of
property and
equipment by
common
stockholder..... -- -- -- -- 142,067 -- -- -- --
Exchange of
Series A
preferred stock
for Series B
preferred stock. (8,000,000) -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 26,128,843 2,613 -- -- 4,206,190 -- -- -- --
Repurchase and
cancellation of
Series B
preferred stock. (1,333,333) (133) -- -- (999,867) -- -- -- --
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 2,733,332 273 -- -- 1,987,904 -- -- -- --
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,969,148 497 -- -- 4,334,300 -- -- -- --
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 18,082,200 1,808 -- -- 16,481,592 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 8,432,317 -- -- (8,432,317) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 3,310,368 --
Net loss........ -- -- -- -- -- -- -- -- (8,852,168)
---------- ------ ---------- ------ ----------- --------- ---------- ----------- -----------
Balances as of
December 31,
1998............ 50,580,190 $5,058 18,001,248 $1,800 $34,955,432 $(122,585) $ -- $(5,223,575) $(9,051,224)
========== ====== ========== ====== =========== ========= ========== =========== ===========
<CAPTION>
Total
stockholders'
(deficit)
equity
-------------
<S> <C>
Balances as of
October 20, 1997
(inception)..... $ --
Issuance of
common stock.... 24,716
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 89,249
Issuance of
Series A
preferred stock. --
Net loss........ (199,056)
-------------
Balances as of
December 31,
1997............ (85,091)
Issuance of
common stock for
notes
receivable...... --
Exercise of
stock purchase
rights for cash. 27,387
Exercise of
options for
cash............ 7,166
Contribution of
property and
equipment by
common
stockholder..... 142,067
Exchange of
Series A
preferred stock
for Series B
preferred stock. --
Issuance of
Series B
preferred stock,
net of $50,058
in issuance
costs........... 4,208,803
Repurchase and
cancellation of
Series B
preferred stock. (1,000,000)
Issuance of
Series C
preferred stock,
net of $61,823
in issuance
costs........... 1,988,177
Issuance of
Series D
preferred stock,
net of $45,632
in issuance
costs........... 4,334,797
Issuance of
Series E
preferred stock,
net of $16,609
in issuance
costs........... 16,483,400
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 3,310,368
Net loss........ (8,852,168)
-------------
Balances as of
December 31,
1998............ $20,564,906
=============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

ONI SYSTEMS CORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--(Continued)
Period from October 20, 1997 (inception) to December 31, 1997 and years ended
December 31, 1998 and 1999 and
(unaudited) three month period ended March 31, 2000

<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
----------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for
cash............ -- $ -- 3,023,220 $ 302 $ 271,997 $ -- $ -- $ -- $ --
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 8,001,824 800 -- -- 7,263,393 -- -- -- --
Issuance of
Series E
preferred stock
in exchange for
services........ 200,000 20 -- -- 182,480 -- (182,500) -- --
Performance of
services........ -- -- -- -- -- -- 97,336 -- --
Issuance of
common stock for
acquisition of
Object-Mart..... -- -- 4,569,276 457 5,874,220 -- -- -- --
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 8,249,468 825 -- -- 14,968,576 -- -- -- --
Exercise of
options for
notes
receivable...... -- -- 5,685,846 569 3,712,925 (3,713,494) -- -- --
Payment on
stockholder
notes........... -- -- -- -- -- 12,000 -- -- --
Issuance of
warrants in
connection with
debt financing.. -- -- -- -- 203,581 -- -- -- --
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 11,824,418 1,182 -- -- 74,654,512 -- -- -- --
Issuance of
warrants in
connection with
purchase and
license
agreement....... -- -- -- -- 2,890,500 -- -- -- --
Stock-based
compensation to
non-employees... -- -- -- -- 73,065 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 41,730,329 -- -- (41,730,329) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- 11,421,739 --
Net loss........ -- -- -- -- -- -- -- -- (46,571,571)
---------- ------ ---------- ------ ------------ ----------- -------- ------------ ------------
Balances as of
December 31,
1999............ 78,855,900 $7,885 31,279,590 $3,128 $186,781,010 $(3,824,079) $(85,164) $(35,532,165) $(55,622,795)
========== ====== ========== ====== ============ =========== ======== ============ ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for
cash............ $ 272,299
Issuance of
Series E
preferred stock,
net of $37,471
in issuance
costs........... 7,264,193
Issuance of
Series E
preferred stock
in exchange for
services........ --
Performance of
services........ 97,336
Issuance of
common stock for
acquisition of
Object-Mart..... 5,874,677
Issuance of
Series F
preferred stock,
net of $20,607
in issuance
costs........... 14,969,401
Exercise of
options for
notes
receivable...... --
Payment on
stockholder
notes........... 12,000
Issuance of
warrants in
connection with
debt financing.. 203,581
Issuance of
Series G
preferred stock,
net of $44,668
in issuance
costs........... 74,655,694
Issuance of
warrants in
connection with
purchase and
license
agreement....... 2,890,500
Stock-based
compensation to
non-employees... 73,065
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 11,421,739
Net loss........ (46,571,571)
--------------
Balances as of
December 31,
1999............ $ 91,727,820
==============
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

ONI SYSTEMS CORP

<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional receivable Services Deferred
----------------- ----------------- paid-in from receivable stock Accumulated
Shares Amount Shares Amount capital stockholders from stockholder compensation deficit
---------- ------ ---------- ------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of
options for cash
(unaudited)..... -- $ -- 1,488,283 $ 149 $ 783,003 $ -- $ -- $ -- $ --
Exercise of
options for
notes receivable
(unaudited)..... -- -- 2,162,000 216 4,605,226 (4,605,442) -- -- --
Issuance of
common shares in
exchange for
services
(unaudited)..... -- -- 14,002 1 17,502 -- -- -- --
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 310,000 31 -- -- 4,341,470 -- -- (2,380,800) --
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 29,000 3 -- -- 405,987 -- -- (222,720) --
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... -- -- -- -- -- -- 36,501 -- --
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... -- -- -- -- 3,000,242 -- -- -- --
Issuance of
warrants in
exchange for
services
(unaudited)..... -- -- -- -- 1,544,600 -- -- -- --
Deferred stock
compensation
(unaudited)..... -- -- -- -- 66,696,890 -- -- (66,696,890) --
Amortization of
deferred stock
compensation
(unaudited)..... -- -- -- -- -- -- -- 13,612,293 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (34,167,291)
---------- ------ ---------- ------ ------------ ----------- -------- ------------ ------------
Balance at March
31, 2000
(unaudited)..... 79,194,900 $7,919 34,943,875 $3,494 $268,175,930 $(8,429,521) $(48,663) $(91,220,282) $(89,790,086)
========== ====== ========== ====== ============ =========== ======== ============ ============
<CAPTION>
Total
stockholders'
(deficit)
equity
--------------
<S> <C>
Exercise of
options for cash
(unaudited)..... $ 783,152
Exercise of
options for
notes receivable
(unaudited)..... --
Issuance of
common shares in
exchange for
services
(unaudited)..... 17,503
Issuance of
Series G shares,
net of $8,207 in
issuance costs
(unaudited)..... 1,960,701
Issuance of
Series G shares
in exchange for
services
(unaudited)..... 183,270
Amortization of
cost of
preferred stock
issued for
leased facility
(unaudited)..... 36,501
Issuance of
warrants in
connection with
purchase and
license
agreement
(unaudited)..... 3,000,242
Issuance of
warrants in
exchange for
services
(unaudited)..... 1,544,600
Deferred stock
compensation
(unaudited)..... --
Amortization of
deferred stock
compensation
(unaudited)..... 13,612,293
Net loss
(unaudited)..... (34,167,291)
--------------
Balance at March
31, 2000
(unaudited)..... $ 78,698,791
==============
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Period from October 20, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999

(1) Description of Business and Significant Accounting Policies

(a) Description of Business

ONI Systems Corp. (ONI) develops, markets and sells optical communications
equipment to networking and internet service providers in the regional and
metropolitan area markets.

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

(b) Principles of Consolidation

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

Share information for all periods has been retroactively adjusted to reflect
a one-for-three reverse split of common stock effected in March 1998, a two-
for-three reverse split of Series B and Series C preferred stock effected in
August 1999, a two-for-one split of common stock, Series D and Series E
preferred stock effected in August 1999 and a two-for-one common and preferred
stock split effected in February 2000.

(d) Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires ONI to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the consolidated financial statements and the reported results of operations
during the reporting period. Actual results could differ from those estimates.

(e) Cash and Cash Equivalents

ONI considers all highly liquid investments with remaining maturities of
three months or less at the date of purchase to be cash equivalents. As of
December 31, 1998 and 1999 and March 31, 2000, cash equivalents totaled
$19,091,688, $79,004,976 and $48,235,327, respectively. Cash equivalents
consisted primarily of money market funds.

(f) Inventory

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

(g) Property and Equipment

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to five years. Leasehold

F-9
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

improvements and assets recorded under capital leases are amortized on a
straight-line basis over the lesser of the related asset's estimated useful
life or the remaining lease term.

(h) Intangibles

ONI has capitalized the cost of identifiable intangibles associated with the
acquisition of Object-Mart, Inc. These intangibles are amortized over their
estimated useful lives, not exceeding two years.

(i) Research and Development Costs

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

(j) Revenue Recognition

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

ONI sells licenses for embedded software and application software. Revenue
from transactions involving ONI's software products is accounted for in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 98-4, Deferral of Effective Date of SOP 97-2, and SOP 98-9, Software
Revenue Recognition with Respect to Certain Arrangements. Accordingly, ONI
recognizes revenue from licenses of software products provided that a purchase
order has been received, the software and related documentation have been
shipped, collection of the resulting receivable is deemed probable, and the fee
is fixed or determinable.

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

Deferred revenue represents amounts billed in excess of revenue recognized.

In 1998 and 1999 ONI derived most of its revenue from contracts with
agencies of the United States government. These contracts include cost-plus and
fixed price contracts, and revenue is recorded as earned as defined within the
specific agreements. Revenue from cost-plus contracts is billed and recognized
at the time the costs are incurred. Revenue for fixed price contracts is
recognized when milestones are completed and product or reports, if any,
committed for the milestones are shipped, which approximates the percentage-of-
completion method. Amounts designated as withholdings are not recognized until
completion of the contract.

(k) Warranty Reserves

ONI provides a limited warranty for its products. Estimated expenses for
warranty obligations are recorded at the time revenue is recognized.

F-10
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(l) Income Taxes

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

(m) Fair Value of Financial Instruments

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

The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to ONI for debt instruments
with similar terms, degrees of risk and remaining maturities. The carrying
values of these obligations approximate their respective fair values.

(n) Concentration of Risk

Financial instruments, that potentially subject ONI to concentrations of
credit risk, consist primarily of cash and cash equivalents and accounts
receivable. ONI's cash and cash equivalents are maintained with a highly
accredited financial institution. In 1998, accounts receivable were due from
agencies of the United States government, resulting in minimal collection
risks. For the year ended December 31, 1999, there were two customers that
represented 46% and 26% of total revenue.

In 2000, ONI's revenue has primarily been derived from the sale of one
product, the ONLINE9000. For the three month period ended March 31, 2000, four
customers accounted for 33%, 30%, 23% and 14% of revenue and 32%, 32%, 22% and
14% of accounts receivable. For the three month period ended March 31, 2000,
export sales to Europe, which were denominated in United States Dollars,
accounted for 30% of total revenue.

(o) Stock-Based Compensation

ONI accounts for stock-based awards to employees using the intrinsic value
method. Expense associated with stock-based compensation is being amortized on
an accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board (FASB)
Interpretation No. 28. Accordingly, approximately 59% of the unearned deferred
compensation is amortized in the first year, 25% in the second year, 12% in the
third year, and 4% in the fourth year following the date of the grant. Pursuant
to SFAS No. 123, Accounting for Stock-Based Compensation, ONI discloses the
pro-forma effect of using the fair value method of accounting for employee
stock-based compensation arrangements.

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

F-11
<PAGE>

ONI SYSTEMS, CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(p) Impairment of Long-Lived Assets

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

(q) Comprehensive Loss

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

(r) Initial Public Offering and Unaudited Pro Forma Balance Sheet

In February 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission that would
permit ONI to sell shares of ONI's common stock in connection with a proposed
initial public offering (IPO). If the offering is consummated under the terms
presently anticipated, all of the outstanding shares of ONI's convertible
preferred stock will automatically convert into shares of common stock upon the
closing of the IPO. The conversion of the convertible preferred stock has been
reflected in the accompanying unaudited pro forma consolidated balance sheet.

Pro forma basic and diluted net loss per share data assuming conversion of
the shares of Series B, C, D, E, F and G preferred stock into shares of common
stock had occurred at the beginning of the period (or date of issuance if
later) are as follows:

<TABLE>
<CAPTION>
Three months
Year ended ended
December 31, March 31,
------------ ------------
1999 2000
------------ ------------
<S> <C> <C>
Pro forma net loss................................. $(46,571,571) $(34,167,291)
Pro forma basic and diluted net loss per share..... $ (0.60) $ (0.33)
Shares used in computing pro forma basic and
diluted net loss per share........................ 78,025,225 103,153,985
</TABLE>

(s) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period, using the as-if-
converted method for convertible preferred shares and the treasury stock method
for options and warrants. All potential shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would be antidilutive. Pursuant to SEC Staff Accounting Bulletin No. 98,
common shares and convertible preferred shares issued for nominal consideration
and options and warrants granted for nominal consideration prior to the
anticipated effective date of the initial public offering are included in the
calculation of basic and diluted net loss

F-12
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

per share as if they were outstanding for all periods presented. To date, ONI
has not had any issuances of stock, options or warrants for nominal
consideration. Diluted net loss per share does not include the effects of the
following potential common shares:

<TABLE>
<CAPTION>
Period from
October 20 Year ended December Three months ended
(inception) to 31, March 31,
December 31, --------------------- ---------------------
1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Shares issuable under
stock options.......... 1,078,220 8,789,776 17,548,724 11,161,028 19,343,345
Shares of unvested stock
subject to repurchase.. -- 5,992,684 8,587,699 4,842,165 10,096,468
Shares issuable pursuant
to warrants to purchase
common stock........... 233,468 233,468 733,468 233,468 1,156,468
Shares issuable pursuant
to warrants to purchase
convertible preferred
stock.................. -- -- 277,926 277,926 277,926
Shares issuable related
to convertible
preferred stock on an
"as-if-converted"
basis.................. 8,000,000 50,580,190 78,855,900 58,582,014 79,194,900
</TABLE>

The weighted-average exercise price of stock options outstanding was $0.005,
$0.08, $0.29 and $0.64 as of December 31, 1997, 1998, 1999 and March 31, 2000
respectively. The weighted-average purchase price of shares of common stock
subject to the Company's right of repurchase was $0.02, $0.44 and $0.87 as of
December 31, 1998, 1999 and March 31, 2000, respectively. The exercise price of
warrants to purchase shares of convertible preferred stock remained $0.88 as of
December 31, 1999 and March 31, 2000. The weighted-average exercise price of
warrants to purchase shares of common stock was $0.62 and $3.16 as of December
31, 1999 and March 31, 2000, respectively. Each share of preferred stock is
convertible into one share of common stock.

(t) Segment Reporting

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

ONI's chief executive officer (CEO) is its chief operating decision-maker.
The financial information that the CEO reviews is identical to the information
presented in the accompanying

F-13
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

statements of operations. ONI has determined that it operates in a single
operating segment: development and sale of optical networking equipment to
communications service providers in the regional and metropolitan area markets.

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

Beginning January 1, 2000, ONI's revenue has been derived from sales of its
ONLINE9000 product. ONI expects to continue selling the ONLINE9000 in the
future, and also to develop other lines of products for sale.

(u) Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because ONI
does not currently hold any derivative instruments and does not engage in
hedging activities, ONI expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. ONI will be required to adopt SFAS No. 133 for the year ended December
31, 2001 in accordance with SFAS No. 137, which delayed implementation of SFAS
No. 133.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), which summarizes views of the
Commission staff in applying generally accepted accounting principles to
revenue recognition in financial statements. ONI believes that its current
revenue recognition principles comply with this bulletin.

(2) Business Combination

On June 29, 1999, ONI acquired all of the outstanding common shares of
Object-Mart, Inc. (Object-Mart) in exchange for 4,569,276 shares of ONI's
common stock and approximately $3,222,000 in cash for a total purchase price of
approximately $9,096,677. Object-Mart was located in San Jose, California, and
provided software products and services to software development companies,
software providers and equipment manufacturers in the telecommunications
industry. The combination was accounted for using the purchase method and,
accordingly, the results of operations of Object-Mart have been included in
ONI's consolidated financial statements only since June 29, 1999. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $5,679,839 has been recorded as goodwill and is being amortized on a
straight-line basis over two years. Identifiable intangibles are amortized on a
straight-line basis over periods not exceeding two years.

The amount of $170,000 allocated to purchased in-process research and
development was determined through established valuation techniques in the
high-technology communications industry and was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed.

The following unaudited pro forma financial information presents the
combined results of operations of ONI and Object-Mart as if the acquisition had
occurred as of the beginning of 1998 and 1999, after giving effect to certain
adjustments, including amortization of goodwill and other

F-14
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

intangibles, additional depreciation expense and related income tax effects.
The pro forma financial information does not necessarily reflect the results of
operations that would have occurred had ONI and Object-Mart constituted a
single entity during these periods.

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Revenue......................................... $ 3,665,811 $ 4,625,795
Net loss........................................ $(11,172,005) $(47,779,504)
Basic and diluted net loss per share............ $ (0.94) $ (2.65)
</TABLE>

(3) Inventories

Inventories consist of:

<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Raw materials....................................... $8,914,321 $ 7,924,748
Work in progress.................................... -- 8,801,088
Finished goods...................................... 734,535 3,154,445
Consignment inventory............................... -- 903,493
---------- -----------
$9,648,856 $20,783,774
========== ===========
</TABLE>

(4) Property and Equipment

Property and equipment is as follows:

<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Computers and equipment................... $1,050,541 $5,569,889 $16,424,038
Furniture and fixtures.................... 204,734 714,592 1,032,043
Leasehold improvements.................... 50,688 273,663 412,554
---------- ---------- -----------
1,305,963 6,558,144 17,868,635
Less accumulated depreciation and
amortization............................. 289,265 1,243,154 2,072,568
---------- ---------- -----------
$1,016,698 $5,314,990 $15,796,067
========== ========== ===========
</TABLE>

Equipment recorded under capital leases was $132,975, $541,580 and $439,571
as of December 31, 1998, 1999 and March 31, 2000, respectively, and the related
accumulated amortization was $13,651, $57,976 and $102,009 as of December 31,
1998, 1999 and March 31, 2000, respectively. There was no equipment recorded
under capital leases as of December 31, 1997.

F-15
<PAGE>

ONI SYSTEMS, CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(5) Intangibles

A summary of intangibles is as follows:

<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Purchased technology and workforce.................. $ 530,000 $ 530,000
Assembled workforce and non-compete agreements...... 630,000 630,000
---------- ----------
1,160,000 1,160,000
Less accumulated amortization....................... 422,500 633,750
---------- ----------
$ 737,500 $ 526,250
========== ==========
</TABLE>

(6) Accrued Liabilities

Accrued liabilities are comprised of the following:

<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Accrued Employee benefits.......................... $ 671,155 $ 1,364,760
Uninvoiced receipts................................ 4,307,740 7,443,179
Other.............................................. 1,107,889 1,762,374
---------- -----------
$6,086,784 $10,570,313
========== ===========
</TABLE>

(7) Related Party Transactions

On October 20, 1997, ONI was incorporated as a wholly-owned subsidiary of
Optivision, Inc. (Optivision) and in connection therewith issued 11,565,752
shares of common stock, 8,000,000 shares of Series A preferred stock and a
$90,000 promissory note to Optivision in exchange for cash of $100,000,
property and equipment of $14,716, and certain intellectual property and
technology rights. On December 22, 1997, ONI was spun-out from Optivision. In
conjunction with the spin-out, ONI reserved 233,468 shares of common stock
issuable to a third party holding warrants to purchase common shares of
Optivision. In January 1998, a further $142,067 of property and equipment was
provided by Optivision to ONI for no additional consideration.

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

During 1998 and 1999, ONI received $122,585 and $3,713,494, respectively, in
promissory notes from certain officers in exchange for common stock. As of
December 31, 1999, $12,000 had been repaid by the stockholders. The notes are
repayable over a period of five to ten years and bear interest at rates ranging
from 4.46% to 6.20%. The notes are secured by the underlying common shares. In
the three month period ended March 31, 2000, ONI received an additional
$4,605,442 in promissory notes in exchange for common stock.

(8) Financing Arrangements

In February 1999, ONI entered into a Loan and Security Agreement with a
financing company that allowed ONI to borrow up to $2,000,000. The loan bears
interest at the prime rate, is repayable

F-16
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. ONI also entered into a Subordinated Loan and Security
Agreement with the same financing company, which allowed ONI to borrow up to
$1,000,000. The subordinated loan bears interest at 12% per annum, is repayable
in 36 equal monthly installments of principal and interest and is secured by
certain assets of ONI. As of December 31, 1999, ONI had not borrowed any
amounts under these agreements. These agreements expired unutilized on February
10, 2000.

In connection with the loan and security agreement and subordinated loan and
security agreement, ONI issued warrants to purchase 90,750 and 119,116 shares
of Series B convertible preferred stock, respectively, at $0.88 per share. The
warrants expire on the earlier of February 10, 2009, or five years from the
effectiveness of ONI's initial public offering. No warrants had been exercised
as of December 31, 1999. The fair value of the warrants was determined to be
$66,474 and $87,252, respectively, calculated using the Black-Scholes option
pricing model, using the following assumptions: no dividends; contractual term
of ten years; risk-free interest rate of 5.5%; and expected volatility of 70%.
The fair value of the warrants has been recorded as additional capital and was
amortized to interest expense over the term of the loan agreements.

(9) Stockholders' Equity

(a) Preferred Stock

As of December 31, 1999, ONI had 80,309,408 shares of preferred stock
authorized. ONI has designated and issued preferred stock as follows:

<TABLE>
<CAPTION>
December 31,
------------------------------------------------ March 31, 2000
1998 1999 (unaudited)
1999 ----------------------- ------------------------ ------------------------
Designated Shares Liquidation Shares Liquidation Shares Liquidation
shares outstanding preference outstanding preference outstanding preference
---------- ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series B................ 25,073,436 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181 24,795,510 $ 5,840,181
Series C................ 2,733,332 2,733,332 2,049,999 2,733,332 2,049,999 2,733,332 2,049,999
Series D................ 4,969,148 4,969,148 4,380,428 4,969,148 4,380,428 4,969,148 4,380,428
Series E................ 26,284,024 18,082,200 16,500,008 26,284,024 23,984,172 26,284,024 23,984,172
Series F................ 8,249,468 -- -- 8,249,468 15,000,008 8,249,468 15,000,008
Series G................ 13,000,000 -- -- 11,824,418 74,700,723 12,163,418 76,872,802
---------- ---------- ----------- ---------- ------------ ---------- ------------
80,309,408 50,580,190 $28,770,616 78,855,900 $125,955,511 79,194,900 $128,127,590
========== ========== =========== ========== ============ ========== ============
</TABLE>

In January 1998, ONI raised $4,208,803, net of issuance costs of $50,058,
through the sale of 18,128,843 shares of Series B preferred stock for cash of
$0.24 per share. In addition, ONI issued 8,000,000 shares of Series B preferred
stock in exchange for the redemption and cancellation of 8,000,000 shares of
Series A preferred stock and repurchased 1,333,333 shares of Series B preferred
stock for cash consideration of $1,000,000. Concurrently, ONI raised
$1,988,177, net of issuance costs of $61,823, from the sale of 2,733,332 shares
of Series C preferred stock for cash of $0.75 per share.

In April 1998, ONI raised $4,334,797, net of issuance costs of $45,632, from
the sale of 4,969,148 shares of Series D preferred stock for cash of $0.88 per
share.

In December 1998, ONI raised $16,483,400, net of issuance costs of $16,609,
from the sale of 18,082,200 shares of Series E preferred stock for cash of
$0.91 per share. In March 1999, ONI closed a second round of Series E preferred
financing, raising $7,264,193, net of issuance costs of

F-17
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$37,471, from the sale of 8,001,824 shares of Series E preferred stock. In
addition ONI issued 200,000 shares of Series E preferred stock in exchange for
additional lease space at its 166 Baypointe Parkway location. The value of
$182,500 ascribed to the Series E preferred stock was recorded as a reduction
of stockholders' equity and is being amortized to rent expense over the period
of the lease agreement.

In September 1999, ONI raised $14,969,401, net of issuance costs of $20,607,
from the sale of 8,249,468 shares of Series F preferred stock for cash of $1.82
per share.

In December 1999, ONI completed another round of private financing, raising
$74,655,694, net of issuance costs of $44,668, from the sale of 11,824,418
shares of Series G preferred stock for cash of $6.32 per share. In March 2000,
ONI raised an additional $1,960,701, net of issuance costs of $8,207, from the
sale of 310,000 shares of Series G preferred stock for cash of $6.32 per share.
In addition 29,000 shares of Series G preferred stock were issued in exchange
for services. The value of $183,270 ascribed to these services has been
expensed in the period ended March 31, 2000 in accordance with EITF 96-18. The
Series G preferred stock issued in March was issued to an employee, a director
and consultants as consideration for both services previously rendered as well
as for services to be rendered in the future. ONI has recorded deferred stock
compensation of $2,603,520, for the three months ended March 31, 2000, for the
difference between the purchase price of the shares and the fair market value
of the shares of $14.00 per share. This amount is being amortized on an
accelerated basis over the vesting period, or the period in which the services
were rendered if shorter, consistent with the method described in FASB
Interpretation No. 28. Amortization of deferred stock compensation associated
with these shares was $585,094 for the three months ended March 31, 2000.

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

. Each share of Series B, C, D, E, F and G preferred stock is convertible
at the option of the holder at any time after the date of issuance on a
one-for-one basis subject to certain antidilution provisions. Conversion
of all Series B, C, D, E, F and G preferred stock is automatic upon the
earlier of (1) the closing of a firm underwritten commitment with respect
to an initial public offering of shares of common stock of ONI, in which
ONI receives cash proceeds of at least $20,000,000 (net of underwriters'
commissions and expenses) or (2) the written consent of the holders of 66
-2/3% of the outstanding shares of preferred stock, voting together as a
single class.

. Holders of Series B, C, D, E, F and G preferred stock are entitled to
receive dividends equal to 10% of their respective liquidation preference
in preference to any dividend on common stock when, as and if declared by
the Board of Directors out of legally available funds. These preferential
dividends are noncumulative. In addition, the holders of Series B, C, D,
E, F and G preferred stock are entitled to receive dividends on a basis
equal to common stockholders out of funds legally available therefor,
when, as and if declared by the Board of Directors. No dividends have
been declared through December 31, 1999.

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

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

F-18
<PAGE>

ONI SYSTEMS, CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(b) Common Stock

As of December 31, 1999, ONI had 159,690,592 shares of common stock
authorized.

In 1998, ONI issued 6,431,496 shares of restricted common stock at prices
ranging from $0.0016 to $0.0882 per share, 5,991,496 of which were issued in
exchange for notes receivable of $122,585. In 1999, ONI issued an additional
513,332 shares of restricted common stock at prices ranging from $0.09 to
$0.91, 20,000 of which were issued in exchange for notes receivable of $18,200.
In the three month period ended March 31, 2000, ONI issued 2,162,000 shares of
restricted common stock at prices ranging from $0.09 to $3.20, all of which
were issued in exchange for notes receivable of $4,605,442. The restricted
shares of common stock vest 25% within 12 months of issuance with the remainder
vesting in 36 equal monthly amounts. On the occurrence of a change in control
event, as defined, 50% of the unvested shares of common stock becomes vested.
Upon termination of employment, ONI may repurchase all unvested shares at an
amount equal to the original purchase price.

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

In December 1999, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 500,000 shares of common stock at an exercise
price of $0.91 per share. The value of $2,890,500 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of six years. For so long as
the Purchase and License Agreement has not been terminated by ONI due to a
material breach by the customer and the warrant remains unexpired, the warrant
becomes vested and exercisable on the ratio of the dollar volume of purchases
of ONI's products by the customer under the agreement to $30 million.
Notwithstanding the above formula, the warrant becomes fully vested and
exercisable on December 7, 2005, the date of expiration of the warrant. The
customer is not obligated to purchase any of ONI's products as a condition to
exercising the warrant. Accordingly, the warrant was expensed in 1999.

In February 2000, in connection with the signing of a Purchase and License
Agreement with a customer to provide certain ONI products in the future, ONI
issued a warrant to purchase 223,000 shares of common stock at an exercise
price of $0.91 per share. The value of $3,000,242 ascribed to the warrant was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 5.50%;
expected volatility of 70%; and contractual term of seven years. For so long as
the Purchase and License Agreement has not been terminated by ONI due to a
material breach by the customer and the warrant remains unexpired, the warrant
becomes vested and exercisable on the ratio of the dollar volume of purchases
of ONI's products by the customer under the agreement to $20 million.
Notwithstanding the above formula, the warrant becomes fully vested and
exercisable on February 15, 2007, the date of expiration of the warrant. Under
the terms of the Purchase and License Agreement, the customer has the ability
to terminate the agreement upon 120 days written notice, and provided the
customer purchased $1 million of product from ONI in fiscal 2000. The customer
is not obligated to purchase any of ONI's products as a condition to exercising
the warrant. Accordingly, the warrant was expensed in the three-month period
ended March 31, 2000.

In March, 2000, as consideration for professional services rendered, ONI
issued a warrant to purchase 200,000 shares of common stock at an exercise
price of $15.00 per share. The value of

F-19
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$1,544,600 ascribed to the warrant was estimated using the Black-Scholes option
valuation model with the following assumptions: no expected dividend yield;
risk free interest rate of 5.50%; expected volatility of 70%; and a contractual
term of four years. The warrant was expensed in the three month period ended
March 31, 2000.

1997 Stock Option Plan

On October 29, 1997, ONI's Board of Directors adopted the 1997 Stock Option
Plan (the 1997 Plan) and reserved a total of 7,638,508 shares of ONI's common
stock for issuance thereunder. ONI did not file a timely notice of Issuance of
Shares pursuant to California securities law and consequently any options to
purchase shares or restricted stock purchase offers issued under the 1997 Plan
did not qualify for an exemption from qualification under California securities
law. As a result, the Board of Directors terminated the 1997 Plan in April 1998
and approved a repurchase offer for any holder of options of shares under the
1997 Plan. The repurchase offer expired without any shares being repurchased.

Options granted under the 1997 Plan may be designated as "Incentive Stock
Options" or "Nonstatutory Stock Options" at the discretion of ONI, with
exercise prices not less than the fair market value at the date of grant.
Options generally vest 25% on the first anniversary of the vesting start date
and then monthly over the next three years. Options expire ten years from the
date of grant.

1998 Equity Incentive Plan

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

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

F-20
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1999 Equity Incentive Plan

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

A summary of the status of ONI's option plans is as follows:
<TABLE>
<CAPTION>
Outstanding options
-------------------
Weighted Weighted
Shares average average
available Number of exercise grant date
for grant shares price fair value
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Authorized......................... 29,751,768 --
Granted.......................... (1,078,220) 1,078,220 $0.005 $0.19
Exercised........................ -- --
Cancelled........................ -- --
----------- ----------
Balance as of December 31, 1997.... 28,673,548 1,078,220 0.005
Granted.......................... (10,885,796) 10,885,796 0.08 $0.69
Exercised........................ -- (1,651,332) 0.08
Cancelled........................ 1,522,908 (1,522,908) 0.07
----------- ----------
Balance as of December 31, 1998.... 19,310,660 8,789,776 0.08
Granted.......................... (20,178,438) 20,178,438 0.42 $1.90
Exercised........................ -- (8,709,066) 0.46
Cancelled........................ 2,710,424 (2,710,424) 0.08
----------- ---------- ------
Balance as of December 31, 1999.... 1,842,646 17,548,724 $ 0.29
=========== ========== ======
Authorized*...................... 4,994,079 -- --
Granted*......................... (5,630,827) 5,630,827 2.28 $2.95
Exercised*....................... -- (3,664,285) 1.48
Cancelled*....................... 171,921 (171,921) 1.10
----------- ---------- ------
Balance as of March 31, 2000*...... 1,377,819 19,343,345 $ 0.64
=========== ========== ======
</TABLE>
- --------
* Unaudited

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

<TABLE>
<CAPTION>
Exercise Options Contractual Exercisable
price outstanding life (years) Options
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.005 200,876 7.71 80,550
0.075 117,212 7.86 7,322
0.09 11,393,482 8.99 128,506
0.456 20,000 9.33 --
0.91 3,669,450 9.54 --
1.25 2,825,900 9.77 21,375
3.20 829,800 9.91 --
5.25 162,000 9.95 --
7.50 124,625 9.98 --
---------- -------
$0.64 19,343,345 9.24 237,753
========== =======
</TABLE>

F-21
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accounting for Stock-Based Compensation

ONI uses the intrinsic value method prescribed by APB No. 25 in accounting
for its stock-based compensation arrangements for employees whereby
compensation cost is recognized to the extent the fair value of the underlying
common stock exceeds the exercise price of the stock options at the date of
grant. Deferred stock compensation of $190,875 for the period from October 20,
1997 (inception) to December 31, 1997, and $8,432,317, and $41,730,329 for the
year ended December 31, 1998 and 1999, respectively, has been recorded for the
excess of the fair value of the common stock underlying the options at the
grant date over the exercise price of the options. An additional $66,696,890 of
deferred stock compensation was recorded for the three months ended March 31,
2000. These amounts are being amortized on an accelerated basis over the
vesting period, generally four years, consistent with the method described in
FASB Interpretation No. 28. Amortization of deferred compensation was $89,249
for the period from October 20, 1997 (inception) to December 31, 1997,
$3,310,368 in 1998 and $11,421,739 in 1999. Amortization of deferred
compensation for the three months ended March 31, 1999 and 2000 was $1,296,281
and $13,027,199, respectively.

In 1998, ONI's Chief Executive Officer purchased 717,624 shares of common
stock that were subject to repurchase pending the achievement of certain
milestones in 1998 and 1999. The shares were remeasured at each date the
milestones were achieved based on the fair value of the common stock at that
date, pursuant to the variable plan treatment ascribed under APB 25. All the
milestones stipulated in the employment agreement were met as of December 31,
1999. Accordingly, additional compensation expense of $836,929 was recorded in
1999. Had compensation cost for ONI's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
ONI's net losses would have been as follows:

<TABLE>
<CAPTION>
Period from Year ended December Three months ended
October 20, 1997 31, March 31,
(inception) to ----------------------- -----------------------
December 31, 1997 1998 1999 1999 2000
----------------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss--as reported... $199,056 $8,852,168 $46,571,571 $4,777,022 $34,167,291
Net loss--pro forma..... $199,056 $8,900,007 $46,917,722 $4,809,910 $34,935,988
Basic and diluted net
loss per share--as
reported............... $ (0.77) $ (0.74) $ (2.58) $ (0.35) $ (1.41)
Basic and diluted net
loss per share--pro
forma.................. $ (0.77) $ (0.75) $ (2.60) $ (0.36) $ (1.44)
</TABLE>

The fair value of options granted is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rates of 5.75% and 5.5% in 1998 and 1999,
respectively, and an expected life of five years.

(10) Commitments and Contingencies

(a) Leases

In February 1999, the Company entered into a leasing agreement with a
financing company which allows ONI to draw up to $1,050,000 for the lease of
certain equipment and $450,000 for the lease of software and tenant
improvements. The leases are accounted for as capital leases. The lease
obligations under this agreement are repayable in 42 equal monthly installments
of principal plus interest commencing on the individual lease inception dates
and are secured by the leased assets.

F-22
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the equipment leasing agreement, ONI issued to the
financing company warrants to purchase 68,062 shares of Series B preferred
stock at a price of $0.88 per share. The warrants expire on February 10, 2009,
or five years from the effectiveness of the ONI's initial public offering, if
earlier. No warrants had been exercised as of December 31, 1999. The fair value
of the warrants was determined to be $49,855, calculated using the Black-
Scholes option pricing model, using the following assumptions: no dividends;
contractual term of ten years; risk-free interest rate of 5.5%; and expected
volatility of 70%. The fair value of the warrants has been recorded as
additional paid-in capital and is being amortized as interest expense over the
term of the lease agreement.

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

<TABLE>
<CAPTION>
Year ending
December Capital Operating
31, leases leases
----------- -------- -----------
<S> <C> <C>
9 months ended 2000.................................... $126,423 $ 3,454,229
2001................................................... 186,525 3,550,550
2002................................................... 151,060 2,339,673
2003................................................... 62,941 1,639,124
2004................................................... -- 1,709,660
Thereafter............................................. -- 3,630,925
-------- -----------
Future minimum lease payments.......................... 526,949 $16,324,159
===========
Less amount representing interest...................... 60,666
--------
Present value of future minimum lease payments......... 466,283
Less current portion................................... 170,905
--------
Long-term portion...................................... $295,378
========
</TABLE>

Total rent expense under the operating leases was $494,308, $908,115 and
$714,879 for the years ended December 31, 1998, 1999 and the quarter ended
March 31, 2000, respectively, and $0 for the period from October 20, 1997
(inception) to December 31, 1997.

(b) Contingencies

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

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

F-23
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(11) Income Taxes

Income tax expense consists of current state tax of $826 and $1,600 for the
years ended December 31, 1998 and 1999, respectively, and current state tax of
$2,500 for the three months ended March 31, 2000.

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

<TABLE>
<CAPTION>
Three months
Period ended December 31, ended
----------------------------------- March 31, 2000
1997 1998 1999 (unaudited)
-------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Income tax (benefit) at
statutory rate............ $(67,679) $(3,009,456) $(15,833,790) $(11,616,879)
State taxes net of federal
income tax benefit........ -- 826 1,600 2,500
Permanent differences...... 48 4,039 24,612 --
Stock Compensation......... 53 417,762 3,161,650 3,853,534
Goodwill Amortization...... -- -- 482,780 245,650
Current year net operating
loss and temporary
differences for which no
benefit is recognized..... 67,578 2,587,655 12,164,748 7,517,695
-------- ----------- ------------ ------------
Total income tax expense... $ -- $ 826 $ 1,600 $ 2,500
======== =========== ============ ============
</TABLE>

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

<TABLE>
<CAPTION>
December 31,
------------------------- March 31, 2000
1998 1999 (unaudited)
----------- ------------ --------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred state taxes................ $ -- $ 1,000 $ 1,000
Fixed assets........................ 39,000 141,000 141,000
Capitalized start-up and
organizational expense............. 343,000 236,000 236,000
Net operating loss carryforwards.... 2,011,000 14,707,000 21,276,000
Deferred stock compensation......... 930,000 3,502,000 6,428,000
Research and other credit
carryforwards...................... 394,000 2,047,000 2,047,000
Accrual amounts..................... 12,000 293,000 293,000
----------- ------------ ------------
Total gross deferred tax assets.... 3,729,000 20,927,000 30,422,000
Valuation allowance.................. (3,729,000) (20,682,000) (30,422,000)
----------- ------------ ------------
Total deferred tax assets.......... -- 245,000 336,000
Deferred tax liabilities:
Intangibles........................ -- (245,000) (336,000)
----------- ------------ ------------
Net deferred tax assets, net of
deferred tax liabilities........... $ -- $ -- $ --
=========== ============ ============
</TABLE>

Management has established a valuation allowance for the portion of deferred
tax assets for which realization is uncertain. The change in the valuation
allowance for deferred tax assets was an increase of $3,729,000 in 1998 and an
increase of $16,650,000 in 1999.

As of December 31, 1999, ONI has net operating loss carryforwards for
federal and California income tax purposes of approximately $34,000,000
available to reduce future income subject to incomes taxes. The net operating
loss carryforwards for federal income tax purposes expire in various years
beginning in 2012 through 2019. The net operating loss carryforwards for
California purposes expire in 2005.

F-24
<PAGE>

ONI SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

ONI also has research credit carryforwards as of December 31, 1999 for
federal and California income tax return purposes of approximately $1,125,000
and $864,000, respectively, available to reduce future income taxes. The
federal research credit carryforward will expire in various years from 2012
through 2019. The California research credit carryforward carries forward
indefinitely until realized. ONI also has a California manufacturing investment
credit carryforward of $59,000 which will expire in various years beginning in
2007 through 2008.

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

(12) Employee Benefit Plan

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

(13) Subsequent Events

(a) In April 2000, ONI adopted a 2000 Equity Incentive Plan, under which
7,000,000 shares of ONI's common stock were reserved exclusively for
issuance under the plan. In addition, ONI adopted a 2000 Employee Stock
Purchase Plan, to be effective on the first day on which price quotations
are available for ONI's common stock on the NASDAQ National Market, in
which 1,000,000 shares of common stock were reserved exclusively for
issuance under the plan.

(b) In March 2000, ONI entered into an agreement with Internet Initiative Japan
Inc. to sell to it $4.0 million of common stock, at the initial public
offering price per share, in a private placement that will close
concurrently with ONI's initial public offering.

(c) Effective April 25, 2000, ONI reincorporated as a Delaware corporation.
Share capital information for all periods has been retroactively adjusted
to reflect the par value of common and preferred stock and amounts of paid-
in capital.

(d) In April 2000, ONI entered into an agreement with CCT Telecom Holdings
Limited to sell to it $10.0 million of common stock, at the initial public
offering price per share, in a private placement that will close concurrent
with ONI's initial public offering.

(e) On May 9, 2000, ONI sold 1,333,333 shares of Series H preferred stock to
Sun Microsystems, Inc., at a price per share of $15.00. These shares of
preferred stock will convert into common stock upon the completion of an
initial public offering. The number of shares of common stock to be issued
on conversion will be computed using a 17.5% discount off of the initial
public offering price. Based on an initial public offering price of $22.00
per share, these shares will convert into 1,101,928 shares of common stock.

(f) In May 2000, ONI granted an option to purchase 1,000,000 shares of common
stock outside of the existing stock option plans with an exercise price of
$4.00 per share to Chris A. Davis, ONI's new Executive Vice President,
Chief Financial and Administrative Officer. This grant will result in
additional deferred stock compensation of $10.0 million, which will be
amortized over four years from the date of the grant.

F-25
<PAGE>

Independent Auditors' Report

The Board of Directors
Object-Mart, Inc.:

We have audited the accompanying balance sheet of Object-Mart, Inc. as of
December 31, 1998, and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 1998 and for the six
months ended June 29, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Object-Mart, Inc. as of
December 31, 1998, and the results of operations and cash flows of Object-Mart,
Inc. for the year ended December 31, 1998 and for the six months ended June 29,
1999, in conformity with generally accepted accounting principles.

/s/ KPMG LLP

Mountain View, California
April 10, 2000

F-26
<PAGE>

OBJECT-MART, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
ASSETS December 31, 1998
------ -----------------
<S> <C>
Current assets:
Cash and cash equivalents................................... $ 54,568
Accounts receivable......................................... 383,907
Other current assets........................................ 12,623
---------
Total current assets...................................... 451,098
Property and equipment........................................ 62,428
Other assets.................................................. 1,298
---------
Total assets.............................................. $ 514,824
=========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Accounts payable............................................ 15,869
Accrued expenses............................................ 9,127
Deferred income taxes....................................... 136,863
---------
Total current liabilities................................. 161,859
Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized and
2,751,000 shares issued and outstanding at December 31, 1998. 146,060
Notes receivable from shareholder............................. (143,360)
Retained earnings............................................. 350,265
---------
Total shareholders' equity................................ 352,965
---------
Total liabilities and shareholders' equity.............. $ 514,824
=========
</TABLE>

See accompanying notes to financial statements

F-27
<PAGE>

OBJECT-MART, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year ended Six months
December 31, ended
1998 June 29, 1999
------------ -------------
<S> <C> <C>
Revenue.............................................. $1,933,081 $1,744,600
Cost of revenue.................................... 1,023,922 509,013
---------- ----------
Gross profit..................................... 909,159 1,235,587
---------- ----------
Operating expenses:
Research and development........................... 198,526 582,927
Sales and marketing................................ 129,451 52,888
General and administrative......................... 69,237 105,524
Stock compensation................................. -- 466,507
---------- ----------
Total operating expenses......................... 397,214 1,207,846
---------- ----------
Operating income................................. 511,945 27,741
Interest income, net................................. 8,138 14,286
---------- ----------
Income before income taxes......................... 520,083 42,027
Income taxes......................................... 207,140 109,023
---------- ----------
Net income/(loss)................................ $ 312,943 $ (66,996)
========== ==========
</TABLE>

See accompanying notes to financial statements.

F-28
<PAGE>

OBJECT-MART, INC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six months
ended
Year ended June 29,
December 31, 1998 1999
----------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................... 312,943 $ (66,996)
Deferred tax expense............................ -- 28,543
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 46,521 20,811
Amortization of deferred stock compensation.... -- 466,507
Changes in operating assets and liabilities:
Accounts receivable............................ (349,750) (206,400)
Prepaid expenses and other current assets...... (12,208) (198,000)
Other assets................................... 410 --
Accounts payable............................... 9,536 (15,836)
Accrued liabilities............................ (7,475) 275,838
Deferred income taxes.......................... 136,863 (121,828)
Deferred revenue............................... -- 1,000,000
-------- ----------
Net cash provided by operating activities.... (136,840) 1,182,639

Cash flows used in investing activities:
Purchase of property and equipment.............. (108,948) (58,951)
-------- ----------
Net cash used in investing activities........ (108,948) (58,951)
-------- ----------

Cash flows from financing activities:
Proceeds from issuance of common stock.......... 2,700 255,638
-------- ----------
Net cash provided by financing activities.... 2,700 255,638
-------- ----------
Net increase in cash and cash equivalents.... 30,592 1,379,326
Cash and cash equivalents at beginning of period. 23,976 54,568
-------- ----------
Cash and cash equivalents at end of period....... 54,568 $1,433,894
======== ==========
</TABLE>

See accompanying notes to financial statements.

F-29
<PAGE>

OBJECT-MART, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31, 1998 and six months ended June 29, 1999

<TABLE>
<CAPTION>
Notes
Common stock receivable Total
------------------ from Retained shareholders'
Shares Amount shareholders earnings equity
--------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1997............... 2,500,000 $ 65,500 $ (65,500) $ 37,322 $ 37,322
Issuance of common
stock.................. 251,000 80,560 (77,860) -- 2,700
Net income.............. -- -- -- 312,943 312,943
--------- -------- --------- -------- ----------
Balance as of December
31, 1998............... 2,751,000 $146,060 $(143,360) $350,265 $ 352,965
Exercise of options for
cash................... 877,500 255,638 -- -- 255,638
Stock compensation...... -- 466,507 -- -- 466,507
Net loss................ -- -- -- (66,996) (66,996)
--------- -------- --------- -------- ----------
3,628,500 $868,205 $(143,360) $283,269 $1,008,114
========= ======== ========= ======== ==========
</TABLE>

See accompanying notes to financial statements.

F-30
<PAGE>

OBJECT-MART, INC.

NOTES TO FINANCIAL STATEMENTS

Year ended December 31, 1998 and six months ended June 29, 1999

(1) Description of Business and Significant Accounting Policies

(a) Description of Business

Object-Mart, Inc. (Object-Mart) was incorporated in California on February
27, 1997. The company provided telecommunications software products and
services to telecommunications software development companies, service
providers and equipment manufacturers.

(b) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires Object-Mart to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses, and to disclose contingent assets and liabilities at the date of
the financial statements and the reported results of operations during the
reporting period. Actual results could differ from those estimates.

Object-Mart considers highly liquid investments with remaining maturities of
less than three months at the date of purchase to be cash equivalents. As of
December 31, 1998, cash equivalents consisted of a money market account in the
amount of $50,862.

(d) Accounts Receivable

Accounts receivable is comprised of unbilled trade accounts receivable. As
of December 31, 1998, there was no allowance for uncollectible accounts
receivable.

(e) Property and Equipment

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from one to three years. Depreciation expense for the year ended
December 31, 1998 was $46,521 and for the six month period ended June 29, 1999
was $20,811.

(f) Software Development Costs

Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs incurred subsequent to the
date technological feasibility is established and prior to the date the product
is generally available for sale. The capitalized cost is then amortized over
the estimated life of the product. To date, Object-Mart has not capitalized any
software development costs because capitalizable costs meeting the requirements
SFAS No. 86 have not been significant.

(g) Revenue Recognition

Object-Mart derives its revenue from software license agreements and
consulting services. Software license revenues are recognized upon execution of
the license agreement and delivery of the software. In all cases, however, no
significant post-contract obligations of Object-Mart shall be remaining.
Otherwise, software license fees are deferred until all of the requirements for
revenue

F-31
<PAGE>

OBJECT-MART, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
recognition have been satisfied. Consulting services contracts include both
hourly service-based contracts and milestone based contracts. Hourly service-
based contracts are billed and recognized as the services are performed.
Milestone-based contracts are billed and recognized when the milestones are
completed and when product, if any, committed for the milestones is shipped and
accepted.

Revenue from the sale of software was accounted for in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, SOP 98-4,
Deferral of Effective Date of SOP 97-2, and SOP 98-9, Software Revenue
Recognition with Respect to Certain Arrangements.

(h) Research and Development

All research and development costs are expensed as incurred.

(i) Fair Value of Financial Instruments

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

(j) Stock-Based Compensation

Object-Mart accounts for stock-based awards to employees using the intrinsic
value method. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board (FASB) Interpretation No. 28. Consistent with the fair value approach
enumerated in SFAS No. 123, Object-Mart discloses the pro forma effects of
using the fair value method of accounting for stock-based compensation
arrangements.

(k) Comprehensive Income/Loss

Other comprehensive income/loss refers to revenue, expenses, gains and
losses that are not included in net income/loss, but rather are recorded
directly in stockholders' equity. To date, Object-Mart has no items of other
comprehensive income/loss and, accordingly, comprehensive loss is the same as
net loss.

(l) Income Taxes

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

F-32
<PAGE>

OBJECT-MART, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Income tax expense for the year ended December 31, 1998 and the six months
ended June 29, 1999 consisted of:

<TABLE>
<CAPTION>
Year ended
December 31, Six months ended
1998 June 29, 1999
------------ ----------------
<S> <C> <C>
Current:
Federal...................................... $ 54,798 $ 182,007
State........................................ 15,479 48,845
-------- ---------
Total current tax expense.................. $ 70,277 $ 230,852
-------- ---------
Deferred:
Federal...................................... 106,414 (97,429)
State........................................ 30,449 (24,400)
-------- ---------
Total deferred tax expense (credit)........ 136,863 (121,829)
-------- ---------
Total tax expense.......................... $207,140 $ 109,023
======== =========
</TABLE>

The income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax income as a result of the
following:

<TABLE>
<CAPTION>
December 31, 1998 June 29, 1999
----------------- -------------
<S> <C> <C>
Federal tax at statutory rate............... $176,828 $ 14,289
State taxes, net of federal income tax
benefit.................................... 30,312 18,011
Deferred stock compensation................. -- 79,362
Other....................................... -- (2,639)
-------- --------
Total tax expense....................... $207,140 $109,023
======== ========
</TABLE>

The types of temporary differences that give rise to significant portions of
Object-Mart's deferred tax assets and liabilities are set out below.

<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
State income taxes............................................. $ 15,616
Plant and equipment............................................ 1,279
---------
Gross deferred tax assets....................................... 16,895
Deferred tax liabilities:
Accruals and reserves.......................................... (153,758)
---------
Net deferred tax liabilities.................................... $(136,863)
=========
</TABLE>

F-33
<PAGE>

OBJECT-MART, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

(2) Property and Equipment

Property and equipment as of December 31, 1998 consisted of the following:

<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Computers...................................................... $ 85,488
Software....................................................... 18,985
Furniture...................................................... 4,476
--------
108,949
Less accumulated depreciation.................................. 46,521
--------
Total.......................................................... $ 62,428
========
</TABLE>

(3) Concentrations of Credit Risk

Financial instruments, which potentially subject Object-Mart to
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable. Cash equivalents are money market funds maintained with a
high quality financial institution. Object-Mart generally does not require
collateral for sales on credit. Object-Mart closely monitors extensions of
credit and has not experienced significant credit losses in the past.

A summary of sales to major customers that exceeded 10% of total sales
during the year ended December 31, 1998 and the six months ended June 29, 1999,
and the amount due from these customers as of December 31, 1998 follows:

<TABLE>
<CAPTION>
Sales
--------------------------- December 31,
Year ended Six months 1998
December 31, ended June 29, Accounts
1998 1999 receivable
------------ -------------- ------------
<S> <C> <C> <C>
Customer A......................... $725,810 $ -- $ 90,000
Customer B......................... $661,521 $ -- $ --
Customer C......................... $277,350 $279,900 $277,350
Customer D......................... $268,400 $788,800 $ 18,400
Customer E......................... $ -- $387,600 $ --
</TABLE>

(4) Shareholders' Equity

(a) Common Stock

In June 1999, in connection with the acquisition by ONI Systems, Corp.
(ONI), all outstanding shares of common stock of Object-Mart were acquired by
ONI in exchange for ONI's common stock and cash consideration. Pursuant to the
acquisition agreement, all shares of Object-Mart's common stock and outstanding
options became vested upon acquisition were exchanged into ONI's common stock.
As a result, Object-Mart recorded $466,507 of stock compensation.

(b) Stock Option Plan

1998 Stock Option Plan

In July 1998, Object-Mart's Board of Directors adopted the 1998 Stock Option
Plan (1998 Plan) and reserved a total of 1,000,000 share of Object-Mart's
common stock for issuance thereunder. Options granted under the 1998 Plan may
be designated as "Incentive Stock Options" or "Nonstatutory Stock Options" at
the discretion of Object-Mart, with exercise prices not less than the

F-34
<PAGE>

OBJECT-MART, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

fair market value at the date of grant. Options generally vest 25% on the first
anniversary of the vesting start date and then monthly over the next three
years. Options expire ten years from the date of grant. All options were vested
upon Object-Mart's acquisition by ONI.

A summary of the status of Object-Mart's option plan is as follows:

<TABLE>
<CAPTION>
Outstanding options
------------------------------
Shares Number Weighted Weighted
available of average average grant
for grant shares exercise price date fair value
--------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1997............... -- --
Authorized in July,
1998................... 1,000,000
Granted................ (900,000) 900,000 $0.20 $0.20
Exercised.............. -- (75,000) 0.20
Cancelled.............. 200,000 (200,000) 0.20
--------- -------- -----
Balance as of 12/31/98.. 300,000 625,000 $0.20
Granted................ (295,500) 295,500 0.60 $0.60
Exercised.............. -- (917,500) 0.33
Cancelled.............. 3,000 (3,000) 0.20
--------- -------- -----
Balance as of June 29,
1999................... 7,500 -- $ --
--------- -------- -----
</TABLE>

Object-Mart uses the intrinsic value method in accounting for its employee
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for any of its stock options granted because the exercise price of
each option equaled or exceeded the fair value of the underlying common stock
as of the grant date for each stock option.

Had compensation cost for Object-Mart's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
Object-Mart's net loss applicable to common stockholders for the year ended
December 31, 1998, and the six month ended June 29, 1999, would not have been
materially different from the reported net income/loss.

F-35
<PAGE>

ONI SYSTEMS CORP.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS

The following unaudited pro forma combined condensed statement of operations
is presented for illustrative purposes only and is not necessarily indicative
of the combined results of operations for future periods or the results of
operations that actually would have been realized had ONI Systems and Object-
Mart, Inc. been a combined company during the specified periods. The unaudited
pro forma combined condensed statement of operations, including the related
notes, is qualified in its entirety by reference to, and should be read in
conjunction with, the historical financial statements and related notes thereto
of ONI Systems and Object-Mart, Inc., included elsewhere in this prospectus.
The following unaudited pro forma combined condensed statement of operations
gives effect to the acquisition of Object-Mart, Inc. by ONI Systems using the
purchase method of accounting. The unaudited pro forma combined condensed
statement of operations is based on the respective historical audited financial
statements and related notes of ONI Systems and Object-Mart, Inc.

The unaudited pro forma combined condensed statement of operations assumes
that the acquisition took place on January 1, 1999 and combines ONI Systems,
audited consolidated statement of operations for the year ended December 31,
1999 which includes Object-Mart's results of operations subsequent to June 29,
1999, the date of acquisition, with Object-Mart's audited consolidated
statement of operations for the six months ended June 29, 1999.

F-36
<PAGE>

ONI SYSTEMS CORP.

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1999

<TABLE>
<CAPTION>
Historical Pro forma
------------------------ ----------------------------
Object-
ONI Systems Mart Adjustments Combined
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $ 3,033,995 $1,744,600 $ (152,800)(a) $ 4,625,795
Cost of revenues....... 1,032,144 509,013 (64,384)(b) 1,476,773
------------ ---------- ----------- ------------
2,001,851 1,235,587 (88,416) 3,149,022
------------ ---------- ----------- ------------
Operating expenses:
Research and
development........... 25,399,728 582,927 (101,108)(c) 25,881,547
Sales and marketing.... 4,557,245 52,888 12,692 (d) 4,622,825
General and
administrative........ 4,755,582 105,524 1,419,960 (e) 6,281,066
Amortization of
deferred stock
compensation.......... 11,421,739 466,507 -- 11,888,246
Amortization of common
stock warrants........ 2,890,500 -- -- 2,890,500
In-process research and
development........... 170,000 -- (170,000)(f) --
------------ ---------- ----------- ------------
Total operating
expenses........... 49,194,794 1,207,846 1,161,544 51,564,184
------------ ---------- ----------- ------------
Operating loss...... (47,192,943) 27,741 (1,249,960) (48,415,162)
Interest income, net... 622,972 14,286 -- 637,258
------------ ---------- ----------- ------------
Income (loss) before
income taxes....... (46,569,971) 42,027 (1,249,960) (47,777,904)
Income taxes........... 1,600 109,023 (109,023)(g) 1,600
------------ ---------- ----------- ------------
Net income (loss)... $(46,571,571) $ (66,996) $(1,140,937) $(47,779,504)
============ ========== =========== ============
Basic and diluted net
loss per share........ $ (2.58) $ (2.65)
============ ============
Shares used to compute
basic and diluted net
loss per share........ 18,043,188 18,043,188
============ ============
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statements.

F-37
<PAGE>

ONI SYSTEMS CORP.

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

(1) Unaudited Pro Forma Combined Condensed Statements of Operations

The pro forma combined condensed statements of operations give effect to the
acquisition as if it had occurred on January 1,1999.

The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:

(a) Adjustment to eliminate intercompany revenue;

(b) Adjustment to eliminate cost of revenue related to intercompany
revenue;

(c) Adjustment to eliminate intercompany expense of $152,800 netted against
reclassification of cost of revenue of $51,692;

(d) Adjustment to reclassify cost of revenue;

(e) The adjustment to record additional amortization of goodwill for the
six month period ended June 29, 1999 is calculated as the six-month
amortization of the $5,679,839 goodwill recorded in relation to the
Object-Mart acquisition, to be amortized over a two-year period;

(f) Adjustment to reverse the value of purchased in-process research and
development as this is a non-recurring charge; and

(g) Adjustment to reverse income tax expense for the amount of the combined
company.

F-38
<PAGE>

[LOGO OF ONI SYSTEMS]
<PAGE>

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

No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Special Note Regarding Forward-Looking Statements......................... 18
Recent Developments....................................................... 18
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 22
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 35
Management................................................................ 47
Related Party Transactions................................................ 60
Principal Stockholders.................................................... 65
Description of Capital Stock.............................................. 68
Shares Eligible for Future Sale........................................... 72
Underwriting.............................................................. 75
Validity of Common Stock.................................................. 77
Experts................................................................... 77
Where You Can Find Additional Information................................. 77
Index to Financial Statements............................................. F-1
</TABLE>

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

Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

8,000,000 Shares

ONI Systems Corp.

Common Stock

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

[ONI SYSTEMS LOGO]

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

Goldman, Sachs & Co.

Banc of America Securities LLC

Chase H&Q

Robertson Stephens

Representatives of the Underwriters

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fees.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 55,863
NASD filing fee.................................................. 21,660
Nasdaq National Market initial filing fee........................ 95,000
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 550,000
Road show expenses............................................... 75,000
Printing and engraving expenses.................................. 350,000
Blue Sky qualification fees and expenses......................... 25,000
Transfer agent and registrar fees and expenses................... 30,000
Miscellaneous expenses........................................... 22,477
----------
Total.......................................................... $1,525,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").

As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation and Bylaws eliminate the personal liability of
its directors for monetary damages for breach of fiduciary duty as a director,
except for liability:

. for any breach of the director's duty of loyalty to the Registrant or its
stockholders;

. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

. for any transaction from which the director derived an improper personal
benefit.

As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:

. the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;

. the Registrant may indemnify its other employees and agents as set forth
in the Delaware General Corporation Law;

. the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;

. the Registrant may advance expenses, as incurred, to its employees and
agents in connection with legal proceedings; and

. the rights conferred in the Bylaws are not exclusive.

II-1
<PAGE>

The Registrant has entered into Indemnification Agreements with each of its
current directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Certificate of Incorporation and to provide additional
procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Registrant
regarding which indemnification is sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification.

Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnification
Agreements entered into between the Registrant and each of its directors and
officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the
Securities Act.

The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.

See also the undertakings set out in response to Item 17.

Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:

<TABLE>
<CAPTION>
Exhibit Document Number
---------------- ------
<S> <C>
Form of Underwriting Agreement....................................... 1.01
Registrant's Amended and Restated Certificate of Incorporation....... 3.01
Registrant's Amended and Restated Certificate of Incorporation (to be
filed immediately after the closing of this offering)............... 3.02
Registrant's Amended and Restated Bylaws............................. 3.03
Form of Indemnification Agreement.................................... 10.01
</TABLE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In the three years prior to the effective date of this Registration
Statement, the Registrant issued and sold the following securities that were
not registered under the Securities Act:

1. In October 1997, in connection with Registrant's formation as a subsidiary
of Optivision, Inc., Optivision received 11,565,752 shares of Registrant's
common stock and 8,000,000 shares of Registrant's Series A preferred stock.
In December 1997, Registrant was spun out of Optivision and Optivision
distributed its holdings of Registrant's common stock and 4,000,000 shares
of Registrant's Series A preferred stock to Optivision shareholders.
Optivision retained 4,000,000 shares of Registrant's Series A preferred
stock. In January 1998, all of the shares of Registrant's Series A
preferred stock were converted into Series B preferred stock on a one-for-
one basis. In January 1998, Optivision sold 2,666,667 shares of
Registrant's Series B preferred stock to a group of investors for an
aggregate purchase price of $2.0 million. In March 1998, Registrant
repurchased 1,333,333 shares of its Series B preferred stock from
Optivision, for an aggregate purchase price of $1.0 million.

2. In connection with Registrant's spin-out from Optivision in December 1997,
Registrant is obligated to issue 233,468 shares of common stock to Venture
Lending & Leasing, Inc., upon the exercise by Venture Lending & Leasing,
Inc. of warrants to purchase capital stock of Optivision. Registrant will
not receive any proceeds from the exercise of these warrants.

3. In January 1998, Registrant sold 9,590,383 shares of Series B preferred
stock to six venture capital funds or other investment entities for
$2,258,859.64 in cash.

II-2
<PAGE>

4. In February 1998, Registrant sold 8,491,347 shares of Series B preferred
stock to two venture capital funds or other investment entities for
$1,999,999.48 in cash.

5. In March 1998, the Registrant sold 47,104 shares of Series B preferred
stock to Brown Venture Associates in exchange for consulting services
rendered, valued at $11,095.

6. In January 1998, the Registrant sold 44,932 shares of Series C preferred
stock to two venture capital funds or other investment entities for
$33,699.00 in cash.

7. In February 1998, the Registrant sold 666,666 shares of Series C preferred
stock to two venture capital funds or other investment entities for
$499,999.50 in cash.

8. In March 1998, the Registrant sold 2,021,734 shares of Series C preferred
stock to a group of investors, including one of Registrant's directors and
two venture capital funds or other investment entities, for $1,516,300.50
in cash.

9. In April 1998, the Registrant sold 4,969,148 shares of Series D preferred
stock to one corporate investor for $4,380,428.20 in cash.

10. In December 1998, the Registrant sold 18,082,200 shares of Series E
preferred stock to a group of investors, including one corporate investor
and 13 venture capital funds or other investment entities, for
$16,500,007.50 in cash.

11. In January 1999, the Registrant sold 82,200 shares of Series E preferred
stock to three individual investors for $75,007.50 in cash.

12. In February 1999, the Registrant sold 4,741,536 shares of Series E
preferred stock to a group of investors, including four individual
investors, three of which are employees of Registrant, one corporate
investor and two venture capital funds or other investment entities, for
$4,326,651.60 in cash.

13. In February 1999, Registrant issued warrants to purchase 277,926 shares of
Series B preferred stock at an exercise price of $0.88 per share to
Comdisco, Inc. as partial consideration, valued at $153,726, for an
equipment lease financing.

14. In to March 1999, the Registrant sold 3,178,088 shares of Series E
preferred stock to a group of investors, including two individual investors
and three venture capital funds or other investment entities, for
$2,900,005.30 in cash.

15. In May 1999, the Registrant sold 200,000 shares of Series E preferred stock
to Cilker Revocable Trust of October 9, 1990 in exchange for additional
lease space, valued at $182,500.

16. In May 1999, the Registrant issued 4,569,276 shares of common stock to a
group of 25 former shareholders of Object-Mart, Inc., as merger
consideration in connection with its acquisition of Object-Mart.

17. In September 1999, the Registrant sold 8,249,468 shares of Series F
preferred stock to a group of investors, including three individual
investors, two of which are employees of Registrant, and 17 venture capital
funds or other investment entities, for $15,000,007.66 in cash.

18. In December 1999, the Registrant sold 11,824,418 shares of Series G
preferred stock to a group of investors, including 15 individual investors,
two of which are employees of Registrant, 18 venture capital funds or other
investment entities and four corporate investors, for $74,700,760.72 in
cash.

19. In March 2000, the Registrant sold 310,000 shares of Series G preferred
stock to two individual investors, one of which is an employee of
Registrant and one of which is a director of Registrant, for $1,958,425.00
in cash and the Registrant sold 29,000 shares of Series G preferred stock
to two executive search services in exchange for services rendered, valued
at $406,000.00.

II-3
<PAGE>

20. In December 1999, Registrant issued a warrant to purchase 500,000 shares of
common stock at an exercise price of $0.91 per share to COLT Telecom Group
plc as partial consideration, valued at $2,890,500, for entering into a
purchase and license agreement.

21. In February 2000, Registrant issued a warrant to purchase 223,000 shares of
common stock at an exercise price of $0.91 per share to FMR Corp. as
partial consideration, valued at $3,000,242, for entering into a purchase
and license agreement.

22. In March 2000, Registrant issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $15.00 per share to Fenwick & West LLP
in exchange for services rendered, valued at $1,544,600.

23. From Registrant's inception on October 20, 1997 through May 15, 2000, the
Registrant sold 6,944,628 shares of common stock to its employees,
consultants and other service providers through restricted stock purchases
under its benefit plans or pursuant to stock purchase agreements.

24. From Registrant's inception on October 20, 1997 through May 15, 2000,
Registrant sold 12,688,761 shares of common stock to its employees upon
exercise of options, and as of May 15, 2000, 20,708,906 shares of common
stock were issuable upon exercise of outstanding options.

25. In March 2000, Registrant agreed to sell $4.0 million of common stock to
Internet Initiative Japan Inc. at the initial public offering price per
share in a private placement that will close concurrent with this offering.

26. In April 2000, Registrant agreed to sell $10.0 million of common stock to
CCT Telecom Holdings Limited at the initial public offering price per share
in a private placement that will close concurrent with this offering.

27. In May 2000, Registrant sold Sun Microsystems, Inc. 1,333,333 shares of
Series H preferred stock for $19,999,995.00 in cash.

The sale of the above securities was determined to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions by an issuer not
involving any public offering or transactions under compensation benefit plans
and contracts relating to compensation as provided under Rule 701. The sales of
securities described in paragraphs 16 and 17 above were determined to be exempt
from registration under the Securities Act in reliance upon Regulation S as a
transaction involving an offer and sale of securities outside the United
States. The recipients of securities in each transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution and appropriate legends were
affixed to the share certificates issued in these transactions. All recipients
had adequate access, through their relationships with the Registrant, to
information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
1.01* Form of Underwriting Agreement.
2.01* Agreement and Plan of Reorganization with Object-Mart, dated May 21,
1999.
3.01* Registrant's Amended and Restated Certificate of Incorporation.
3.02* Form of Registrant's Amended and Restated Certificate of Incorporation
(to be filed immediately after the closing of this offering).
3.03* Registrant's Amended and Restated Bylaws.
4.01* Form of Specimen Certificate for Registrant's common stock.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
4.02* Form of Restated and Amended Investors' Rights Agreement, dated May 1,
2000, by and between certain investors and Registrant.
4.03* Voting Agreement portion of Series D Preferred Stock Purchase
Agreement, dated April 1, 1998, by and between Cisco Systems, Inc. and
Registrant.
4.04* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.05* Warrant to Purchase Capital Stock held by Venture Lending & Leasing,
Inc.
4.06* Warrant Agreement No. 1 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.07* Warrant Agreement No. 2 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.08* Warrant Agreement No. 3 to Purchase Shares of Series B Preferred Stock
held by Comdisco, Inc.
4.09* Warrant Agreement to Purchase Common Stock held by COLT Telecom Group
plc.
4.10* Warrant Agreement to Purchase Common Stock held by FMR Corp.
4.11* Redemption and Repurchase Agreement, dated December 22, 1999, by and
between Williams Communications, Inc. and Registrant.
4.12* Warrant to Purchase Common Stock held by Fenwick & West LLP.
4.13* Subscription Agreement, dated March 27, 2000, by and between Internet
Initiative Japan Inc. and Registrant and related Regulation S Investor
Representation Letter.
4.14* Subscription Agreement, dated April 27, 2000, by and between CCT
Telecom Holdings Limited and Registrant and related Regulation S
Investor Representation Letter.
5.01* Opinion of Fenwick & West LLP regarding the legality of the securities
being registered.
10.01* Form of Indemnification Agreement entered into between Registrant and
each of its directors and executive officers.
10.02* 1997 Stock Option Plan, as amended.
10.03* 1998 Equity Incentive Plan, as amended.
10.04* 1999 Equity Incentive Plan, as amended.
10.05* 2000 Equity Incentive Plan.
10.06* 2000 Employee Stock Purchase Plan.
10.07* Assignment of Lease, dated June 23, 1998, by and between JTS
Corporation ("JTS") and Registrant.
10.08* Agreement, dated June 23, 1998, by and between JTS and Registrant.
10.09* Amendment to Lease, dated May 1, 1999, by and between Cilker Revocable
Trust of October 9, 1990 and Registrant.
10.10* Lease Agreement, dated September 29, 1999, by and between John
Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 as
amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA
dated 7/20/77 as amended, and Registrant.
10.12* Offer Letter, dated December 12, 1997, from Registrant to Hugh C.
Martin.
10.13* Offer Letter, dated February 4, 1998, from Registrant to Terrence J.
Schmid.
10.14* Offer Letter, dated June 1, 1998, from Registrant to Hon Wah Chin.
10.15* Offer Letter, dated August 17, 1998, from Registrant to William R.
Cumpston.
10.16* Offer Letter, dated September 10, 1999, from Registrant to Michael A.
Dillon.
10.17* Offer Letter, dated February 29, 2000, from Registrant to Robert J.
Jandro.
10.18* Offer Letter, dated February 9, 2000, from Registrant to Andrew W.
Page.
10.19* Series E Preferred Stock Purchase Agreement dated as of December 23,
1998.
10.20* Series F Preferred Stock Purchase Agreement dated as of September 2,
1999.
10.21* Series G Preferred Stock Purchase Agreement dated as of December 22,
1999.
10.22* Offer Letter, dated April 14, 2000, from Registrant to Chris A. Davis.
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
10.23* Separation Agreement dated March 29, 2000 between Terrence J. Schmid
and Registrant.
10.24+ Purchase Agreement, dated March 21, 2000, between Registrant and E-TEK
Dynamics, Inc.
10.25* Series H Preferred Stock Purchase Agreement dated as of May 1, 2000.
10.26* Regus Business Centre Service Agreement dated March 29, 2000.
10.27 Lease Agreement with Mission West Properties, L.P.
21.01* List of Registrant's Subsidiaries.
23.01* Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Report on Financial Statement Schedule and Consent of KPMG LLP,
independent auditors.
23.03 Consent of KPMG LLP, independent auditors.
24.01* Power of Attorney (see signature page hereto).
27.01* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ Registrant has requested confidential treatment as to portions of this
exhibit.

(b) The following financial statement schedule is filed herewith:

Schedule II--Valuation and Qualifying Accounts

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

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on this 24th day of May, 2000.

ONI SYSTEMS CORP.

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

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.

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

<S> <C> <C>
Principal Executive Officer:

/s/ Hugh C. Martin President, Chief Executive May 24, 2000
______________________________________ Officer and Chairman of
Hugh C. Martin the Board

Principal Financial Officer and
Principal Accounting Officer:

/s/ Chris A. Davis Executive Vice President, May 24, 2000
______________________________________ Chief Financial and
Chris A. Davis Administrative Officer

Additional Directors:

* Director May 24, 2000
______________________________________
Matthew W. Bross

* Director May 24, 2000
______________________________________
Kevin R. Compton

* Director May 24, 2000
______________________________________
Jonathan D. Feiber

* Director May 24, 2000
______________________________________
James F. Jordan

* Director May 24, 2000
______________________________________
Gregory B. Maffei

/s/ Hugh C. Martin May 24, 2000
*By: _________________________________
Hugh C. Martin, attorney-in-fact
</TABLE>

II-7
<PAGE>

ONI SYSTEMS CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Period from October 20, 1997 (inception) to December 31, 1997 and the years
ended December 31, 1998 and 1999 and the (unaudited) three months ended March
31, 2000

<TABLE>
<CAPTION>
Period from October
20, Year Ended Year Ended Three months
1997 (inception) to December 31, December 31, ended
December 31, 1997 1998 1999 March 31, 2000
------------------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Reserve for obsolete and
excess inventory:
Balance, beginning of
period................. -- -- $ -- $1,366,905
Additions charged to
expense................ -- -- 1,366,905 383,624
Reductions.............. -- -- -- 388,500
Balance, end of period.. -- -- $1,366,905 $1,362,029
</TABLE>

S-1
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
10.24+ Purchase Agreement, dated March 21, 2000, between Registrant and E-TEK
Dynamics, Inc.
10.27 Lease Agreement with Mission West Properties, L.P.
23.02 Report on Financial Statement Schedule and Consent of KPMG, LLP,
independent auditors.
23.03 Consent of KPMG, LLP, independent auditors.
</TABLE>
- --------

+ Registrant has requested confidential treatment as to portions of this
exhibit.

<PAGE>

EXHIBIT 10.24

[CONFIDENTIAL TREATMENT REQUESTED]

PURCHASE AGREEMENT
-------------------

This Purchase Agreement ("Agreement") is made between ONI Systems Corp.
("ONI") and E-TEK Dynamics, Inc. and its affiliates ("E-TEK"), as of the latest
date signed below.

ONI Systems Corp. E-TEK Dynamics, Inc.

By: /s/ Martin Desroches By: /s/ Sanjay Subheder
------------------------------- --------------------------------

Name: Martin Desroches Name: Sanjay Subheder
------------------------------- --------------------------------

Title: V.P. Operations Title: CFO
------------------------------- --------------------------------

Date: 03/24/00 Date: 3/24/00
------------------------------- --------------------------------
================================================================================

1. Supply Orders.

1.1. "Supply" or "Supplies" means the E-TEK Optical Components and Module
Integration Services listed in Exhibit B, as may be amended from time to time by
mutual written agreement. Sales of E-TEK products not listed in that exhibit
will also be subject to the terms of trade herein.

1.2. "Specifications" means the specifications for the Supplies as agreed
by the parties.

1.3. ONI will submit purchase orders ("Orders") to E-TEK for Supplies from
time to time, specifying the type and quantity of Supplies and the proposed
delivery dates and shipping instructions. In the event the terms of any Order,
acknowledgement, invoice, confirmation or similar document conflict with or are
additional to the terms of this Agreement, the terms of this Agreement alone
shall apply and shall govern regardless of execution of such document by one or
both parties.

1.4. E-TEK will accept and acknowledge in writing all Orders submitted by
ONI within * * days after receipt thereof, subject to a *
* lead time and E-TEK's available manufacturing capacity. Each acknowledgement
shall include a firm shipping schedule for the Supplies ordered. E-TEK shall
give prompt notice to ONI of any anticipated delay in meeting the shipping
schedule. Such notice will include the reasons for the delay.

1.5. Subject to ONI's purchase commitments in Exhibit A, ONI may (i)
cancel delivery of Supplies under an Order, in whole or in part, subject to
payment of a cancellation fee based on the purchase price applicable to the
cancelled portion of the Order, in accordance with the following:

//
//

- -----------------------
* Confidential treatment has been requested with respect to certain portions of
this exhibit. Confidential portions have been omitted from the public filing and
have been separately filed with the Securities and Exchange Commission.
<PAGE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
If E-TEK receives the cancellation notice this many ....then ONI will pay a cancellation
weeks before the delivery date fee equal to:
- ------------------------------------------------------------------------------------------------
<S> <C>
0 - 4 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>4 - 8 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>8 - 12 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
>12 weeks * *
---------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>

and, (ii) reschedule delivery of Supplies under an Order one time as
follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
If E-TEK receives the rescheduling notice this many . . . then ONI may postpone delivery
weeks before the delivery date... by this time
- ------------------------------------------------------------------------------------------------
<S> <C>
0 - 4 weeks * * weeks
- ------------------------------------------------------------------------------------------------
>4 - 8 weeks * * weeks
- ------------------------------------------------------------------------------------------------
>8 - 12 weeks * * weeks
- ------------------------------------------------------------------------------------------------
</TABLE>

1.6 ONI may cancel delivery of Supplies, without penalty, when the
delivery of such Supplies is more than 30 days late. ONI must provide 7 days
written notice on late delivery order cancellation, no less than 30 days after
the then-current delivery date. E-TEK will have 7 days after notification to
deliver late material or renegotiate delivery dates.

2. Sales Forecasts.

2.1. ONI will give E-TEK monthly rolling * *week forecasts ("Forecasts")
for the proposed purchase and sale of Supplies, broken down by weeks. ONI shall
use commercially reasonable efforts to provide 52-week forecasts.

2.2. Subject to Sections 1.5 and Exhibit A of this Agreement, the * *
weeks and only the * * weeks of the rolling forecast are binding forecasts
("Binding Forecasts"). ONI will purchase and issue Orders for all Supplies
covered under Binding Forecasts, in the amounts, and for delivery at the times,
provided in such Binding Forecasts. (Higher quantities of Supplies in earlier
Forecasts will prevail over lower quantities in subsequent Forecasts.)

3. Volumes.

3.1. Notwithstanding any Forecast, ONI will purchase and issue Orders for
Supplies in accordance with the Purchase Commitment in Exhibit A.

4. Purchase Price.

4.1. The prices set forth on Exhibit B apply to all Supplies purchased by
ONI through * *. Prices for Supplies will be reviewed in good
faith by the parties * * months ("Price Review").

4.2. Prices exclude taxes, shipping, handling, transportation and
insurance. Taxes and costs may be added to the invoice as a separate charge or
invoiced separately.

5. Payment. E-TEK will invoice ONI upon shipment of Supplies. ONI will
pay the invoiced amount within thirty days from the date of delivery of the
Supplies. Such payments will be in U.S. currency. Any invoice not paid in full
by the due date will have a late payment charge of one and one-half percent per
month (or the maximum rate permitted by law, whichever is less) assessed against
any unpaid balance from the due date of the invoice until the date of payment.
E-TEK may hold shipment when payments are past due.

6. Delivery; Acceptance.

6.1 Delivery of Supplies from E-TEK to ONI will be FCA/FOB (Incoterms) E-
TEK's facility.

6.2. Subject to the quarterly loss allowance described in Exhibit C, risk
of loss, but not title, to ONI components consigned to E-TEK shall pass to E-TEK
upon delivery of such components to E-TEK's carrier. All other shipment terms
for ONI components supplied on consignment to E-TEK will be governed by FCA/FOB
(Incoterms) ONI's facility.

6.3. ONI accepts delivery of all Supplies, requested on any given Order or
any Binding Forecasts, from E-TEK unless it notifies E-TEK in writing within
fifteen days of receipt that it rejects certain Supplies. Any notice of
rejection will include the reasons for the rejection.

6.4 E-TEK shall use commercially reasonable efforts to timely manufacture
sufficient Supplies pursuant to any accepted Orders. In the event that Supplies
are delivered more than thirty days after the scheduled delivery date ("Delayed
Delivery"), ONI will have the right to recover damages equal to the difference
between the purchase price and the market price of the subject Supplies on the
scheduled delivery date. In addition, ONI may procure substitute products from
other suppliers at the cost or expense of ONI. Any substitute products
purchased by ONI from other suppliers as a result of Delayed Delivery shall be
credited against ONI's Purchase Commitment to E-TEK set forth in Exhibit A.

7. Configuration Control.

7.1. ONI may ask E-TEK to change the Specifications of any Supply custom-
designed to ONI's Specifications. E-TEK will use commercially reasonable
efforts to evaluate and make a requested change. If the affected Supply is in
production and E-TEK determines to change the Specification as requested, ONI
will purchase any custom-designed work in process rendered non-conforming by
ONI's requested change. If ONI's requested change alters E-TEK's cost of a
Supply, or requires additional time or resources for E-TEK to implement, then
the parties will negotiate a reasonable price adjustment and lead time for the
affected Supply and the parties will modify the Orders and forecasts
accordingly.
<PAGE>

7.2. E-TEK may change any Supply if the change does not render the Supply
non-conforming to the Specifications; provided that E-TEK notifies ONI in
writing promptly (as is reasonable under the circumstances) prior to
implementing such change in the Supply. Such notice shall include a detailed
description of the changes to be made to the Supply and a written assurance that
such changes will not render the Supply non-conforming to the Specification.

8. Term and Termination.

8.1 This Agreement will remain in effect until December 31, 2001 ("Initial
Term") and will automatically renew for successive one year periods. Either
party can terminate the Agreement at the end of the Initial Term or at the end
of a subsequent renewal term by giving written notice to the other party at
least ninety days before the end of such term.

8.2. Either party may also terminate this Agreement upon written notice
if:

8.2.1. the other party breaches a material term of this Agreement and
fails to cure it within ninety days of receiving written notice of such breach.

8.2.2. the other party ceases to do business (excluding mergers,
acquisitions, consolidations or reorganizations) because of election to
dissolve, dissolution, insolvency, inability to pay debts as they become due,
general assignment for the benefit of creditors, or, upon the other party's
filing of any bankruptcy petition, whether voluntary or involuntary.

9. Intellectual Property Warranty and Indemnity.

9.1. E-TEK agrees to indemnify, defend and hold harmless ONI and its
officers, directors, successors and assigns from and against any and all loss,
damage, settlement or expense (including reasonable legal expenses), as
incurred, resulting from or arising out of any claims that any Supply or the use
or sale thereof infringe upon, misappropriate or violate any patents,
copyrights, or trade secret rights or proprietary rights (collectively,
"Intellectual Property Rights") of persons, firms or entities who are not
parties to this Agreement; provided that ONI (i) immediately notifies E-TEK, in
writing, of any notice or claim of such alleged infringement, violation or
misappropriation involving the Supplies of which it becomes aware, and (ii)
permits E-TEK to control the defense, settlement, adjustment or compromise of
any such claim using counsel of E-TEK's own choosing; and, (iii) fully
cooperates with the defense. ONI may employ counsel, at its own expense, to
assist it with respect to any such claim.

9.2. E-TEK's obligation to indemnify will not cover any claim that asserts
that a Supply infringes any third party's rights only when used in combination
with any other technology or device not supplied by E-TEK under this Agreement,
and not as a standalone product.

9.3. If by reason of such infringement claim, ONI shall be prevented or
are likely to be prevented by injunction or other legal means from selling or
using any Supplies, or if, in E-TEK's opinion, such claim is likely to occur, E-
TEK will have the right, but not the obligation, to (i) obtain all rights
required to permit the sale or use of the Supplies by ONI, or (ii) modify or
replace such Supplies to make them non-infringing (and extend this

<PAGE>

indemnity thereto), provided that any such replacement or modified Supplies are
reasonably satisfactory to ONI. If E-TEK is unable to achieve either of the
options set forth above within a reasonable period of time after issuance of the
injunction, but in no event longer than ninety days after E-TEK's receipt of
notice thereof, then (i) ONI will immediately cease any further use and
distribution of the Supplies, (ii) any further supply obligations for those
Supplies will be terminated without any liability to E-TEK, and (iii) E-TEK will
promptly return the fees for those Supplies which are paid by ONI hereunder and
returned promptly to E-TEK (plus related shipping costs), less the amortized
portion of the purchase price amortized on a straight line basis over five years
from the date of purchase.

9.4. In no event will E-TEK's aggregate liability under this section ever
exceed the total purchase price received from ONI for the alleged infringing
Supply.

9.5. THE FOREGOING IS E-TEK'S SOLE OBLIGATION AND LIABILITY WITH RESPECT
TO ANY CLAIMS RELATING TO E-TEK'S ACTUAL OR ALLEGED INFRINGEMENT OR
MISAPPROPRIATION OF ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. EXCEPT FOR
THE WARRANTY STATED IN SECTION 9.1, E-TEK DISCLAIMS ALL OTHER WARRANTIES,
EXPRESS AND IMPLIED, RELATING TO CLAIMS THAT THE SUPPLIES INFRINGE, OR ARE
DERIVED FROM, ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.

10. Product Warranties.

10.1. E-TEK warrants to ONI that for a period of thirty-six months from the
date of delivery of a Supply (the "Warranty Period") that such Supply will be
free from defects in materials and workmanship, and will conform to the agreed-
upon Specifications. This warranty shall not apply in any instance where any
such defect or nonconformity is a result, in whole or in part, of a non-E-TEK-
sourced defective or nonconforming component, material or product supplied by or
through ONI. This warranty is subject to proper installation, operation and
maintenance of the subject Supply in accordance with reasonable industry
standards and/or documentation (if any) to be provided by E-TEK. E-TEK's sole
obligation under this warranty is, at E-TEK's option, to either repair, replace
or correct any defect, or to refund the purchase price upon 30 days from the
return of the defective Supply. Prior to returning any defective Supply, ONI
will request a Return Material Authorization "RMA" number which will be provided
by E-TEK within 48 working hours. All returned Supplies will be shipped to E-
TEK's principal offices with freight and insurance prepaid by ONI; provided,
that the cost will be reimbursed to ONI if the subject Supplies are
nonconforming or defective within the Warranty Period. Supplies that are
repaired or serviced by E-TEK will be warranted as provided in this section for
either the remainder of the original Warranty Period or ninety days after the
Supplies are re-delivered to ONI, whichever is later. E-TEK will provide in
writing a Preliminary Root Cause Analysis within 30 days of E-TEK's receipt of
defective Supplies, and a full Root Cause Analysis and Corrective Action plan
within 60 days of E-TEK's receipt of defective Supplies. Further grace periods
might be granted per E-TEK's request.

10.2. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 10, E-TEK DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

<PAGE>

[CONFIDENTIAL TREATMENT REQUESTED]

11. Limitation of Liability. EXCEPT FOR E-TEK'S INDEMNITY OBLIGATIONS SET
FORTH IN SECTION 9 (BUT SUBJECT TO THE LIMITS SET FORTH IN SECTION 9.4), IN NO
EVENT WILL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY FOR ANY SPECIAL,
INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS
OF PROFITS OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS) THAT RELATE IN ANY WAY
TO THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF ANY DAMAGES.

12. Confidential Information. Paragraphs 1-11, 13 and 15 of the parties'
February 3, 1999 Mutual Non-Disclosure Agreement ("NDA") are hereby incorporated
by reference into this Agreement. All other sections of the NDA are terminated
by consent. In addition, the parties acknowledge that: (i) this Agreement, its
terms and conditions, the Supplies, and the business relationship between the
parties, are all deemed to be "Confidential Information" (as defined in the
NDA); (ii) the NDA's term shall now extend to the date of expiration or
termination of this Agreement; and, (iii) Recipient's duty to protect
Confidential Information will expire five (5) years from its receipt of that
information. Notwithstanding the foregoing, the parties may issue a joint press
release commenting generally on the existence of a business relationship and
purchase agreement between them, provided specific terms and conditions are not
disclosed.

13. Notices. Any notice will be in writing, delivered either by overnight
mail or courier, and will be addressed as follows:

If to ONI: If to E-TEK:
ONI Systems Corp. E-TEK Dynamics, Inc.
166 Baypointe Parkway 1865 Lundy Avenue
San Jose, CA 9513 San Jose, CA 95131, U.S.A.
Attn: General Counsel Attn: General Counsel

Notices will be deemed to have been effectively given and received on the
date of delivery.

14. Relationship of Parties. E-TEK and ONI are separate and distinct
entities, and this Agreement does not create a partnership, joint venture, or
any common undertaking.

15. Force Majeure. Neither party shall be responsible or liable for any
delay or failure to deliver or perform, due to any causes beyond the reasonable
control of the delayed party (a "Force Majeure Condition"). In the event of a
Force Majeure Condition, the delayed party shall notify the other party of the
delay in delivery or other performance, and such time will be extended for a
period of time equal to the duration of such Force Majeure Condition; provided
that if a Force Majeure Condition continues beyond ninety days, the non-delayed
party may terminate this Agreement upon notice to the delayed party.

16. Governing Law; Attorneys' Fees. This Agreement will be governed by and
construed in accordance with the laws of California (excluding laws and
principles relating to the conflict of laws). Each party agrees that in any
action to enforce this
<PAGE>

Agreement, the prevailing party will be entitled to recover reasonable
attorneys' fees and other costs incurred therein, in addition to any other
appropriate relief.

17. Severability. If any term or provision of this Agreement is held
invalid or unenforceable to any extent, the remainder of this Agreement will not
be affected and each other term and provision will be valid to the fullest
extent permitted by law.

18. Entire Agreement; Modification; Waiver. This Agreement constitutes
the entire agreement between the parties with respect to its subject matter and
supersedes all prior and contemporaneous agreements, representations and
understandings of the parties. No modification of this Agreement will be binding
unless executed in writing by the parties. No waiver of any provision will be
deemed a waiver of any other provision, nor will any waiver constitute a
continuing waiver. No waiver will be binding unless executed in writing.

19. Binding Effect; Assignment. This Agreement will be binding on and
will inure to the benefit of the parties and their respective agents, successors
and permitted assigns; provided, however, that no party will have the right to
transfer or assign any rights or obligations under this Agreement without first
obtaining the other party's written consent, except no consent will be required
for assignments in connection with a merger, corporate reorganization, or sale
of all, or substantially all, of a party's stock or assets. Any attempted
assignment in violation of this provision will be void.

20. Trade Restrictions. ONI will procure all import and export licenses
and permits, pay all customs charges, duty fees, value added tax (VAT), or any
similar tariffs and fees, and take all other actions required to accomplish the
lawful import and export of the Supplies. ONI warrants that it will comply in
all respects with the export and re-export restrictions of U.S. law and
regulations for each of the Supplies shipped.

21. Survival Of Provisions. Sections 9-22, inclusive, will survive any
expiration or termination of this Agreement.

22. Intellectual Property Ownership. Nothing in this Agreement shall be
construed as a sale, transfer, license or assignment of the Intellectual
Property Rights of any party in and to the Supplies, Specifications, related
information and documentation, it being understood and agreed that each party
retains all rights in and to the parts of the Supplies, Specifications, related
information and documentation that it supplies.

23. Compliance With Laws. E-TEK will comply with all applicable laws,
ordinances, regulations and codes in the performance and execution of this
Agreement.

- - END OF TEXT -

[CONFIDENTIAL TREATMENT REQUESTED]

EXHIBIT A
---------

ONI will purchase Module Integration Services and Optical Components from E-TEK.
Each Module will be comprised of components, broken down into two groups:
Optical Components ("OC") and Other Components.

Purchase Commitment:

For each quarter during this Agreement beginning July 1, 2000, ONI will purchase
from E-TEK at least * * of its requirements of
Module Integration Services listed in Exhibit B, and functionally similar
products. E-TEK will have reasonable audit rights, exercised not more than once
in any six-month period, to confirm that this purchase commitment is being met.
If, at the end of any quarter, E-TEK has accumulated more than two-weeks of
back-schedule versus ONI's demand, indicating their inability to supply to ONI's
required volume of Module Integrated Services, E-TEK will not have audit rights
for that quarter and ONI will not be obligated to purchase the above mentioned
volume in that quarter.

For each quarter during this Agreement beginning July 1, 2000, ONI will purchase
from E-TEK at least * * of its requirements of OCs listed in
Exhibit B, and functionally similar products. These E-TEK OCs will be purchased
from E-TEK and supplied by ONI on consignment. All non-E-TEK OCs and all Other
Components will also be supplied by ONI on consignment. E-TEK will have
reasonable audit rights, exercised not more than once in any six-month period,
to confirm that this purchase commitment is being met. If, at the end of any
quarter, E-TEK has accumulated more than two-weeks of back-schedule versus ONI's
demand, indicating their inability to supply to ONI's required volume of OCs, E-
TEK will not have audit rights for that quarter and ONI will not be obligated to
purchase the above mentioned volume in that quarter.

These purchase commitments will be evaluated in U.S. dollars valued at E-TEK's
prices. The audits contemplated in the two preceding paragraphs will be
conducted by third parties. Those third parties will be appointed by E-TEK,
subject to ONI's consent, which will not be unreasonably withheld.

Once E-TEK's OCs supply situation and product portfolio improves and E-TEK feels
they can offer price competitive "turn-key" modules, ONI will consider
converting existing consignment business into "turn-key" business where E-TEK
directly procures all the required components and sub-assemblies and sales the
modules as products.

The terms of consignment are described in Exhibit C.

Exhibit B
---------
Module Integration Services Pricing
- --------------------------------------------------------------------------------
Module Type Assembly Connectors Vert. Integr. Total
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------
* * * * *
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Optical Component Pricing
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------
* * * *
- --------------------------------------------------------------------------------

Long-term Price Reduction.

Notwithstanding the terms in section 4 of the Agreement, E-TEK will decrease the
prices in this Exhibit B by at * * each year, beginning January 1,
2002. This * * price decrease will be based, for each Module type, on the
average unit price of that type of Module sold by E-TEK to ONI in the then-
preceding * *month period.

Exhibit C
---------

Supply of Components by ONI:

All ONI-supplied components will be timely delivered to E-TEK on consignment,
will meet agreed-upon specifications, and will be free from defects in materials
and workmanship. E-TEK will have no liability to ONI as a result of any ONI-
supplied components that are delivered late, defective or out of spec to E-TEK.

For each quarter beginning April 1, 2000 through September 30, 2000, E-TEK will
be allowed a quarterly loss allowance of an amount equal to the greater *
* of total revenues received by E-TEK in that quarter. For each quarter
beginning October 1, 2000, that quarterly loss allowance will be an amount equal
to the greater of * * of total revenues received by E-TEK in
that quarter. This loss allowance is in addition to the value of ONI-components
that are delivered damaged or defective to E-TEK. If E-TEK loses or destroys
ONI-supplied components in excess of this loss allowance, E-TEK will pay or
credit ONI for such lost or destroyed components in a per unit amount to be
decided by the parties in good faith.

Physical Inventory Audit:

Physical Inventory for ONI-components consigned at E-TEK's facilities will be
performed by E-TEK and audited by ONI ("PI"), once a quarter, or more frequently
if otherwise mutually agreed upon by the parties. On a weekly basis, ONI will
provide to E-TEK the computed book value of ONI's consignment inventory then
located at E-TEK facilities based on the last PI results, adjusted by the
transactions of the then-preceding week. Within 5 working days of E-TEK's
receipt of ONI's computed book value, E-TEK must either agree or disagree in
writing with ONI's computed book value, including details and justifications in
case of disagreement. In order to keep the consignment inventory as accurate as
possible, both parties will act in good faith and report any discrepancies to
the other party as soon as discovered.

In the event that ONI's computed book value differs from E-TEK's estimate of
ONI's consigned inventory by more than $25,000, PI will be performed as soon as
possible, but no later than a week from such event.

<PAGE>

Exhibit 10.27
STANDARD FORM LEASE

1. Basic Provisions

1.1 Parties: This Lease, executed in duplicate at Cupertino, California,
on May _____, 2000, by and between Mission West Properties, L.P., a Delaware
limited partnership, and ONI Systems Corporation, a Delaware Corporation,
hereinafter called respectively Lessor and Lessee, without regard to number or
gender.

1.2 Letting: Lessor hereby leases to Lessee, and Lessee hires from Lessor,
the Premises, for the term, at the rental and upon all the terms and conditions
set forth herein.

1.3 Use: Lessee may use the Premises for the purpose of conducting
therein office, research and development, light manufacturing, and warehouse
activities, and any other legal activity.

1.4 Premises: The real property with appurtenances as shown on Exhibit A
(the "Premises") situated in the City of San Jose, County of Santa Clara, State
of California, and more particularly described as follows:

The Premises for Phase I includes three 98,500 square foot two story
buildings and one 50,500 sq.ft. single story building totaling 346,000
sq.ft. ("Phase I") including all improvements thereto, as shown on Exhibit
A.1 including the right to use not less than 1211 unreserved parking
spaces. The address for the Premises is ____ Silver Creek, San Jose,
California. Lessee's pro-rata share of the Premises is 100%.

The Premises for Phase II is one 98,500 square foot two story building
("Phase II"), including all improvements thereto, as shown on Exhibit A.1
including the right to use not less than 345 unreserved parking spaces.
The address of the Premises for Phase II is _____ Silver Creek, San Jose,
California. Lessee's pro-rata share of the Premises for Phase II is 100%.

The total combined Premises for Phase I and Phase II is four 98,500 square
foot two story buildings and one 50,500 square foot single story building
totaling 444,500 square feet ("Phase I and Phase II") including all
improvements thereto, as shown on Exhibit A.1 including the right to use
all of the available unreserved parking spaces. Lessee's pro-rata share of
the Premises is 100%.

1.5 Term: The term shall be for one hundred twenty (120) months unless
extended pursuant to Section 35 of this Lease (the "Lease Term"), commencing on
the Commencement Date as defined in Section 1.11 and ending one hundred twenty
(120) months thereafter.

Rent: Base rent shall be payable in monthly installments as follows:

<TABLE>
<CAPTION>
Base rent Estimated CAC* Total
--------- --------------- --------
<S> <C> <C> <C>
Months 1 through 12 (Phase I only)** $615,880 $42,904* $658,784
Months 13 through 23 (Phase I only)** $640,515 $44,620* $685,135
Month 24 (Phase I and Phase II)** $822,858 $57,326* $880,184
Months 25 through 36 (Phase I & II)** $855,773 $59,619* $915,392
</TABLE>

Monthly base rent to increase by 4% on the annual anniversary of the
Commencement Date each year during the Lease Term over the prior year's rent
rounded to the nearest dollar.
<PAGE>

* CAC charges to be adjusted per Common Area Charges Section below

** Assumes Substantial Completion of Phase II twenty three months after Phase I

Base rent and CAC as scheduled above shall be payable in advance on or before
the first day of each calendar month during the Lease Term. The term "Rent," as
used herein, shall be deemed to be and to mean the base monthly rent and all
other sums required to be paid by Lessee pursuant to the terms of this Lease.
Rent shall be paid in lawful money of the United States of America, without
offset or deduction, and shall be paid to Lessor at such place or places as may
be designated from time to time by Lessor. Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment. Upon
execution of this Lease, Lessee shall deposit with Lessor the first month's rent
( including estimated CAC) in the amount of $658,784 and the Security Deposit.

1.7 Security Deposit: Lessee shall deposit with Lessor the sum of One
Million Three Hundred and Seventeen Thousand Five Hundred and Sixty Eight
Dollars ($1,317,568) (the "Security Deposit"). The Security Deposit shall be
held by Lessor as security for the faithful performance by Lessee of all of the
terms, covenants, and conditions of this Lease applicable to Lessee. If Lessee
commits a default as provided for herein, including but not limited to a default
with respect to the provisions contained herein relating to the condition of the
Premises, Lessor may (but shall not be required to) use, apply or retain all or
any part of the Security Deposit for the payment of any amount which Lessor may
spend by reason of default by Lessee. If any portion of the Security Deposit is
so used or applied, Lessee shall, within ten days after written demand
therefore, deposit cash with Lessor in an amount sufficient to restore the
Security Deposit to its original amount. Lessee's failure to do so shall be a
default by Lessee. Any attempt by Lessee to transfer or encumber its interest
in the Security Deposit shall be null and void. Upon occupancy of Phase II,
Lessee's Security Deposit shall be increased to One Million Eight Hundred and
Thirty Thousand Seven Hundred and Eight Four Dollars ($1,830,784).
Notwithstanding the above, Lessee may reduce the Security Deposit to an amount
equal to one month's rent and CAC provided Lessee has a shareholder's equity of
a minimum of $100 million based on their last 10-Q. If at any time during this
Lease Term, Lessee's shareholder's equity is less than $100 million, Lessee
shall deposit with Lessor the Security Deposit referenced above within ten days
after the issuance of Lessee's financial statements indicating the reduction in
shareholder's equity below $100 million. If Lessee fails to make the Security
Deposit as required, Lessee shall be deemed to be in default per Section 14.1
(a) of this Lease.

1.8 Common Area Charges: Lessee shall pay to Lessor, as additional Rent,
an amount equal to Lessee's pro-rata share of the total common area charges of
the Premises as defined below (the common area charges for the Premises is
referred to herein as ("CAC"). Lessee shall pay to Lessor as Rent, on or before
the first day of each calendar month during the Lease Term, subject to
adjustment and reconciliation as provided hereinbelow, the sum of Forty Two
Thousand Nine Hundred and Four Dollars ($42,904) for Phase I and Fifty Seven
Thousand Three Hundred and Twenty Six Dollars ($57,326)for Phase I and Phase II
combined, said sum representing Lessee's estimated monthly payment of Lessee's
percentage share of CAC and includes a fixed monthly sum of Ten Thousand Three
Hundred and Eighty Dollars ($10,380) for Phase I and Thirteen Thousand Three
Hundred and Thirty Five Dollars ($13,335) for Phase I and Phase II combined
which represents the long term capital reserve for replacement of HVAC units,
parking lot, roof and painting of building exterior ("Capital Reserves"). It is
understood and agreed that Lessee's obligation under this paragraph shall be
prorated to reflect the Commencement Date and the end of the Lease Term.

Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease commences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment
for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of
the calendar year and the end of the Lease Term, Lessor shall provide Lessee a
statement of actual CAC

Page 2
<PAGE>

incurred including capital reserves for the preceding year or other applicable
period in the case of a termination year. If such statement shows that Lessee
has paid less than its actual percentage, then Lessee shall on demand pay to
Lessor the amount of such deficiency. If such statement shows that Lessee has
paid more than its actual percentage, then Lessor shall, at its option, promptly
refund such excess to Lessee or credit the amount thereof to the Rent next
becoming due from Lessee. Lessor reserves the right to revise any estimate of
CAC if the actual or projected CAC show an increase or decrease in excess of 10%
from an earlier estimate for the same period. In such event, Lessor shall
provide a revised estimate to Lessee, together with an explanation of the
reasons therefore, and Lessee shall revise its monthly payments accordingly.
Lessor's and Lessee's obligation with respect to adjustments at the end of the
Lease Term or earlier expiration of this Lease shall survive the Lease Term or
earlier expiration.

As used in this Lease, CAC shall include but is not limited to: (i) items as
specified in Sections 5(b), 6, and 31; (ii) all costs and expenses including but
not limited to supplies, materials, equipment and tools used or required in
connection with the operation and maintenance of the Premises; (iii) licenses,
permits and inspection fees; (iv) all other costs incurred by Lessor in
maintaining and operating the Premises; (v) Capital Reserves replacements and
government regulations imposed on the Premises not related to Lessee's use and
occupancy of the Premises; and (vi) an amount equal to three percent (3%) of the
base rent and CAC, as compensation for Lessor's accounting and management
services. Lessee shall have the right to review the basis and computation
analysis used to derive the CAC applicable to this Lease annually. The CAC shall
exclude maintenance and repair costs which are covered by any warranty,
insurance or other right of reimbursement; costs of correcting defects in the
design or construction of the building shells; any debt service or ground lease
rent; amounts paid to third parties which are affiliated with Lessor in excess
of what Lessor would have paid if the goods or services had been competitively
priced; costs for which the Capital Reserves have been established; and other
items or charges which are not customarily recovered or reimbursed as an
operating expense by owners of leased properties comparable to the Premises.

1.9 Late Charges: Lessee hereby acknowledges that a late payment made by
Lessee to Lessor of Rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges, which may be imposed on
Lessor according to the terms of any mortgage or trust deed covering the
Premises. Accordingly, if any installment of Rent or any other sum due from
Lessee is not received by Lessor or Lessor's designee within five (5) days after
such amount is due, Lessee shall pay to Lessor a late charge equal to five (5%)
percent of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payments made by Lessee. Acceptance of such late charges by
Lessor shall in no event constitute a waiver of Lessee's default with respect to
such overdue amount, nor shall it prevent Lessor from exercising any of the
other rights and remedies granted hereunder. Lessor shall allow two late
payments during any 12 month period as a result of accounting errors and give
Lessee a notice of delinquency and a five day cure period before any late charge
is imposed.

1.10 Quiet Enjoyment: Lessor covenants and agrees with Lessee that upon
Lessee paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises for
the Lease Term, subject, however, to the rights reserved by Lessor hereunder.

1.11 Possession for Phase I: Possession shall be deemed tendered and the
term shall commence upon the first to occur of the following (the "Commencement
Date"): (i) the Premises are Substantially Complete or (ii) Lessee occupies the
Premises or (iii) if Lessor is prevented from or delayed in completing its work
under this Lease due to Lessee Delays, such work will be deemed Substantially
Complete as of the date on which it would have been Substantially Complete had
it not been for such Lessee Delays. It is the intention of Lessee and Lessor
that February 1, 2001 shall be the Commencement Date.

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"Substantially Complete for Phase I" shall mean that: (i) Lessor has tendered
possession of Premises to Lessee, (ii) Lessor has met all requirements for
occupancy, (iii) The Lessee Interior Improvements are materially complete per
the approved plans including gas, electric, water and sewer service, exclusive
of telephone or other communication systems, punchlist items and there remains
no incomplete or defective items of work which would materially adversely affect
Lessee's intended use of the Premises of Phase I, (iv) the interior of each
building in Phase I is in a "broom clean" condition, and (v) completion of
parking facilities for Phase I.

1.12 Possession for Phase II: Possession shall be deemed tendered and the
term shall commence for Phase II upon the first to occur of the following (the
"Commencement Date for Phase II"): (i) the Premises for Phase II are
Substantially Complete or (ii) Lessee occupies the Premises for Phase II and
commences to conduct business operations or (iii) if Lessor is prevented from or
delayed in completing its work under Section 2 of this Lease due to Lessee
Delays, such work will be deemed Substantially Complete for Phase II as of the
date on which it would have been Substantially Complete for Phase II had it not
been for such Lessee Delays. It is the intention of Lessee and Lessor that
January 1, 2003 shall be the Commencement Date for Phase II.

"Substantially Complete for Phase II" shall mean that: (i) Lessor has tendered
possession of the Premises for Phase II to Lessee, (ii) Lessor has met all
requirements for occupancy of the Premises for Phase II, (iii) The Lessee
Interior Improvements for Phase II are materially complete per the approved
plans including gas, electric, water and sewer service, exclusive of telephone
or other communication systems, punch list items and there remains no incomplete
or defective items of work which would materially adversely affect Lessee's
intended use of the Premises for Phase II, (iv) the interior of the building in
Phase II is in a "broom clean" condition, and (v) completion of parking
facilities for Phase II.

1.13 Commencement Date Memorandum for Phase I: When the actual
Commencement Date for Phase I is determined as provided for in this Lease, the
parties shall execute a Commencement Date Memorandum for Phase I setting forth
the Commencement Date for Phase I and the termination date but failure to do so
shall not affect the continuing validity and enforceability of this Lease, which
shall remain in full force and effect.

1.14 Commencement Date Memorandum for Phase II: When the actual
Commencement Date for Phase II is determined as provided for in this Lease, the
parties shall execute a Commencement Date Memorandum for Phase II setting forth
the Commencement Date for Phase II and the termination date but failure to do so
shall not affect the continuing validity and enforceability of this Lease, which
shall remain in full force and effect.

2. Lessee's Improvements

2.1 Building Shell for Phase I: The "Building Shell for Phase I", as
defined in the attached Exhibit B shall be constructed at Lessor's sole cost and
expense by independent contractors to be employed by and under the supervision
of Lessor in accordance with the site plan, elevations, plans, specifications,
and working drawings to be prepared by Lessor, which have been approved by
Lessee, with a list of such plans approved by Lessee being attached hereto as
Exhibit C (collectively the "Shell Plans for Phase I"). Lessor shall be
responsible for ensuring that Building Shell for Phase I conform to the approved
plans and all applicable statutes, rules, regulations, ordinances, and City of
San Jose Building Department interpretations necessary for occupancy.

2.1.1 Lessee Interior Improvements for Phase I: The "Lessee Interior
Improvements for Phase I" shall be defined as all items not part of the Building
Shell for Phase I and shall be constructed by independent contractors to be
employed by and under the supervision of Lessor, in accordance with complete
plans and specifications prepared by Lessor for submission to the City of San
Jose ("Lessee Improvement Plans for Phase I"), complete with all mechanical and
electrical design, approved

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by Lessee, and then to be attached hereto as Exhibit D. Lessee and its
designated representatives, shall at all times during the construction of the
Lessee Interior Improvements for Phase I have access to the Premises to monitor
the progress of construction and Lessor's compliance with its obligation
hereunder; provided however, that such access shall not unreasonably interfere
with the activities of Lessor or its contractors. Lessee shall have a reasonable
right to approve the independent contractors Lessor engages to construct the
Lessee Interior Improvements. Lessee has employed an architect RMW, at Lessee
sole expense, to prepare the design development plans for the Lessee's Interior
Improvements. Lessee shall turn over these plans in CD form or electronic mail
to Lessor's architect, who will prepare the construction drawings.

2.1.2 Budget: Before entering into any contract with a contractor
furnishing labor or materials in connection with the construction of the Lessee
Interior Improvements for Phase I where the payment due under such contract is
estimated by Lessor to be in excess of Fifty Thousand Dollars ($50,000), Lessor
shall request bids from at least three (3) qualified contractors selected by
Lessor and approved by Lessee (which approval shall not be unreasonably
withheld) for bidding. Lessor will accept the lowest bid. Lessee shall have
the opportunity to review and approve the qualified bidders list prepared by
Lessor, which approval shall not be unreasonable withheld, and may select a
bidder of Lessee's choice for each bid, provided the bidder, meets the Lessor's
reasonable qualified bidder requirements. Lessor shall make available to
Lessee all bids and supporting data (including schedules of values).

2.1.3 Lessor's Allowance: Lessor shall contribute up to Six Million Nine
Hundred and Twenty Thousand Dollars ($6,920,000) or Twenty Dollars ($20) per
square foot towards construction of the Lessee Interior Improvements for Phase I
(the "Phase I TI Allowance"), which is included in base rent.

2.1.4 Cost Statement & Lessee's Contribution: Lessor will prepare for
Lessee's approval a cost statement which upon completion and approval shall be
attached as Exhibit E (the "Phase I Cost Statement"), showing the expected
construction cost of the Lessee Interior Improvements for Phase I. Lessor may
include in the Phase I Cost Statement, a construction management fee, covering
its overhead and profit equal to six percent (6%) of all costs shown on the
Phase I Cost Statement including 3% for general conditions plus any additional
costs approved by Lessee. No other general contractor's fees or costs shall be
charged to Lessee or against the Phase I TI Allowance in connection with the
Lessee Interior Improvements. If Lessor's actual cost exceeds the Phase I Cost
Statement, Lessee may pay the excess or remove items until the total costs are
acceptable to Lessee. Lessor and Lessee shall negotiate in good faith to
reduce the costs for construction of the Lessee Interior Improvements for Phase
I by modifying the plans or taking other appropriate actions. Lessee shall pay
its approved share of the cost for construction of the Lessee Interior
Improvements for Phase I within fifteen (15) days after Lessor has billed Lessee
and provided Lessee with evidence that the approved work being billed has been
installed. All costs payable by Lessee for construction of the Lessee Interior
Improvements for Phase I shall be reasonably documented and subject to
verification by Lessee.

2.1.5 Change Orders: Change to the plans for the Lessee Interior
Improvements for Phase I or the Phase I Cost Statement after the final approval
by the parties must be approved in writing by Lessor and Lessee, which approval
shall not be unreasonably withheld. In this regard, Lessor shall not be
required to approve any change which will: (i) increase its cost contribution
above the Phase I Cost Statement, (ii) structurally impair the Premises, or
(iii) materially and adversely effect the outside appearance of the subject
building. Change orders shall be written and shall describe the nature of the
change and the reasonably determined increase or decrease in each item of the
Phase I Cost Statement (including the Lessor's management fee) occasioned by the
change. If Lessee requests a change which will delay the Substantial
Completion of the Lessee Interior Improvements for Phase I beyond the Scheduled
Completion Date (defined below), the maximum amount of Lessee Delay, as defined
in Section 2.1.8 that can be attributed to the change shall also be specified in
the change order.

2.1.6 Inability to Obtain Materials: If Lessor notifies Lessee that any
fittings, finished or other materials specified by Lessee for the Lessee
Interior Improvements for Phase I are not: (i) regularly used, (ii) cannot be
obtained within

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sixty (60) days after placing an order therefore, and (iii) Lessor reasonably
determines that such extended delivery time will prohibit Lessor from
Substantially Completing the Lessee Interior Improvements for Phase I by the
Scheduled Completion Date, then Lessee shall within five days either (i) execute
a change order selecting an alternative reasonably approved by Lessor, or (ii)
agree that any delay in the Substantial Completion of the Lessee Interior
Improvements for Phase I as a consequence of the inability to obtain the item
will be a Lessee Delay.

2.1.7 Time Periods For Approval: Lessee shall approve or disapprove any
preliminary plans on or before the fifth (5th) business day following
submission to Lessee of the plan. Lessee shall approve or disapprove on or
before the tenth (10th) business day following submission to Lessee of any final
plans. All change orders shall be approved or disapproved within three (3)
business days during construction. If plans or change orders are disapproved,
Lessee shall state the reason for disapproval and Lessor and Lessee shall act in
good faith to resolve any issues. Lessor shall approve or disapprove any design
development plans by architect RMW on or before the fifth (5th) business day
following submission to Lessor of the plans. If plans are disapproved, Lessor
shall state the reason for disapproval and Lessor and Lessee shall act in good
faith to resolve any issues.

2.1.8 Completion of the Work & Delay: Lessor shall use its best efforts
to cause the Commencement Date of the initial term to occur not later than
February 1, 2001. If the Commencement Date has not occurred by February 28,
2001, Lessee shall receive one day of base rent abatement for each day after
February 28, 2001 until the Commencement Date. If Lessee is entitled to base
rent abatement as provided in the preceding sentence, such abatement shall begin
on the Commencement Date. Lessor and Lessee agree that having a Commencement
Date after February 28, 2001 will cause Lessee and Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Accordingly, the parties hereby agree that Lessee's
right to the abatement of base rent specified herein represents a fair and
reasonable settlement for both parties and neither party shall have further
liability to the other for any damages. If the Commencement Date has not
occurred by March 31, 2001, Lessee may at its sole option, by written notice to
Lessor, have the right to terminate this Lease at any time after March 31, 2001
until the Commencement Date. Notwithstanding anything to the contrary herein
(but subject to the last sentence of this section), all dates stated herein
shall be extended for the number of days Lessor is unable to Substantially
Complete the Premises as a result of delays: (i) due to governmental actions
(other than governmental action of refusing to approve work which fails to
comply with the law or the building permit) which occurs after receipt of normal
building permits, (ii) due to acts of God, (iii) due to circumstances beyond
Lessor's control, (iv) resulting from the City of San Jose failing to issue a
building permit within thirty (30) days after submittal of plans by Lessor, and
(v) due to Lessee Delays. "Lessee Delays" means a delay in Substantial
Completion resulting from (a) Lessee's failure to meet Lessee's deadlines for
approval as shown on Exhibit F, (b) delays due to change orders, (c) delays due
to Lessee's failure to meet the deadlines for approving any plans or change
orders, and (d) delays because of the inability to obtain any product,
materials, design, color, fitting, or finish pursuant to this Section 2.1.6.
Notwithstanding the above, Lessor shall not be entitled to a delay exceeding 180
days as a result of (ii), (iii) or (iv) above.

2.1.9 Standard of Performance: Lessor shall be responsible for ensuring
that the Building Shell and the Lessee Interior Improvements for Phase I conform
to all applicable Laws and the approved plans for the Lessee Interior
Improvements for Phase I and are performed in a good and workmanlike manner.
Neither Lessee's approval of the plans for the Lessee Interior Improvements for
Phase I, the Phase I Cost Estimate, nor Lessee's recommendation of any
contractor for the work, shall relieve Lessor of its obligations under this
Lease nor make Lessee liable to Lessor or any contractor , or their
subcontractors with respect to the work. Lessor shall complete punchlist items
within 30 days after Commencement Date.

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2.1.10 Installation of Lessee's improvements: Lessee shall be permitted
during the installation of Lessee Improvements by Lessor to inspect Lessor's
work and to install Lessee items such as telephone, security and moveable
partitions and other Lessee related work provided it does not materially
interfere with or delay Lessor's work or final approvals ("Lessee's Work").

2.2 Building Shell for Phase II: The "Building Shell for Phase II", as
defined in the attached Exhibit B shall be constructed at Lessor's sole cost and
expense by independent contractors to be employed by and under the supervision
of Lessor in accordance with the site plan, elevations, plans, specifications,
and working drawings to be prepared by Lessor, which have been approved by
Lessee, and thereafter attached hereto as Exhibit C.1 (collectively the "Shell
Plans for Phase II"). Lessor shall be responsible for ensuring that Building
Shell for Phase II conform to the approved plans and all applicable statutes,
rules, regulations, ordinances, and City of San Jose Building Department
interpretations necessary for occupancy.

2.2.1 Lessee Interior Improvements for Phase II: The "Lessee Interior
Improvements for Phase II" shall be defined as all items not part of the
Building Shell for Phase II and shall be constructed by independent contractors
to be employed by and under the supervision of Lessor, in accordance with
complete plans and specifications prepared by Lessor for submission to the City
of San Jose ("Lessee Improvement Plans for Phase II"), complete with all
mechanical and electrical design, approved by Lessee, and then to be attached
hereto as Exhibit D.1. Lessee and its designated representatives, shall at all
times during the construction of the Lessee Interior Improvements for Phase II
have access to the Premises to monitor the progress of construction and Lessor's
compliance with its obligation hereunder; provided however, that such access
shall not unreasonably interfere with the activities of Lessor or its
contractors. Lessee shall have a reasonable right to approve the independent
contractors Lessor engages to construct the Lessee Interior Improvements.
Lessee has employed an architect RMW, at Lessee sole expense, to prepare the
design development plans for the Lessee's Interior Improvements. Lessee shall
turn over these plans in CD form or electronic mail to Lessor's architect, who
will prepare the construction drawings.

2.2.2 Budget: Before entering into any contract with a contractor
furnishing labor or materials in connection with the construction of the Lessee
Interior Improvements for Phase II where the payment due under such contract is
estimated by Lessor to be in excess of Fifty Thousand Dollars ($50,000), Lessor
shall request bids from at least three (3) qualified contractors selected by
Lessor and approved by Lessee (which approval shall not be unreasonably
withheld) for bidding. Lessor will accept the lowest bid. Lessee shall have
the opportunity to review and approve the qualified bidders list prepared by
Lessor, which approval shall not be unreasonable withheld, and may select a
bidder of Lessee's choice for each bid, provided the bidder, meets the Lessor's
reasonable qualified bidder requirements. Lessor shall make available to
Lessee all bids and supporting data (including schedules of values).

2.2.3 Lessor's Allowance: Lessor shall contribute up to One Million Nine
Hundred and Seventy Thousand Dollars ($1,970,000) or Twenty Dollars ($20) per
square foot towards construction of the Lessee Interior Improvements for Phase
II (the " Phase II TI Allowance"), which is included in base rent.

2.2.4 Cost Statement & Lessee's Contribution: Lessor will prepare for
Lessee's approval a cost statement which upon completion and approval shall be
attached as Exhibit E.1 (the "Phase II Cost Statement"), showing the expected
construction cost of the Lessee Interior Improvements for Phase II. Lessor may
include in the Phase II Cost Statement, a construction management fee, covering
its overhead and profit equal to six percent (6%) of all costs shown on the
Phase II Cost Statement including 3% for general conditions plus any additional
costs approved by Lessee. No other general contractor's fees or costs shall be
charged to Lessee or against the Phase II TI Allowance in connection with the
Lessee Interior Improvements. If Lessor's actual cost exceed the Phase II Cost
Statement, Lessee may pay the excess or remove items until the total costs are

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acceptable to Lessee. Lessor and Lessee shall negotiate in good faith to
reduce the costs for construction of the Lessee Interior Improvements for Phase
II by modifying the plans or taking other appropriate actions. Lessee shall pay
its approved share of the cost for construction of the Lessee Interior
Improvements for Phase II within fifteen (15) days after Lessor has billed
Lessee and provided Lessee with evidence that the approved work being billed has
been installed. All costs payable by Lessee for construction of the Lessee
Interior Improvements for Phase II shall be reasonably documented and subject to
verification by Lessee.

2.2.5 Change Orders: Change to the plans for the Lessee Interior
Improvements for Phase II or the Phase II Cost Statement after the final
approval by the parties must be approved in writing by Lessor and Lessee, which
approval shall not be unreasonably withheld. In this regard, Lessor shall not
be required to approve any change which will: (i) increase its cost contribution
above the Phase II Cost Statement, (ii) structurally impair the Premises, or
(iii) materially and adversely effect the outside appearance of the subject
building. Change orders shall be written and shall describe the nature of the
change and the reasonably determined increase or decrease in each item of the
Phase II Cost Statement (including the Lessor's management fee) occasioned by
the change. If Lessee requests a change which will delay the Substantial
Completion of the Lessee Interior Improvements for Phase II beyond the Scheduled
Completion Date (defined below), the maximum amount of Lessee Delay, as defined
in Section 2.1.8 that can be attributed to the change shall also be specified in
the change order.

2.2.6 Inability to Obtain Materials: If Lessor notifies Lessee that any
fittings, finished or other materials specified by Lessee for the Lessee
Interior Improvements for Phase II are not: (i) regularly used, (ii) cannot be
obtained within sixty (60) days after placing an order therefore, and (iii)
Lessor reasonably determines that such extended delivery time will prohibit
Lessor from Substantially Completing the Lessee Interior Improvements for Phase
II by the Scheduled Completion Date, then Lessee shall within five days either
(i) execute a change order selecting an alternative reasonably approved by
Lessor, or (ii) agree that any delay in the Substantial Completion of the Lessee
Interior Improvements for Phase II as a consequence of the inability to obtain
the item will be a Lessee Delay.

2.2.7 Time Periods For Approval: Lessee shall approve or disapprove any
preliminary plans on or before the fifth (5th) business day following
submission to Lessee of the plan. Lessee shall approve or disapprove on or
before the tenth (10th) business day following submission to Lessee of any final
plans. All change orders shall be approved or disapproved within three (3)
business days during construction. If plans or change orders are disapproved,
Lessee shall state the reason for disapproval and Lessor and Lessee shall act in
good faith to resolve any issues. Lessor shall approve or disapprove any design
development plans by architect RMW on or before the fifth (5th) business day
following submission to Lessor of the plans. If plans are disapproved, Lessor
shall state the reason for disapproval and Lessor and Lessee shall act in good
faith to resolve any issues.

2.2.8 Completion of the Work & Delay: Lessor shall use its best efforts
to cause the Commencement Date of the initial term to occur not later than
January 1, 2002. If the Commencement Date has not occurred by February 1, 2002,
Lessee shall receive one day of base rent abatement for each day after February
1, 2002 until the Commencement Date. If Lessee is entitled to base rent
abatement as provided in the preceding sentence, such abatement shall begin on
the Commencement Date. Lessor and Lessee agree that having a Commencement Date
after February 1, 2002 will cause Lessee and Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Accordingly, the parties hereby agree that Lessee's
right to the abatement of base rent specified herein represents a fair and
reasonable settlement for both parties and neither party shall have further
liability to the other for any damages. If the Commencement Date has not
occurred by February 1, 2002, Lessee may at its sole option, by written notice
to Lessor, have the right to terminate this Lease at any time

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after February 1, 2002 until the Commencement Date. Notwithstanding anything to
the contrary herein (but subject to the last sentence of this section), all
dates stated herein shall be extended for the number of days Lessor is unable to
Substantially Complete the Premises as a result of delays: (i) due to
governmental actions (other than governmental action of refusing to approve work
which fails to comply with the law or the building permit) which occurs after
receipt of normal building permits, (ii) due to acts of God, (iii) due to
circumstances beyond Lessor's control, (iv) resulting from the City of San Jose
failing to issue a building permit within thirty (30) days after submittal of
plans by Lessor, and (v) due to Lessee Delays. "Lessee Delays" means a delay in
Substantial Completion resulting from (a) Lessee's failure to meet Lessee's
deadlines for approval as shown on Exhibit F, (b) delays due to change orders,
(c) delays due to Lessee's failure to meet the deadlines for approving any plans
or change orders, and (d) delays because of the inability to obtain any product,
materials, design, color, fitting, or finish pursuant to this Section 2.2.6.
Notwithstanding the above, Lessor shall not be entitled to a delay exceeding 180
days as a result of (ii), (iii) or (iv) above.

2.2.9 Standard of Performance: Lessor shall be responsible for ensuring
that the Building Shell and the Lessee Interior Improvements for Phase II
conform to all applicable Laws and the approved plans for the Lessee Interior
Improvements for Phase II and are performed in a good and workmanlike manner.
Neither Lessee's approval of the plans for the Lessee Interior Improvements for
Phase II, the Phase II Cost Estimate, nor Lessee's recommendation of any
contractor for the work, shall relieve Lessor of its obligations under this
Lease nor make Lessee liable to Lessor or any contractor, or their
subcontractors with respect to the work. Lessor shall complete punchlist items
within 30 days after Commencement Date of Phase II.

2.2.10 Installation of Lessee's improvements: Lessee shall be permitted
during the installation of Lessee Improvements by Lessor to inspect Lessor's
work and to install Lessee items such as telephone, security and moveable
partitions and other Lessee related work provided it does not materially
interfere with or delay Lessor's work or final approvals ("Lessee's Work").

2.2.11 Adjustment of Initial Base Rent for Phase II: If the cost per
rentable square foot of constructing the Building Shell for Phase II ("Phase II
Shell Cost") exceeds 104% of the cost per rentable square foot of constructing
the Building Shell for Phase I ("Phase I Shell Cost"), the initial base monthly
rent for Phase II shall be adjusted as follows: (i) if the Phase II Shell Cost
is no more than 108% of the Phase I Shell Cost, the initial base monthly rent
shall increase by 1% for each percentage point by which the Phase II Shell Cost
exceeds 104% of the Phase I Shell Cost; and (ii) .if the Phase II Shell Cost is
greater than 108% of the Phase I Shell Cost, the initial base monthly rent shall
increase by the sum of 4% plus fifty basis points for each percentage point by
which the Phase II Shell Cost exceeds 108% of the Phase I Shell Cost.

2.3 Acceptance Of Premises And Covenants To Surrender: Lessee accepts the
Premises in an "AS IS" condition and "AS IS" state of repair, subject to
Lessor's (a) representation that the Premises are in good order and repair, and
comply with all requirements for occupancy and comply with 2.1 for Phase I and
2.2 for Phase II as of the Commencement Date; and (b)warranty against defects in
materials or workmanship which shall continue as to all claims arising within
one year after the Commencement Date for each of Phase I and Phase II. Lessee
shall have the benefit of any existing construction or equipment
warranties.Lessee agrees on the last day of the Lease Term, or on the sooner
termination of this Lease, to surrender the Premises to Lessor in Good Condition
and Repair. "Good Condition and Repair" shall generally mean that the Premises
are in the condition that one would expect the Premises to be in, if throughout
the Lease Term Lessee (i) uses and maintains the Premises in a commercially
reasonable manner and in an accordance with the requirements of this Lease and
(ii) makes all Required Replacements. Lessee's duty to keep the Premises in
Good Condition and Repair is limited by sections 19 and 21 of this Lease.
"Required Replacements" are the replacements to worn-out equipment, fixtures,
and improvements that a

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commercially reasonable owner-user would make excluding HVAC replacements, roof
replacement, exterior painting and parking lot replacement. Notwithstanding the
above Good Condition and Repair shall not mean in a new condition. All of the
following shall be in Good Condition and Repair: (i) the interior walls and
floors of all offices and other interior areas, (ii) all suspended ceilings and
any carpeting shall be clean and in good condition, (iii) all glazing, windows,
doors and door closures, plate glass, and (iv) all electrical systems including
light fixtures and ballasts, plumbing, and temperature control systems. Lessee,
on or before the end of the Lease Term or sooner termination of this Lease,
shall remove all its personal property and trade fixtures from the Premises, and
all such property not so removed shall be deemed to be abandoned by Lessee.
Lessee shall reimburse Lessor for all disposition costs incurred by Lessor
relative to Lessee's abandoned property. If the Premises are not surrendered at
the end of the Lease Term or earlier termination of this Lease, Lessee shall
indemnify Lessor against loss or liability resulting from any delay caused by
Lessee in surrendering the Premises including, without limitation, any claims
made by any succeeding Lessee founded on such delay. Lessor will provide Lessee
notice in writing if Lessor has a new lease for The Premises or portion thereof
that will result in damages or claims against Lessor.

3. Uses Prohibited: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant of the project in which the
Premises are located or allow any sale by auction except auctions conducted over
the internet upon the Premises, or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, or place any loads upon
the floor, walls, or ceiling which may endanger the structure, or use any
machinery or apparatus which will in any manner vibrate or shake the Premises,
or place any harmful liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to remain upon any part of
the Premises outside of the building proper. No materials, supplies, equipment,
finished products or semi-finished products, raw materials or articles of any
nature shall be stored upon or permitted to remain on any portion of the
Premises outside of the building structure, unless approved by the local, state
federal or other applicable governing authority. Lessor consents to Lessee's
use of materials which are incidental to the normal, day-to-day operations of
any office user, such as copier fluids, cleaning materials, etc., but this does
not relieve Lessee of any of its obligations not to contaminate the Premises and
related real property or violate any Hazardous Materials Laws. Upon prior
consent and approval by Lessor, which may not be unreasonably withheld, Lessee
may utilize Hazardous Materials directly required for Lessee's research and
development or light manufacturing and assembly activities subject to the
provisions of Section 33.

4. Alterations And Additions: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor; any addition or alteration to said
Premises, except movable furniture and trade fixtures, shall become at once a
part of the realty and belong to Lessor at the end of the Lease Term or earlier
termination of this Lease. Alterations and additions which are not deemed as
trade fixtures shall include HVAC systems, lighting systems, electrical systems,
partitioning, carpeting, or any other installation which has become an integral
part of the Premises. Lessee agrees that it will not proceed to make such
alterations or additions until all required government permits have been
obtained and after having obtained consent from Lessor to do so, until five (5)
days from the receipt of such consent, so that Lessor may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Lessee's improvements. Lessee shall at all times permit such notices to be
posted and to remain posted until the completion of work. At the end of the
Lease Term or earlier termination of this Lease, Lessee shall remove and shall
be required to remove its special tenant improvements, all related equipment,
and any additions or alterations installed by Lessee at or during the Lease Term
and Lessee shall return the Premises to the condition that existed before the
installation of the tenant improvements. Notwithstanding the above, Lessor
agrees to allow any reasonable alterations and improvements and will use its
best efforts to notify Lessee at the time of approval if such improvements or
alterations are to be removed at the end of the Lease Term or earlier
termination of this Lease.

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<PAGE>

5. Maintenance Of Premises:

(a) Lessee shall at its sole cost and expense keep, repair, and maintain the
interior of the Premises in Good Condition and Repair, including, but not
limited to, the interior walls and floors of all offices and other interior
areas, doors and door closures, all lighting systems, temperature control
systems (i.e. control thermostats and like in kind equipment), and plumbing
systems, including any Required Replacements. Lessee shall provide interior
and exterior window washing as needed. Lessee's duty to keep the Premises in
Good Condition and Repair is subject to sections 19 and 21 of this Lease.

(b) Lessor shall, at Lessee's expense, keep, repair, and maintain in Good
Condition and Repair including replacements (based on a pro-rata share of (i)
costs based on square footage or (ii) costs directly related to Lessee's use
of the Premises) the following, which shall be included in the monthly CAC:

1. The exterior of the building, any appurtenances and every part thereof,
including but not limited to, glazing, sidewalks, parking areas, electrical
systems, and painting of exterior walls. The parking lot to receive a
finish coat every five to seven years.

2. The HVAC by a service contract with a licensed air conditioning and
heating contractor which contract shall provide for a minimum of quarterly
maintenance of all air conditioning and heating equipment at the Premises
including HVAC repairs or replacements which are either excluded from such
service contract or any existing equipment warranties.

3. The landscaping by a landscape contractor to water, maintain, trim and
replace, when necessary, any shrubbery, irrigation parts, and landscaping
at the Premises.

4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of debris,
and trimming overhanging trees, repair of the roof and application of a
finish coat every five years to the building at the Premises.

5. Exterior pest control.

6. Fire monitoring services.

7. Parking lot sweeping.

8. Electrical Switchgear.

(c) Lessee hereby waives any and all rights to make repairs at the expense of
Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.

(d) Lessor shall be responsible for the repair of any structural defects in
the Premises including the roof structure (not membrane), exterior walls and
foundation during the Lease Term.

6. Insurance:

A) Hazard Insurance: Lessee shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose other than that for which the
Premises are hereby leased; and no use shall be made or permitted to be made
of the Premises, nor acts done, which may cause a cancellation of any
insurance policy covering the Premises, or any part thereof, nor shall Lessee
sell or permit to be kept, used or sold, in or about said Premises, any
article which may be prohibited by a special form property insurance policy.
Lessee shall comply with any and all requirements, pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable special form property insurance, covering the
Premises. Lessor shall, at Lessee's sole cost and expense, purchase and keep
in force special form property insurance, covering loss or damage to the
Premises in an amount equal to the full replacement cost of the Premises, as
determined by Lessor, with proceeds payable to Lessor. In the event of a loss
per the insurance provisions of this paragraph, Lessee shall

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<PAGE>

be responsible for deductibles up to a maximum of $5,000 per occurrence.
Lessee acknowledges that the insurance referenced in this paragraph does not
include coverage for Lessee's personal property.

B) Loss of Rents Insurance: Lessor shall, at Lessee's sole cost and
expense, purchase and maintain in full force and effect, a policy of rental
loss insurance, in an amount equal to the amount of Rent payable by Lessee
commencing within sixty (60) days of the date of the loss or on the date of
loss if reasonably available for the next ensuing one (1) year, as reasonably
determined by Lessor with proceeds payable to Lessor ("Loss of Rents
Insurance").

C) Liability and Property Damage Insurance: Lessee, as a material part of
the consideration to be rendered to Lessor, hereby waives all claims against
Lessor and Lessor's Agents for damages to goods, wares and merchandise, and
all other personal property in, upon, or about the Premises, and for injuries
to persons in, upon, or about the Premises, from any cause arising at any
time, and Lessee will hold Lessor and Lessor's Agents exempt and harmless from
any damage or injury to any person, or to the goods, wares, and merchandise
and all other personal property of any person, arising from the use or
occupancy of the Premises by Lessee, or from the failure of Lessee to keep the
Premises in Good Condition and Repair, as herein provided. Lessee shall, at
Lessee's sole cost and expense, purchase and keep in force a standard policy
of commercial general liability insurance and property damage policy covering
the Premises and all related areas insuring the Lessee having a combined
single limit for both bodily injury, death and property damage in an amount
not less than five million dollars ($5,000,000.00) and Lessee's insurance
shall be primary. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder. Lessee shall, at its sole cost and expense,
comply with all of the insurance requirements of all local, municipal, state
and federal authorities now in force, or which may hereafter be in force,
pertaining to Lessee's use and occupancy of the said Premises. Subject to
Lessee's obligations under Section 9, Lessee's duty to comply with insurance
requirements and laws shall not require Lessee to make structural
modifications or additions to Premises unless these are required by virtue of
Lessee's specialized use of the Premises or alterations made by Lessee after
the Commencement Date.

D) Personal Property Insurance: Lessee shall obtain, at Lessee's sole cost
and expense, special form property insurance including coverage for direct
physical loss special form, and a sprinkler leakage endorsement insuring the
personal property of Lessee. The proceeds from any personal property damage
policy shall be payable to Lessee. Lessee shall be permitted to self-insure
for loss of personal property subject to having a shareholder's equity of
$50,000,000 and provided Lessee indemnifies Lessor against all damage claims
to Lessor's satisfaction.

All insurance policies required in 6 C) and 6 D) above shall: (i) provide for a
certificate of insurance evidencing the insurance required herein, being
deposited with Lessor ten (10) days prior to the Commencement Date, and upon
each renewal, such certificates shall be provided 15 days prior to the
expiration date of such coverage, (ii) be in a form reasonably satisfactory to
Lessor and shall provide the coverage required by Lessee in this Lease, (iii) be
carried with companies with a Best Rating of B+VII minimum, (iv) specifically
provide that such policies shall not be subject to cancellation, reduction of
coverage, or other change except after 30 days prior written notice to Lessor,
(v) name Lessor, Lessor's lender, and any other party with an insurable interest
in the Premises as designated by Lessor as additional insureds by endorsement to
policy, and (vi) shall be primary.

Lessee agrees to pay to Lessor, as additional Rent, on demand, the full cost of
the insurance policies referenced in 6 A) and 6 B) above as evidenced by
insurance billings to Lessor which shall be included in the CAC. If Lessee does
not occupy the entire project, the insurance premiums shall be allocated to the
portion of the project occupied by Lessee on a pro-rata square footage or other
equitable basis, as determined by Lessor. It is agreed that Lessee's obligation
under this paragraph shall be prorated to the reflect the Commencement Date and
the end of the Lease Term.

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<PAGE>

Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk covered by
fire and extended coverage insurance and those risks required to be covered
under Lessee's personal property insurance. The parties shall provide that
their respective insurance policies insuring the property or the personal
property include a waiver of any right of subrogation which said insurance
company may have against Lessor or Lessee, as the case may be.

7. Abandonment: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above or any contrary
provision elsewhere in this Lease, the Premises shall not be considered vacated
or abandoned if Lessee maintains the Premises in Good Condition and Repair,
provides security and is not in default.

8. Free From Liens: Lessee shall keep the subject Premises , free from any and
all liens including but not limited to liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee. Lessee shall have no
duty to keep Premises free of liens for work performed by Lessor at Lessor's
expense. However, the Lessor shall allow Lessee to contest a lien claim, so
long as the claim is discharged prior to any foreclosure proceeding being
initiated against the property and provided Lessee provides Lessor a bond if the
lien exceeds $5,000.

9. Compliance With Governmental Regulations: Lessee shall, at its sole cost
and expense, comply with all of the requirements of all local, municipal, state
and federal authorities now in force, or which may hereafter be in force,
pertaining to the Premises, and shall faithfully observe in the use and
occupancy of the Premises all local and municipal ordinances and state and
federal statutes now in force or which may hereafter be in force.
Notwithstanding the above, Lessee shall not be obligated to pay for changes in
compliance with Governmental Regulations if the cost exceeds Twenty Five
Thousand Dollars ($25,000) and does not occur as a result of Lessee's
specialized use of the Premises or alterations made by Lessee but such cost
shall be amortized over their useful life (not to exceed 15 years) at Wells
Fargo Prime Rate plus 1.0 and added to monthly CAC during Lease Term.

10. Intentionally Omitted.

11. Advertisements And Signs: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any signs
not approved by the city, local, state, federal or other applicable governing
authority. Lessee shall not place, or permit to be placed upon the Premises, any
signs, advertisements or notices without the written consent of the Lessor, and
such consent shall not be unreasonably withheld. A sign so placed on the
Premises shall be so placed upon the understanding and agreement that Lessee
will remove same at the end of the Lease Term or earlier termination of this
Lease and repair any damage or injury to the Premises caused thereby, and if not
so removed by Lessee, then Lessor may have the same removed at Lessee's expense.

12. Utilities: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage, PG&E and telephone site service or related fees shall be the obligation
of Lessee and paid for by Lessee. If any such services are not separately
metered to Lessee, Lessee shall pay a reasonable proportion of all charges which
are jointly metered, the determination to be made by Lessor acting reasonably
and on any equitable basis. Lessor and Lessee agree that Lessor shall not be
liable to Lessee for any disruption in any of the utility services to the
Premises provided Lessor acts reasonably to avoid any such disruption, or if
such disruption is unavoidable, to minimize the effect thereof on Lessee's use
and enjoyment of the Premises, to extent that such disruption is within Lessor's
control.

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<PAGE>

13. Attorney's Fees: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, because of the breach of
any other covenant herein, or to enforce, protect, or establish any term,
conditions, or covenant of this Lease or the right of either party hereunder,
the losing party shall pay to the Prevailing Party reasonable attorney's fees
which shall be deemed to have accrued on the commencement of such action and
shall be enforceable whether or not such action is prosecuted to judgment. The
term "Prevailing Party" shall mean the party that received substantially the
relief requested, whether by settlement, dismissal, summary judgment, judgment,
or otherwise.

14. Default

14.1 Lessee Default: The occurrence of any of the following shall
constitute a default and breach of this Lease by Lessee: a) Any failure by
Lessee to pay Rent or to make any other payment required to be made by Lessee
hereunder when due if not cured within ten (10) days after written notice
thereof by Lessor to Lessee; b) The abandonment or vacation of the Premises by
Lessee except as provided in Section 7; c) A failure by Lessee to observe and
perform any other provision of this Lease to be observed or performed by Lessee,
where such failure continues for thirty days after written notice thereof by
Lessor to Lessee; provided, however, that if the nature of such default is such
that the same cannot be reasonably cured within such thirty (30) day period,
Lessee shall not be deemed to be in default if Lessee shall, within such period,
commence such cure and thereafter diligently prosecute the same to completion;
d) The making by Lessee of any general assignment for the benefit of creditors;
the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt
or of a petition for reorganization or arrangement under any law relating to
bankruptcy; e) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets or Lessee's interest in this Lease, or the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease.

14.2 Surrender Of Lease: In the event of any such default by Lessee, then
in addition to any other remedies available to Lessor at law or in equity,
Lessor shall have the immediate option to terminate this Lease before the end of
the Lease Term and all rights of Lessee hereunder, by giving written notice of
such intention to terminate. In the event that Lessor terminates this Lease due
to a default of Lessee, then Lessor may recover from Lessee: a) the worth at the
time of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided; plus
d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of award"
is computed by allowing interest at the rate of Wells Fargo's prime rate plus
two percent (2%) per annum. As used in (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).

14.3 Right of Entry and Removal: In the event of any such default by
Lessee, Lessor shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Lessee.

14.4 Abandonment: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate

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<PAGE>

this Lease as provided in Section 14.2 above, then Lessor may from time to time,
without terminating this Lease, either recover all Rent as it becomes due or
relet the Premises or any part thereof for such term or terms and at such rental
rates and upon such other terms and conditions as Lessor, in its sole
discretion, may deem advisable with the right to make alterations and repairs to
the Premises. In the event that Lessor elects to relet the Premises, then Rent
received by Lessor from such reletting shall be applied; first, to the payment
of any indebtedness other than Rent due hereunder from Lessee to Lessor; second,
to the payment of any cost of such reletting; third, to the payment of the cost
of any alterations and repairs to the Premises; fourth, to the payment of Rent
due and unpaid hereunder; and the residue, if any, shall be held by Lessor and
applied to the payment of future Rent as the same may become due and payable
hereunder. Should that portion of such Rent received from such reletting during
any month, which is applied by the payment of Rent hereunder according to the
application procedure outlined above, be less than the Rent payable during that
month by Lessee hereunder, then Lessee shall pay such deficiency to Lessor
immediately upon demand therefore by Lessor. Such deficiency shall be calculated
and paid monthly. Lessee shall also pay to Lessor, as soon as ascertained, any
costs and expenses incurred by Lessor in such reletting or in making such
alterations and repairs not covered by the rentals received from such reletting.

14.5 No Implied Termination: No re-entry or taking possession of the
Premises by Lessor pursuant to Section 14.3 or Section 14.4 of this Lease shall
be construed as an election to terminate this Lease unless a written notice of
such intention is given to Lessee or unless the termination thereof is decreed
by a court of competent jurisdiction. Notwithstanding any reletting without
termination by Lessor because of any default by Lessee, Lessor may at any time
after such reletting elect to terminate this Lease for any such default.

15. Surrender Of Lease: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, terminate all or any existing subleases or sub tenancies,
or may, at the option of Lessor, operate as an assignment to him of any or all
such subleases or sub tenancies.

16. Taxes: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal property
taxes, taxes based on vehicles utilizing parking areas in the Premises, taxes
computed or based on rental income (other than federal, state and municipal net
income taxes), environmental surcharges, privilege taxes, excise taxes, business
and occupation taxes, school fees or surcharges, gross receipts taxes, sales
and/or use taxes, employee taxes, occupational license taxes, water and sewer
taxes, assessments (including, but not limited to, assessments for public
improvements or benefit), assessments for local improvement and maintenance
districts, and all other governmental impositions and charges of every kind and
nature whatsoever, regardless of whether now customary or within the
contemplation of the parties hereto and regardless of whether resulting from
increased rate and/or valuation, or whether extraordinary or ordinary, general
or special, unforeseen or foreseen, or similar or dissimilar to any of the
foregoing (all of the foregoing being hereinafter collectively called "Tax" or
"Taxes") which, at any time during the Lease Term, shall be applicable or
against the Premises, or shall become due and payable and a lien or charge upon
the Premises under or by virtue of any present or future laws, statutes,
ordinances, regulations, or other requirements of any governmental authority
whatsoever. The term "Environmental Surcharge" shall include any and all
expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or
any regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to impose
taxes, assessments or other types of surcharges as a means of controlling or
abating environmental pollution or the use of energy in regard to the use,
operation or occupancy of the Premises. The term "Tax" shall include, without
limitation, all taxes, assessments, levies, fees, impositions or charges levied,
imposed, assessed, measured, or based in any manner whatsoever (i) in whole or
in part on the Rent payable by Lessee under this Lease, (ii) upon or with
respect to the use, possession, occupancy, leasing, operation or management of
the Premises, (iii) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the Premises, (iv)
upon Lessee's business operations conducted at the Premises, (v) upon, measured
by or reasonably attributable to the cost or

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<PAGE>

value of Lessee's equipment, furniture, fixtures and other personal property
located on the Premises or the cost or value of any leasehold improvements made
in or to the Premises by or for Lessee, regardless of whether title to such
improvements shall be in Lessor or Lessee, or (vi) in lieu of or equivalent to
any Tax set forth in this Section 16. In the event any such Taxes are payable by
Lessor and it shall not be lawful for Lessee to reimburse Lessor for such Taxes,
then the Rent payable thereunder shall be increased to net Lessor the same net
rent after imposition of any such Tax upon Lessor as would have been payable to
Lessor prior to the imposition of any such Tax. It is the intention of the
parties that Lessor shall be free from all such Taxes and all other governmental
impositions and charges of every kind and nature whatsoever. However, nothing
contained in this Section 16 shall require Lessee to pay any Federal or State
income, franchise, estate, inheritance, succession, transfer or excess profits
tax imposed upon Lessor. If any general or special assessment is levied and
assessed against the Premises, Lessor agrees to use its best reasonable efforts
to cause the assessment to become a lien on the Premises securing repayment of a
bond sold to finance the improvements to which the assessment relates which is
payable in installments of principal and interest over the maximum term allowed
by law. It is understood and agreed that Lessee's obligation under this
paragraph will be prorated to reflect the Commencement Date and the end of the
Lease Term. It is further understood that if Taxes cover the Premises and Lessee
does not occupy the entire Premises, the Taxes will be allocated to the portion
of the Premises occupied by Lessee based on a pro-rata square footage or other
equitable basis, as determined by Lessor. Lessee shall pay invoiced tax bills on
or before due date.

Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall have
the right to contest or review the amount or validity of any Tax by appropriate
legal proceedings but which is not to be deemed or construed in any way as
relieving, modifying or extending Lessee's covenant to pay such Tax at the time
and in the manner as provided in this Section 16. However, as a condition of
Lessee's right to contest, if such contested Tax is not paid before such contest
and if the legal proceedings shall not operate to prevent or stay the collection
of the Tax so contested, Lessee shall, before instituting any such proceeding,
protect the Premises and the interest of Lessor and of the beneficiary of a deed
of trust or the mortgagee of a mortgage affecting the Premises against any lien
upon the Premises by a surety bond, issued by an insurance company acceptable to
Lessor and in an amount equal to one and one-half (1 1/2) times the amount
contested or, at Lessor's option, the amount of the contested Tax and the
interest and penalties in connection therewith. Any contest as to the validity
or amount of any Tax, whether before or after payment, shall be made by Lessee
in Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor
from and against any and all costs or expenses, including attorneys' fees, in
connection with any such proceedings brought by Lessee, whether in its own name
or not. Lessee shall be entitled to retain any refund of any such contested Tax
and penalties or interest thereon which have been paid by Lessee. Nothing
contained herein shall be construed as affecting or limiting Lessor's right to
contest any Tax at Lessor's expense.

17. Notices: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid, in a sealed
envelope addressed to the intended recipient as follows:

<TABLE>
<S> <C>
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626

(b) Until Commencement Date for Phase I for Lessee: 166 Baypointe Parkway
San Jose, California 95134
Attention: Director, Real Estate & Facilities
</TABLE>

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<PAGE>

<TABLE>
<S> <C>
CC: Chief Financial Officer
Fax No: 408.965.2859

(c) After Commencement Date for Phase I for Lessee: XXXXXXX Silver Creek Drive
San Jose, California
Attention: Director, Real Estate & Facilities
CC: Chief Financial Officer
Fax No:
</TABLE>

or such other addresses, facsimile number or individual as may be designated by
a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day following
its receipt, and if given by registered or certified mail, on the day on which
delivery is made or refused or if given by recognized overnight courier, on the
first business day following deposit with such overnight courier and if given by
facsimile transmission, on the day on which it was transmitted provided such day
is a business day, failing which, on the next business day thereafter.

18. Entry By Lessor: Lessee shall permit Lessor and its agents to enter into
and upon said Premises at all reasonable times using the minimum amount of
interference and inconvenience to Lessee and Lessee's business, subject to any
security regulations of Lessee, for the purpose of inspecting the same or for
the purpose of maintaining the building in which said Premises are situated, or
for the purpose of making repairs, alterations or additions to any other portion
of said building, including the erection and maintenance of such scaffolding,
canopies, fences and props as may be required, without any rebate of Rent and
without any liability to Lessee for any loss of occupation or quiet enjoyment of
the Premises; and shall permit Lessor and his agents, at any time within ninety
(90) days prior to the end of the Lease Term, to place upon said Premises any
usual or ordinary "For Sale" or "For Lease" signs and exhibit the Premises to
prospective tenants at reasonable hours.

19. Destruction Of Premises:

19.1 Damage Subject to Restoration in One Year. In the event one or more of
the buildings which are part of the Premises are damaged during the Lease Term
from any cause, Lessor shall forthwith repair the same, provided such repairs
can be made within one year after the date of the receipt of building permit
under the laws and regulations of State, Federal, County, or Municipal
authorities but subject to Section 19.3. Such damage shall in no way annul or
void this Lease, except that Lessee shall be entitled to a proportionate
reduction of Rent while such repairs are being made to the extent of payments
received by Lessor or any lender under Lessor's Loss of Rents Insurance
coverage.

19.2 Damage Not Subject to Restoration in One Year. In the event one or more of
the buildings which are part of the Premises are damaged during the Lease Term
from any cause, but such repairs cannot be made within one year after the date
of the receipt of building permit under the laws and regulations of State,
Federal, County, or Municipal authorities but subject to Section 19.3, either
party may terminate this Lease, as to the damaged building or buildings by
notice to the other within 20 days after the date Lessor advises Lessee in
writing that repair will exceed one year. However, if Lessor exercises such
termination right: (a) Lessee shall have the option to avoid such termination by
notifying Lessor within 10 days after receipt of such notice that Lessee will
commence paying Rent for such damaged building(s) prior to the completion of
repairs and at such time as Lessor's Loss of Rents Insurance coverage. with
respect to such building(s) has been depleted; and (b) if Landlord thereafter
elects to rebuild one or more of such buildings at a point in time where at
least 40% of the Lease Term is unexpired, Lessee shall

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have the right to reinstate this Lease as to the building or buildings Landlord
elects to rebuild. If this Lease is not terminated as provided in this Section
19.2, Lessor shall forthwith repair the damage to the buildings(s) and Lessee
shall be entitled to a proportionate reduction of Rent while such repairs are
being made to the extent of payments received by Lessor or any lender under
Lessor's Loss of Rents Insurance coverage.

19.3 Uninsured Damage. Notwithstanding Sections 19.1 and 19.2 above, if the
reasonable cost of repairing damage to a building or buildings is not fully
covered by Lessor's insurance (with the exception of the deductible thereunder),
Lessor shall have the option of terminating this Lease as to the damaged
building or buildings by notice to Lessee within 60 days after the date of
damage. If Lessor so elects to terminate this Lease as to the damaged
building(s), Lessee may avoid such termination by agreeing to pay all costs to
repair the damaged building(s) not covered by Lessor's insurance.

19.4 Destruction of Three or More Buildings. If three or more of the buildings
within the Premises are damaged to a degree that repairs cannot be made within
one year after the date of the receipt of building permit under the laws and
regulations of State, Federal, County, or Municipal authorities, either party
may terminate this Lease as to the entire Premises (including any undamaged
building or buildings) by notice to the other within 30 days after the date of
damage. However, if Lessor exercises such termination option, Lessee shall be
permitted to remain in possession of any undamaged building or buildings for up
to one year after Lessor's notice of termination, subject to all terms and
conditions of this Lease (except the Rent shall be proportionately reduced based
on the ratio that the rentable area of the undamaged building or buildings bears
to the total rentable area of the buildings within the Premises prior to such
damage.

19.5 Waiver of Civil Code Sections. The provisions of Section 1932, Subdivision
2, and of Section 1933, Subdivision 4, of the Civil Code of the State of
California are waived by Lessee and Lessor. The parties intend that the
provisions of this Lease, including this Section 19, shall govern their
respective rights and remedies in case of damage to the Premises.

20. Assignment And Subletting: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof, or
any right or privilege appurtenant thereto, or cause any other person or entity,
to occupy or use the Premises, or any portion thereof, without the advance
written consent of Lessor (as provided in Section 36). Notwithstanding the
above, Lessee may, without the consent of Lessor, assign this Lease or sublet
all or any part of the Premises to a bona fide subsidiary or affiliate of
Lessee, an entity in which or with which Lessee merges or an entity which
acquires all or substantially all of the assets of Lessee ("Excepted Party").
Any such assignment or subletting requiring Lessor's consent made without
Lessor's consent shall be void, and shall, at the option of the Lessor,
terminate this Lease. This Lease shall not, or shall any interest therein, be
assignable, as to the interest of Lessee, by operation of law, without the
written consent of Lessor. If Lessee desires to assign its rights under this
Lease or to sublet all or any part of the Premises to a party other than an
Excepted Party, Lessee shall first notify Lessor of the proposed terms and
conditions of such assignment or subletting. Lessor shall have the right of
first refusal to enter into a direct Lessor-lessee relationship with such party
under such proposed terms and conditions, in which event Lessee shall be
relieved of its obligations hereunder to the extent of the Lessor-lessee
relationship entered into between Lessor and such third party; provided,
however, that notwithstanding the above, Lessee shall have the right to sublease
up to One Hundred and Fifty Thousand Square Feet (150,000 sq.ft.) for a period
up to five (5) years from the Commencement Date of Phase I (but no renewals or
extensions on such sublease shall be allowed by Lessor)and Lessor's right of
first refusal shall not apply as to any such sublease(s) If Lessee exercises its
right of first refusal to enter into a direct Lessor-Lessee relationship with a
new lessee, then Lessee may recover from such rent an amount equal to the
unamortized value of its tenant improvements and Lessee shall continue to own
such improvements until end of the Lease Term at which time such title to such
improvements shall revert to Lessor. Notwithstanding the foregoing, Lessee may
assign this Lease to an Excepted Party, provided there is no substantial
reduction in the net worth of the resulting guarantor. Whether or not Lessor's
consent to a sublease or assignment is required, in the event of any sublease or
assignment, Lessee shall be and shall remain primarily liable for the
performance of all conditions, covenants, and obligations of Lessee hereunder
and, in the event of a default by an assignee or sublessee, Lessor may proceed
directly against the original Lessee hereunder and/or any other predecessor of
such assignee or sublessee without the necessity of

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exhausting remedies against said assignee or sublessee. If Lessee merges or
sells substantially all of its assets and the net worth of the resulting entity
is substantially less than that of Lessee, such sale shall be a default under
this Lease unless approved by Lessor.

21. Condemnation: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which is susceptible of
occupation hereunder, this Lease shall as to the part so taken, terminate as of
the date title vests in the condemnor or purchaser, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay for the
remainder of the Lease Term only that portion of Rent as the value of the part
remaining. The rental adjustment resulting will be computed at the same Rental
rate for the remaining part not taken; however, Lessor shall have the option to
terminate this Lease as of the date when title to the part so taken vests in the
condemnor or purchaser. If all of the Premises, or such part thereof be taken
so that there does not remain a portion susceptible for occupation hereunder,
this Lease shall thereupon terminate. If a part or all of the Premises be
taken, all compensation awarded upon such taking shall be payable to the Lessor.
Lessee may file a separate claim and be entitled to any award granted to Lessee.

22. Effects Of Conveyance: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the Premises,
so that, in the event of any sale of said land or building, or in the event of a
Lease of said building, Lessor shall be and hereby is entirely freed and
relieved of all covenants and obligations of Lessor hereunder, and it shall be
deemed and construed, without further agreement between the parties and the
purchaser of any such sale, or the Lessor of the building, that the purchaser or
lessor of the building has assumed and agreed to carry out any and all covenants
and obligations of the Lessor hereunder. If any security is given by Lessee to
secure the faithful performance of all or any of the covenants of this Lease on
the part of Lessee, Lessor may transfer and deliver the security, as such, to
the purchaser at any such sale of the building, and thereupon the Lessor shall
be discharged from any further liability.

23. Subordination: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises are a part and to any and all advances made on the security thereof and
to renewals, modifications, replacements and extensions thereof. Lessee agrees
to promptly execute any documents which may be required to effectuate such
subordination provided Lessee receives a non-disturbance agreement on standard
commercial terms from Lender dated prior to lien. Notwithstanding such
subordination, if Lessee is not in default and so long as Lessee shall pay the
Rent and observe and perform all of the provisions and covenants required under
this Lease, Lessee's right to quiet possession of the Premises shall not be
disturbed or effected by any subordination.

24. Waiver: The waiver by Lessor or Lessee of any breach of any term, covenant
or condition, herein contained shall not be construed to be a waiver of such
term, covenant or condition or any subsequent breach of the same or any other
term, covenant or condition therein contained. The subsequent acceptance of
Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach
of any term, covenant, or condition of the Lease.

25. Holding Over: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold. Such
holding over shall be construed to be a tenancy at sufferance from month to
month. Lessee shall pay to Lessor monthly base rent equal to one and one-half
(1.5) times the monthly base rent installment due in the last month of the Lease
Term and all other additional rent and all other terms and conditions of the
Lease shall apply, so far as applicable. Holding over by Lessee without written
approval of Lessor shall subject Lessee to the liabilities and obligations
provided for in this Lease and by law, including, but not limited to those in
Section 2.3 of this Lease. Lessee shall indemnify and hold Lessor harmless
against any loss or liability resulting from

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any delay caused by Lessee in surrendering the Premises, including without
limitation, any claims made or penalties incurred by any succeeding lessee or by
Lessor; provided that Lessor gives Lessee notice as provided in Section 2.3 of
any leases which will result any such claims or penalties. No holding over shall
be deemed or construed to exercise any option to extend or renew this Lease in
lieu of full and timely exercise of any such option as required hereunder.

26. Lessor's Liability: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Premises and neither Lessor or any of
its partners shall be liable personally for any deficiency. If Lessor has
transferred its interest in the Premises, in enforcing any judgment for Lessor's
breach of the Lease, Lessee shall be entitled to reach the proceeds of a sale
or other disposition of the Premises.

27. Estoppel Certificates: Lessee shall at any time during the Lease Term, upon
not less than ten (10) days prior written notice from Lessor, execute and
deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.

28. Time: Time is of the essence of the Lease.

29. Captions: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed by
all of the parties hereto or their respective successors in interest.

30. Party Names: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.

31. Earthquake Insurance: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed Ninety-Nine Thousand Dollars ($99,000) for Phase I and One Hundred
Seventy-Eight Thousand Dollars ($178,000) for Phase I and Phase II combined. per
year for earthquake insurance if Lessor desires to obtain some form of
earthquake insurance in the future, if and when available, on terms acceptable
to Lessor as determined in the sole and absolute discretion of Lessor. Lessee's
responsibility for the deductible in case of loss covered under Lessor's
earthquake insurance policy should not exceed Three Hundred and Forty Six
Thousand Dollars ($346,000) for Phase I and Ninety Eight Thousand and Five
Hundred Dollars ($98,500) for Phase II.

32. Habitual Default: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for two or more times during any twelve month period
during the Lease Term, and such defaults continue after written notice of
delinquency beyond the applicable cure period, then, at the option of Lessor,
either (a) Lessee shall be required to increase the amount of the Security
Deposit to three month's Base Rent or (b) Lessor may require Lessee to commence
paying Base rent quarterly in advance. If Lessor exercises its option under
clause (a) or (b) of the preceding sentence and Lessee thereafter makes all
payments of Rent without default for twelve (12) consecutive months, and there
exists no material non-monetary default by Lessee at such time, then (i) if
Lessor exercised the option under clause (a), the

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Security Deposit shall be reduced to the sum otherwise required under this Lease
but for Lessor's exercise of such option, and (ii) if Lessor exercised the
option under clause (b), Lessee may revert to paying the base Rent monthly in
advance.

33. Hazardous Materials

33.1 Definitions: As used in this Lease, the following terms shall have the
following meaning:

a. The term "Hazardous Materials" shall mean (i) polychlorinated biphenyls;
(ii) radioactive materials and (iii) any chemical, material or substance
now or hereafter defined as or included in the definitions of "hazardous
substance" "hazardous water", "hazardous material", "extremely hazardous
waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7,
or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined
as "hazardous substance" under Section 25316 of the California Health and
Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material", "hazardous
substance", or "hazardous waste" under Section 25501 of the California
Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials
Release, Response, Plans and Inventory), (iv) defined as a "hazardous
substance" under Section 25181 of the California Health and Safety Code,
Division 20l, Chapter 6.7 (Underground Storage of Hazardous Substances),
(v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
"hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of
the California Administrative Code, Division 4, Chapter 20, (viii) defined
as "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section
1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix)
defined as a "hazardous waste", pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined
as "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42 U.S.C.
9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 156
U.S.C. 2601 et seq.

b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.

c. The term "Lessor's Agents" shall mean Lessor's agents, representatives,
employees, contractors, subcontractors, directors, officers and partners.

d. The term "Lessee's Agents" shall mean Lessee's agents, representatives,
employees, contractors, subcontractors, directors, officers, partners,
invitees or any other person in or about the Premises other then Lessor or
Lessor's Agents.

33.2 Lessee's Right to Investigate: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials used
and stored by previous occupants in or about the Premises. Lessee shall provide
Lessor with copies of all inspections, tests and evaluations. Lessee shall
indemnify, defend and hold Lessor harmless from any cost, claim or expense
arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.

33.3 Lessor's Representations: Lessor hereby represents and warrants to the
best of Lessor's knowledge that the Premises are, as of the date of this Lease,
in compliance with all Hazardous Material Laws.

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33.4 Lessee's Obligation to Indemnify: Lessee, at its sole cost and
expense, shall indemnify, defend, protect and hold Lessor and Lessor's Agents
harmless from and against any and all cost or expenses, including those
described under subparagraphs i, ii and iii herein below set forth, arising from
or caused in whole or in part, directly or indirectly by:

a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of Hazardous
Material to, in, on, under, about or from the Premises; or

b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or

c. Any release of Hazardous Material to, in, on, under, about, from or onto
the Premises caused by or occurring as a result of acts or omissions of
Lessee or Lessee's Agents or occurring during the Lease Term, except ground
water contamination from other parcels where the source is from off the
Premises not arising from or caused by Lessee or Lessee's Agents.

The cost and expenses indemnified against include, but are not limited to the
following:

i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive damages,
cost or expenses;

ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other economic
loss, damage to the natural resources of the environment, nuisance,
pollution, contamination, leaks, spills, release or other adverse effects
on the environment;

iii. The cost of any repair, clean-up, treatment or detoxification of the
Premises necessary to bring the Premises into compliance with all Hazardous
Material Laws, including the preparation and implementation of any closure,
disposal, remedial action, or other actions with regard to the Premises,
and expenses (including, without limitation, reasonable attorney's fees and
consultants fees, investigation and laboratory fees, court cost and
litigation expenses).

33.5 Lessee's Obligation to Remediate Contamination: With respect to any
Hazardous Materials contamination of the Premises for which Lessee is
responsible under Section 33.4, Lessee shall, at its sole cost and expense,
promptly take any and all action necessary to remediate contamination during
the Lease Term.

33.6 Obligation to Notify: Lessor and Lessee shall each give written notice
to the other as soon as reasonably practical of (i) any communication received
from any governmental authority concerning Hazardous Material which related to
the Premises and (ii) any contamination of the Premises by Hazardous Materials
which constitutes a violation of any Hazardous Material Laws.

33.7 Survival: The obligations of Lessee under this Section 33 shall
survive the Lease Term or earlier termination of this Lease.

33.8 Certification and Closure: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then Lessee
shall comply at its sole cost and expense with the requirements of the closure
plan and furnish to Lessor a copy of such plan.

33.9 Prior Hazardous Materials: Lessee shall have no obligation to clean up
or to hold Lessor harmless with respect to any Hazardous Material or wastes
discovered on the Premises, except as a result of Environmental Surcharges,
which were not introduced into, in, on, about, from or under the Premises during
the Lease Term or ground water contamination from other parcels where the source
is from off the Premises not arising from or caused by Lessee or Lessee's
Agents.

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34. Brokers: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
CB Richard Ellis ("CB") and Lessee agrees to indemnify and hold Lessor harmless
against any claim, cost, liability or cause of action asserted by any broker or
finder claiming through Lessee other than CB. Lessor shall at its sole cost and
expense pay an agreed upon brokerage commission to CB in connection with this
transaction. Lessor represents and warrants that it has not utilized or
contacted a real estate broker or finder with respect to this Lease other than
CB and Lessor agrees to indemnify and hold Lessee harmless against any claim,
cost, liability or cause of action asserted by any broker or finder claiming
through Lessor.

35. Option to Extend

A. Option: Lessor hereby grants to Lessee one (1) option to extend the Lease
Term, with the extended term to be for a period of five (5) years, on the
following terms and conditions:

(i) Lessee shall give Lessor written notice of its exercise of its option
to extend no earlier than twelve (12) , nor later than six (6) calendar
months before the Lease Term would end but for said exercise. If Lessee
and Lessor have not agreed to rental terms in writing, Lessee may withdraw
its notice of exercise of an extension option prior to six (6) months
before the Lease Term would end but for said exercise. Lessor shall
provide Lessee with Lessor's proposed base monthly rent for the option
period within twenty (20) days of Lessee's written request. However, once
Lessee delivers a notice of exercise of an option to extend the Lease Term
it may not be withdrawn except as provided for herein and subject to the
provisions of this Section 35, such notice shall operate to extend the
Lease Term. Upon any extension of the Lease Term pursuant to this Section
35, the term "Lease Term" as used in this Lease shall thereafter include
the then extended term. Time is of the essence.

(ii) Lessee may not extend the Lease Term pursuant to any option granted by
this Section 35 if Lessee is in default as of the date of the exercise of
its option. If Lessee has committed a default by Lessee as defined in
Section 14 or 32 that has not been cured or waived by Lessor in writing by
the date that any extended term is to commence, then Lessor may elect not
to allow the Lease Term to be extended, notwithstanding any notice given by
Lessee of an exercise of this option to extend.

(iii) All terms and conditions of this Lease shall apply during the
extended term, except that the base rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below

(iv) The option rights of ONI Systems Corporation granted under this
Section 35 are granted for ONI Systems Corporation's and Excepted Party's
personal benefit and may not be assigned or transferred by ONI Systems
Corporation or Excepted Party exercised if ONI Systems Corporation or
Excepted Party is not occupying the Premises at the time of exercise

B. Extended Term Rent - Option Period: The monthly Rent for the Premises during
the extended term shall equal the fair market monthly Rent for the Premises as
of the commencement date of the extended term, but in no case, less than the
Rent during the last month of the prior Lease term. Promptly upon Lessee's
exercise of the option to extend, Lessee and Lessor shall meet and attempt to
agree on the fair market monthly Rent for the Premises as of the commencement
date of the extended term. In the event the parties fail to agree upon the
amount of the monthly Rent for the extended term prior to commencement thereof,
the monthly Rent for the extended term shall be determined by appraisal in the
manner hereafter set forth; provided, however, that in no event shall the
monthly Rent for the extended term be less than in the immediate preceding
period. Annual base rent

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increases during the extended term shall not be less than four percent (4%) per
year. In the event it becomes necessary under this paragraph to determine the
fair market monthly Rent of the Premises by appraisal, Lessor and Lessee each
shall appoint a real estate appraiser who shall be a member of the American
Institute of Real Estate Appraiser ("AIREA") and such appraisers shall each
determine the fair market monthly Rent for the Premises taking into account the
value of the Premises and the amenities provided by the outside areas, the
common areas, and the Building, and prevailing comparable Rentals in the area.
Such appraisers shall, within twenty (20) business days after their appointment,
complete their appraisals and submit their appraisal reports to Lessor and
Lessee. If the fair market monthly Rent of the Premises established in the two
(2) appraisals varies by five percent (5%) or less of the higher Rent, the
average of the two shall be controlling. If said fair market monthly Rent varies
by more than five percent (5%) of the higher Rental, said appraisers, within ten
(10) days after submission of the last appraisal, shall appoint a third
appraiser who shall be a member of the AIREA and who shall also be experienced
in the appraisal of Rent values and adjustment practices for commercial
properties in the vicinity of the Premises. Such third appraiser shall, within
twenty (20) business days after his appointment, determine by appraisal the fair
market monthly Rent of the Premises taking into account the same factors
referred to above, and submit his appraisal report to Lessor and Lessee. The
fair market monthly Rent determined by the third appraiser for the Premises
shall be controlling, unless it is less than that set forth in the lower
appraisal previously obtained, in which case the value set forth in said lower
appraisal shall be controlling, or unless it is greater than that set forth in
the higher appraisal previously obtained in which case the Rent set for in said
higher appraisal shall be controlling. If either Lessor or Lessee fails to
appoint an appraiser, or if an appraiser appointed by either of them fails,
after his appointment to submit his appraisal within the required period in
accordance with the foregoing, the appraisal submitted by the appraiser properly
appointed and timely submitting his appraisal shall be controlling. If the two
appraisers appointed by Lessor and Lessee are unable to agree upon a third
appraiser within the required period in accordance with the foregoing,
application shall be made within twenty (20) days thereafter by either Lessor or
Lessee to AIREA, which shall appoint a member of said institute willing to serve
as appraiser. The cost of all appraisals under this subparagraph shall be borne
equally be Lessor and Lessee.

C. Effect of Conditional Exercise: As used in this section, "Rent Floor"
means the requirement under Section 35.B above that the minimum rent for the
extended term be no less than the minimum rent in the immediate preceding
period. Lessee may deliver to Lessor under Section 35.B a notice conditionally
exercising the option to extend, subject to Lessor's agreement to either waive
the Rent Floor or to reduce the floor below the amount specified under Section
35.B. If Lessee timely delivers such a notice ("Conditional Exercise Notice"),
Lessor may notify Lessee within thirty (30) days after receipt thereof that
Lessor waives such Rent Floor or agrees to accept a reduced Rent Floor as set
forth in the Conditional Exercise Notice. If Lessor timely gives the notice
described in the preceding sentence, Lessee's Conditional Exercise Notice shall
become an unconditional exercise of the option to extend, and the extended term
rent shall be established as provided in Section 35.B, except that there shall
be no Rent Floor or the Rent Floor shall reduced as provided in the Conditional
Exercise Notice. If Lessor does not timely respond to Lessee's Conditional
Exercise Notice in the manner contemplated above, Lessee's Conditional Exercise
Notice shall be ineffective and Lessee's extension option shall lapse. However,
in such case, Lessor shall not, prior to the expiration of the Lease term, enter
into any lease or option to lease of all or any part of the Premises with a
third party for less than the Rent Floor unless Lessor first delivers to Lessee
a notice ("Refusal Notice") setting forth all relevant terms and conditions of
the proposed lease or option to lease. Lessee shall have five days after the
delivery of the Refusal Notice to notify Lessor that Lessee accepts such terms,
in which case Lessor and Lessee shall promptly execute a new lease, or an
amendment to this Lease, incorporating the terms set forth in the Refusal
Notice. However, if Lessee does not so respond to the Refusal Notice, Lessor
shall be free to enter into a lease or option to lease with such third party on
terms no less favorable to Lessor than those set forth in the Refusal Notice.

36. Approvals: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which

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may be required of it in this Lease within ten business days of the request of
such consent in writing by the Lessee or Lessor, such consent shall be deemed to
have been given by the Lessor or Lessee.

37. Authority: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the by-
laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and that
the Lease is binding upon said individual, corporation (or partnership) as the
case may be in accordance with its terms.

38. Indemnification of Lessor: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of Lessee
or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage, or
disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be responsible or liable for any injury or damage or
injury to any person whatsoever, happening on, in, about, or in connection with
the Premises, or for any injury or damage to the Premises or any part thereof.
This Lease is entered into on the express condition that Lessor shall not be
liable for, or suffer loss by reason of injury to person or property, from
whatever cause, which in any way may be connected with the use, condition or
occupancy of the Premises or personal property located herein. The provisions of
this Lease permitting Lessor to enter and inspect the Premises are for the
purpose of enabling Lessor to become informed as to whether Lessee is complying
with the terms of this Lease and Lessor shall be under no duty to enter, inspect
or to perform any of Lessee's covenants set forth in this Lease. Lessee shall
further indemnify, defend and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
to Lessee's part to be performed under the terms of this Lease. The provisions
of Section 38 shall survive the Lease Term or earlier termination of this Lease
with respect to any damage, injury or death occurring during the Lease Term.

39. Successors And Assigns: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.

40. Miscellaneous Provisions: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.

41. Choice of Law: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all parts
of this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Lessor or Lessee.

42. Right of First Offer to Lease: Prior to Lessor accepting any offer to lease
any Mission West buildings in the Silver Creek area of San Jose, or prior to
Lessor making any offer to lease any Mission West building in the Silver Creek
area of San Jose, Lessor shall give Lessee written notice of such offer and
Lessee shall have the opportunity to lease the subject building or the part
thereof offered for lease on the terms and conditions set forth in the notice of
offer. Lessee shall have the option, which may be exercised by written notice
to Lessor at any time within fifteen (15) days from the receipt of the Lessor's
notice to agree to lease the portion of the subject building specified in the
notice to Lessee. If Lessee fails to exercise its option within the 15-day
period, Lessor shall have 270 days thereafter to lease the subject building
specified in the notice, but in no case on terms more favorable than those
offered to Lessee.

Page 25
<PAGE>

If Lessor elects, within 270 days of Lessor's notice, to lease the subject
building to a third party on terms more favorable to the third party lessee than
the terms set forth in the above offer, then Lessor must re-offer the subject
building to Lessee on the same terms and conditions offered to the third party
lessee ("Lessor's Second Notice"). Lessee shall have five (5) business days
from Lessee's receipt of Lessor's Second Notice to elect to lease the subject
building. If Lessee does not respond in writing accepting all terms and
conditions, Lessor shall thereafter be entitled to lease the subject building to
the third party on the terms and conditions set forth in Lessor's Second Notice
or on other terms and conditions at least as favorable to Lessor as said terms
and conditions in Lessor's Second Notice for a period of 270 days after which
Lessee's Right of First Offer to Lease shall again be in effect for the Premises
or the subject building. This right of first offer is subject to any existing
rights of lessees.

43. Right of First Offer to Purchase: Prior to Lessor accepting any offer to
sell Premises or any part thereof, Lessor shall give Lessee written notice of
such offer and Lessee shall have the opportunity to purchase the Premises or the
part thereof offered for sale on the terms and conditions set forth in the
notice of offer. Lessee shall have the option, which may be exercised by
written notice to Lessor at any time within fifteen (15) days from the receipt
of the Lessor's notice to sell Premises or portion thereof specified in the
notice to Lessee. If Lessee fails to exercise its option within the 15-day
period, Lessor shall have 270 days thereafter to sell the Premises or portion
thereof in the notice, but in no case on terms more favorable than those offered
to Lessee.

If Lessor elects, within 270 days of Lessor's notice, to sell the Premises or
portion thereof to a third party on terms more favorable to the third party
purchaser than the terms set forth in the above offer, then Lessor must re-offer
the Premises or portion thereof on the same terms and conditions offered to the
third party purchaser ("Lessor's Second Notice"). Lessee shall have five (5)
business days from Lessee's receipt of Lessor's Second Notice to elect to
purchase Premises or portion thereof. If Lessee does not respond in writing
accepting all terms and conditions, Lessor shall thereafter be entitled to sell
the Premises or portion thereof to the third party on the terms and conditions
set forth in Lessor's Second Notice or on other terms and conditions at least as
favorable to Lessor as said terms and conditions in Lessor's Second Notice for a
period of 270 days. After 270 days Lessee's Right of First Offer to Purchase
shall again be in effect for the Premises or portion thereof. Notwithstanding
the above, Lessee's Right of First Offer to Purchase herein shall be null and
void if the sale of Premises involves Lessor's entire portfolio or a portion
thereof exceeding 900,000 sq.ft.. Any sale as provided in this paragraph shall
void any future purchase rights under this Section 43.

44. Entire Agreement: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent change
or addition to this Lease shall be binding unless in writing and signed by the
parties hereto.

In Witness Whereof, Lessor and Lessee have executed this Lease, the day and year
first above written.

<TABLE>
<S> <C>
Lessor Lessee
Mission West Properties, L.P. ONI Systems Corporation
By: Mission West Properties, Inc., its general partner

By: By:
------------------------------------------------------- -------------------------------------------------------
Signature of authorized representative signature of authorized representative

- ----------------------------------------------------------- ------------------------------------------------------------
printed name printed name

</TABLE>

Page 26
<PAGE>

- ----------------------------------------------------------- ----------------------------------------------------------
Title Title

- ----------------------------------------------------------- ----------------------------------------------------------
Date Date
</TABLE>

Page 27
<PAGE>

Exhibit A

Site plan to be attached.

Page 28
<PAGE>

Exhibit B

BUILDING SHELL

Mission West Properties ("Building Shell") includes the following items in
customary quantities and quality. All items not listed are part of Lessee
Interior Improvements.

Exterior walls
Foundations
Floors Slabs
Roof structures and membrane
Glazing
Exit doors
Truck doors
Landscaping
Parking and paving
Storm sewer line to building
Sanitary sewer line to building
Water line to building
Paint of exterior walls
Shell architecture and engineering (Mission West staff)
All permits for the above items

Page 29
<PAGE>

Exhibit C

Building Shell plans to be attached.

Page 30
<PAGE>

Exhibit D

Lessee Interior Improvement Plans to be attached.

Page 31
<PAGE>

Exhibit F
Lessee Approval Deadlines

<TABLE>
<CAPTION>
Phase I Phase II
-------- --------
<S> <C> <C>
Lease signed 05/15/00 N/A

Approval of site plan Approved Approved

Approval of building elevation Approved Approved

Approval of restroom, stairs and underground plumbing 06/15/00 05/15/02

Approval of preliminary floor plan, single line 07/01/00 06/01/02

Approval of final shell plans Approved Approved

Approval of interior plans and specifications 07/15/00 06/15/02

Final selection of all material and interior finishes for construction such as
Carpet, ceramic tile, paint, and any other lessee selected materials and finishes 08/15/00 07/15/02
</TABLE>

Lessee shall not unreasonably withhold approval of final shell or interior plans
if they conform in general to the preliminary site plan, preliminary elevation,
and floor plans.

The Commencement Date shall be extended one day for each day Lessee does not
meet each deadline set forth on this Exhibit E and Lessee shall pay Rent for any
delays that effect the Substantial Completion Date which shall be considered a
Lessee Delay.

Page 32

<PAGE>

Report on Financial Statement Schedule and Consent

EXHIBIT 23.02

The Board of Directors
ONI Systems Corp.:

The audits referred to in our report dated March 9, 2000, except for Note
13 which is as of May 9, 2000, included the related financial statement
schedule of ONI Systems Corp. as of December 31, 1998 and 1999, and for the
period from October 20, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999, included in the registration statement
on page S-1. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.

/s/ KPMG LLP

Mountain View, California

May 23, 2000

<PAGE>

Exhibit 23.03

Consent of KPMG LLP, Independent Auditors

The Board of Directors
Object-Mart Inc.

We consent to the use of our report included herein dated April 10, 2000,
related to the balance sheet of Object-Mart Inc. as of December 31, 1998, and
the related statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1998 and for the six months ended June 29, 1999,
and to the reference to our firm under the heading "Experts" in the
prospectus.

/s/ KPMG LLP

Mountain View, California

May 23, 2000